US & World Daily Markets Financial Briefing 13-10-2009

Use the following reports to help guide you through these earnings announcements: Intel (NASDAQ: INTC), Johnson and Johnson (NYSE: JNJ) Click here.

Overbought Levels of Markets May Make Traders Wary

The major index futures are pointing to a marginally higher opening on Tuesday. Even as stocks showed some tiredness following continued upward momentum, positive earnings optimism is keeping sentiment upbeat. The rally in the commodity prices is continuing, reflecting the lingering hopes that all may well that ends well. That said, the overbought levels of the markets, which is achieved without adequate support of fundamentals, faces the risk of a pullback. Traders could also focus on the Fed speeches scheduled for the day.

U.S. stocks, which opened Monday’s trading higher and rose sharply in early trading on earnings optimism, surrendered their early gains gradually over the course of session. After dipping below the unchanged line in late afternoon trading, the Dow Industrials and the S&P 500 Index recovered to close modestly higher, while the Nasdaq Composite remained just below the flat line. The absence of any major catalysts lead to some indecision in the markets, pushing some traders to the sidelines, and consequently, volume was light.

The Dow Industrials ended up 20.86 points or 0.21% at 9,886 and the S&P 500 Index rose 4.70 points or 0.44% to close at 1,076, while the Nasdaq Composite Index declined 0.14 points or 0.01% to 2,139.

Nineteen of the thirty Dow components closed the session higher, with Bank of America (BAC) (up 3.03%), Chevron (CVX) (up 1.25%), Intel (INTC) (1.14%), Johnson & Johnson (JNJ) (up 1.28%), Pfizer (PFE) (up 1.06%) and Exxon Mobil (XOM) (up 1.24%) leading the gainers. On the other hand, Boeing (BA) fell 1.95%, Caterpillar (CAT) declined 1.10%, Cisco Systems (CSCO) dipped 1.02% and United Technologies (UTX) moved down 1.13%.

Among the sector indexes, the NYSE Arca Oil Index and the Philadelphia Oil Service Index gained 0.99% and 1.22%, respectively. The KBW Bank Index advanced 0.97% and the Philadelphia Semiconductor Index gained 1.40%.

Earnings Cheer

Notwithstanding the oversold levels of the markets, earnings optimism has been holding the markets together, giving investors a reason to buy into stocks. The primary reason for the earnings outperformance even amid a trying time is the conservative estimates of analysts, which were developed using sparse information in an uncertain economic environment.

With a teetering economy glaring at them, companies were forced to cut costs to stay afloat, which definitely proved beneficial to the bottom line. Alcoa (AA), the first Dow component to report its results, surprised to the upside, posting an unexpected profit in the third quarter. The profits came on the back of an improvement in demand in its downstream segment and the benefits of cost savings initiatives, the impact of which was offset by currency headwinds.

Yesterday, Dutch consumer electronics giant Royal Philips Electronics also posted an unexpected profit for the third quarter despite sales declining year-over-year. The solid bottom-line results reflect cost savings, although a sales rebound may not be in the offing for a while.

However, there is an element of risk associated with this earnings-induced rally. U.S. stocks are now overvalued and are trading at a trailing price-earnings multiple of 27.6 and therefore, the time taken for earnings to recover during the current recession will be much more than the historical average.

Traders may look for more clarity on an earnings recovery as the reporting season rolls on. Intel (INTC) is the first among the top technology companies to report its results. The Santa Clara, California-based company, which is scheduled to release its results today after the markets close, is expected to say it posted a 23% decline in earnings per share to 27 cents and a 11.8% decline in revenues to $9.02 billion.

Although the chip sector is likely to benefit from the improving global economic trends and in turn a recovery in the end markets, lean finished good inventory levels and a meaningful reduction in costs, they still face the risk of seeing a reduction in sequential revenue growth. FBR Research expects Intel to report better than expected results for the third quarter and issue above-consensus revenue guidance for the fourth quarter.

Intel’s shares have run up sharply since early March without any major correction and are now trading at a forward price-earnings multiple of 31.39 compared to the industry average of 26.25. On the downside, the stock has strong support around $18.98, while it is currently challenging a resistance around $20.69. The stock also has resistance around $21.70 and $22.75.

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Overbought Levels of Markets May Make Traders Wary

Canadian stocks could see further strength on Tuesday morning as gold and oil prices are notably higher. The market will also play catch-up after taking yesterday off for Thanksgiving.

Crude oil prices jumped 91 cents to move to $74.18 per barrel. The Organization of Petroleum Exporting Countries forecast crude oil demand will rise by 700,000 barrels to 84.9 million barrels per day in 2010. This is up 200,000 from OPEC's last forecast.

Meanwhile, gold gained $7.90 to extend its record high above $1,065 per ounce. Silver added 15.5 cents to $17.975 while copper slipped 1.25 cents to $2.8445.

On the economic front, Statistics Canada reported on Tuesday that new home prices increased 0.1% in August following a 0.3% advance in July. Economist were looking for new home prices to rise 0.2%.
 
HudBay had its target increased to C$14.50 from C$9 by Credit Suisse.

Highway traffic management technology provider International Road Dynamics Inc. reported third quarter net earnings rose to C$519,070 or C$0.03 per share from C$188,270 or C$0.01 per share in the previous year.

Greystar Resources announced that David Rovig will retire from the positions of President and Chief Executive Officer.

The S&P/TSX Composite Index slipped 12.42 points or 0.1% on Friday to close at 11,472.09. The market gained more than 400 points last week.

Currency, Commodity Futures

Crude oil futures are trading up $0.84 at $74.11 a barrel after rising $1.50 to $73.27 a barrel in Monday’s session. Gold futures are currently receding $7.90 to $1,065.40 an ounce. In the previous session, the precious metal rose $8.90 to $1,057.50 an ounce.

On the currency front, the U.S. dollar is trading at 89.557 yen compared to the 89.825 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is currently worth $1.4859 compared to yesterday’s $1.4773.

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Asian Markets End Modestly Higher Amid Cautious Trading

The markets across Asia, open for trading, ended in positive territory with modest gains amid cautious trading on Tuesday amid expectations of better corporate earnings in the U.S. Bellwether Intel Corp and drug giant Johnson & Johnson are scheduled to unveil quarterly results in the US later in the day. Higher commodity prices, including oil prices, also lifted market sentiment. The market in India is closed on the eve of elections in three states.

In Japan, the benchmark Nikkei 225 Index gained 60.17 points, or 0.60%, to 10,077, while the broader Topix index of all first section stocks rose 3.57 points, or 0.40%, to 901.

On the economic front, data released by the Bank of Japan revealed that the balance of loan issued by banks in the country rose 1.6% in September compared to the same period last year, following 1.8% annual expansion in the preceding month of August. According to the data, total loans in September for all banks amounted to 465.43 trillion yen. When excluding local credit union institutions or "shinkin banks", the loan total was up 1.7%, after the 1.9% gain in the preceding month. Further, lending by city banks was up 0.6%, slower than the revised 0.8% growth in the previous month.

Steel stocks led the gains after brokerages revised their stance on the outlook for the industry. Goldman Sachs raised the rating for JFE Holdings to "conviction buy" and in a separate statement, the World Steel Association that the market for the alloy has bottomed out.. JFE Holdings surged up 4.81%, Nippon Steel Corp. climbed 4.75%, Kobe Steel advanced 2.45% and Sumitomo Metal Industries gained 1.29%.
 
Automotive stocks also ended in positive territory following weaker yen. Toyota Motor Corp gained 2.56%, Honda Motor Corp. rose 2.18%, Suzuki Motor advanced 1.20%, Nissan Motor Co., climbed 1.93% and Mitsubisbhi Motor added 1.35%.

Precision machinery stocks ended higher. Olympus Corp. advanced 3.23%, Nikon Corp. climbed 3.39%, Terumo Corp. added 0.45% and Konica Minolta Holdings added 0.56%.

Mixed trading was witnessed among banking stocks. Sumitomo Mitsui Financial Group lost 1.15%, Resona Holdings declined 1.51% and Mizuho Financial edged down 0.53%. However, Mitsubishi UFJ Group bucked the weak trend and ended in positive territory with a gain of 0.60%.

In Australia, the benchmark S&P/ASX200 Index advanced 45.90 points, or 0.97% to close at 4,786, while the All-Ordinaries Index ended at 4,790, representing a gain of 44.30 points, or 0.93%.

On the economic front, a report released by the National Australia Bank revealed that business confidence in the country unexpectedly slipped for the first time in five months during September, driven primarily by a decline in confidence among manufacturers as well as retailers. The index measuring business confidence stood at 14 in September, down 4 points from August's reading of 18. August marked the highest reading recorded in the index in nearly six years. A figure above zero means optimists outnumber pessimists.

Metals and mining stocks led the gains after commodity prices in the international market firmed up on Monday. BHP Billiton gained 0.92%, Rio Tinto climbed 1.45%, Gindalbie Metals rose 2.82%, Iluka Resources added 1.02%, Mincor Resources surged up 7.53%, and Murchison Metals increased 2.60%.

Gold stocks ended in positive territory. Lihir Gold rose 1.91%, Newcrest Mining climbed 2.60% and Sino Gold Mining advanced 2.39%.

Banks gained following flow of foreign funds in to the country and recent upgrades by brokerages. ANZ Bank rose 1.78%, Commonwealth Bank of Australia gained 1.92%, National Australia Bank advanced 1.52% and Westpac Banking climbed 1.82%. However, investment banker Macquarie Group bucked the trend and ended in negative territory with a loss of 1.18%.
 
Mixed trading was witnessed among oil stocks. While Woodside Petroleum managed to end in positive territory with a gain of 0.68%, Santos slipped 0.33%, Oil Search shed 0.15% and Origin Energy edged down 0.06%.

Mixed trading was also witnessed among retail stocks. David Jones gained 2.90% and Harvey Norman surged up 3.42%. However, Wesfarmers declined 1.20% and Woolworths slipped 0.55%.

In Hong Kong, the Hang Seng Index ended in positive territory with a modest gain of 168.01 points, or 0.79% at 21,467, taking cues from Wall Street and other markets in the region, including China and Japan. Strength in commodity prices in the international market and weakening of the yen against the dollar also lifted sentiment partially. As many as 32 of the 42 components in the index ended higher as traders picked up stocks on bargain hunting at lower level that drifted in the previous session.

In South Korea, the KOSPI Index slipped into negative territory with a loss of 10.88 points, or 0.66% and closed at 1,629, as traders preferred to lock in profits ahead of the earnings in the U.S later in the day that include Intel and Johnson & Johnson. Foreign institutional investors unloaded bank stocks and those of major shipbuilders amid concerns after North Korea yet again test fired missiles, raising tension in the region.

Among the other major markets in the region, China's Shanghai Composite Index gained 41.71 points, or 1.44% to 2,937, and Indonesia's Jakarta Composite Index added 15.30 points, or 0.62%, to close at 2,472. However, Singapore's Strait Times Index bucked the trend and slipped 12.07 points, or 0.45% to close at 2,668 and Taiwan's Weighted Inded edged down 3.28 points, or 0.04% to 7,597.

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The major European averages opened lower and have been showing some degree of volatility. Currently, the French CAC 40 Index is receding 0.30% and the German DAX Index is moving down 0.29%, while the U.K.’s FTSE 100 Index is gaining 0.02%.

On the economic front, a report released by the French National Institute for Statistics and Economic Studies showed that French consumer prices fell 0.4% year-over-year in September, marking the fifth straight month of negative inflation. Economists had expected a more modest 0.2% drop. On a monthly basis, consumer prices fell 0.2% in September compared to a 0.5% increase in August.

A separate report released by the Bank of France showed that the nation’s trade deficit widened to a seasonally adjusted 3.7 billion euros in August compared to 1.5 billion euros in July. The wider deficit reflected the widening of the deficit on the trade of goods and a decline in the surplus on the trade of services.

The consumer price inflation report released by the U.K. National Statistical Office showed that the U.K.’s annual inflation rate slowed to 1.1% in September from 1.6% in August. Economists had expected a more modest decline in the inflation rate to 1.3%. On a monthly basis, consumer prices remained unchanged in September. The core consumer price inflation rate, excluding food, alcohol and tobacco, was 1.7% compared to a 1.8% rate in August.

An index measuring sentiment in the U.K. housing industry jumped to its highest level since May 2007 in September, the Royal Institution of Chartered Surveyors said. That reading came in at 22 compared to forecasts of 16.

Meanwhile, German economic sentiment declined 1.7 points to 56 in October, according to a report released by Zew Centre for Economic Research. Economists had expected an increase in the reading to 58.8. Notwithstanding the decline, the index stayed above the historical average of 26.7 points.

U.S. Economic News

Council of Economic Advisers Chair Christina Romer is due to address the NABE annual meeting in St. Louis at 7:30 AM ET. Federal Reserve Vice Chair Donald Kohn is also scheduled to address the NABE annual meeting in St. Louis at 12 PM. Additionally, New York Federal Reserve Bank President William Dudley is due to speak to the Institute of International Bankers at 1:15 pm.

The Treasury Budget, a monthly account of the surplus or deficit of the federal government is due to be released at 2 PM ET. The budget is considered an indicator of budgetary trends and the thrust of fiscal policy. Economists estimate a deficit of $31 billion for September.

Earnings

Johnson & Johnson (JNJ) reported a 5.3% decline in third quarter sales to $15.1 billion. The company’s net earnings rose 2.6% to $1.20 per share. Analysts estimated earnings of $1.13 per share on revenues of $15.22 billion. The company also raised its 2009 earnings per share estimate to $4.54-$4.59 per share, while analysts estimate earnings of $4.52 per share.

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Johnson Controls may see some activity after it said it expects net sales for 2010 to grow 9% year-over-year to $31 billion. The company also said it expects a significant increase in earnings per share to $1.35-$1.45. For the fourth quarter, the company expects earnings of 40-42 cents per share, with the company expecting all automotive geographic regions to be profitable.

AIG is likely to react to its announcement that it has agreed to sell its 97.57% stake in Taiwan-based insurer Nan Shan Life Insurance Company to a consortium comprising Hong Kong financial services firm Primus Financial Holdings Limited and Hong Kong-based investment company China Strategic Holdings for $2.15 billion.

Mentor Graphics is likely to be in focus after it announced an agreement to buy Valor Computerized Systems in a cash and stock deal valued at $82 million or $4.60 per share. The company expects to close the deal during the first calendar quarter of 2010.

Ball Corp. may also be in focus over its announcement concerning the sale of its plastic pail assets to BWAY Corp., the principal operating subsidiary of BWAY Holding Company (BWY), for about $32 million. The deal mainly consists of the sales of its pail manufacturing plant in Newnan, which it acquired in 2006. The company expects the sale to be completed by the end of November.

Novartis is expected to see some activity after it said it has entered into an agreement for exclusive U.S. and Canadian rights to a new oral schizophrenia medication meant for the acute treatment of adult patients. The company is buying the commercialization rights from Vanda Pharma (VNDA), which completed the Phase III trials in 2006 and secured FDA approval in May 2009. Novartis expects to launch the medication in the U.S. in early 2010 and is due to pay Vanda an upfront payment of $200 million and additional milestone payments.

Cathay General Bancorp. could come under selling pressure after it announced that it has commenced a public offering of its common stock. The company expects to generate gross proceeds of $70.5 million from the offering.

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