US & World Daily Markets Financial Briefing 16-06-2009

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The major U.S. index futures are pointing to a higher opening on Tuesday. Futures staged a recovery as a report released earlier in the day showed that housing starts rose by much more than economists’ had expected. Commodity prices are also moving to the upside in reaction to the positive data that has rekindled hopes of a recovery after stocks came under significant selling pressure on the premonition that the recent gains may have been overdone when considered in light of the still-shaky economic fundamentals.

Consumer electronics retailer Best Buy’s fiscal year first quarter results were mixed, with earnings topping expectations, while sales missed estimates. The company’s forward earnings outlook for the year surrounded the consensus estimates. The weakness of the dollar should bode well for commodities and in turn the commodity space. Additionally, the Federal Reserve’s industrial production report is likely to impact trading in today’s session. Given the fact that the major averages have strong technical support at current levels, a significant pullback is unlikely even if economic concerns return.

In what was seen as a long-due pullback after the rally seen since early March, U.S. stocks melted on Monday, pounded by sliding commodities, which to their discomfort found the dollar firming up strongly. Risk aversion sent traders by droves to the safe haven dollar, as conviction about a near term economic revival was shaken by economic reports that showed that the manufacturing sector is still in the doldrums and it may be a while before the housing market bottoms out.

The major averages opened sharply lower and staged a steady decline until early morning trading. Thereafter, the downward momentum slowed, as a result of which the major averages showed sideways movement. Bond yields slipped further on Monday. The Dow Industrials fell 187.13 points or 2.13% to 8,612, the Nasdaq Composite declined 42.42 points or 2.28% to 1,816 and the S&P 500 Index ended down 22.49 points or 2.38% at 924. The only consolation was that volume wasn’t significant enough to confirm the price action.

Twenty-eight of the thirty Dow components ended the session lower, with only Microsoft and American Express bucking the downtrend by posting modest gains. Alcoa (down 6.51%) led the Dow’s slide, and Caterpillar, DuPont, Merck and Pfizer were down over 4% each, while Boeing and JP Morgan Chase declined more than 3% each.

Among the sector indexes, the Dow Jones U.S. Basic Materials Index ended down 4.21%, the NYSE Arca Oil Index dropped 2.76% and the Philadelphia Oil Service Index lost 1.05%. Gold stocks also came under selling pressure, as reflected by the 4.19% decline of the NYSE Arca Gold Bugs Index.

The Dow Jones Transportation Average fell 4.27% compared to a more modest 2.22% slippage by the Dow Jones Utility Average. The NYSE Arca Biotechnology Index fell 3.62%, while the KBW Bank Index was off 2.54%. The NYSE Arca Airline Index slipped 3.69%. In the technology space, the Philadelphia Semiconductor Index and the Amex Internet Index declined over 1% each, while the NYSE Arca Computer Hardware Index, the NYSE Arca Networking Index, the NYSE Arca Software Index and the NYSE Arca Disk Drive Index lost about 2%.

On the economic front, the National Association of Homebuilders’ said its housing market index fell by 1 point to 15 in June, reflecting the caution of homebuilders due to their concerns over a fragile state of the housing market. The index of current home sales and the index gauging traffic of prospective buyers remained unchanged at 14 and 13, respectively, while the index gauging expectations for the next six months fell 1 point to 26.

The New York Fed’s survey showed that the general business conditions index, indicating conditions in the manufacturing sector in the New York region, fell to –9.41 in June after improving to –4.55 in May. The new orders index improved fractionally to –8.15, while the shipments index fell to –4.84 in June from 1.29 in May. The prices paid and prices received indexes improved by about 6 points and 15 points, respectively to –5.75 and –12.64. However, on a positive note, the outlook index improved to 47.8 in June from 43.8 in May, marking the highest since July 2007.

The government is still searching for a panacea to nurse the ailing U.S. consumers back to health. According to an estimate released by Royal Bank of Scotland, U.S. households have seen almost $14 trillion wiped from the value of their assets since the asset values were at their peak in late 2007. Equity and house prices account for about 30% and 13% of household assets, respectively. Therefore, it is apparent that households will opt to save rather than to spend in a bid to replenish their balance sheets. Consequently, consumer spending is likely to remain negative in the second quarter, acting as an overall drag on economic growth.

Even if the recession ends, supported by a rebound in manufacturing activity, the growth is likely to be too weak to prevent the rise of unemployment. Therefore, we may have to brace for an unemployment rate of 10%-11% early next year.

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Bay Street stocks have seen notable strength in Tuesday morning trading. High commodity prices and a strong day for Research in Motion has driven the market higher.

The S&P/TSX Composite Index has climbed 138.83 points to 1.37% to 10.533.61. The index fell 2.35% in the previous session.

Mining stocks have added 2.5%, erasing some of yesterday's weakness. Teck Cominco has rallied 3.3% to lead the big names.

Equinox Minerals has added 3.5% after the shares were upgraded to Sector Perform from Underperform by RBC Capital Markets.

Gold stocks are up 2.4% and materials stocks have added 1.8% as the precious metal is up $8.80 to $936.30 in Comex trading. Goldcorp is up 3.2%, Eldorado Gold has added 3% and Royal Gold added 2.5%.

Agnico-Eagle Mines has added 2.1% after the company said that it has executed a new non-amortizing US$600 million revolving credit facility, maturing June 2012.
 
Technology stocks have added 2.2%. Research in Motion has gained nearly 3% after a pair of analysts boosted price estimates for the Blackberry maker. Thomas Weisel raised its forecast to $92 per share from $85 and RBC Capital Markets upped its outlook price to $100 per share from $90.

This summer, RIM will unveil its new BlackBerry Tour, which is designed to compete with the latest iPhone from Apple.

In other corporate news, Magna International has surged 8.1% after the company was upgraded to Overweight from Neutral by JPMorgan Chase.

Air Canada has soared 14.1% as the company has reportedly reached tentative deals with its pilots and flight attendants regarding the airliner's pension obligations.

On the economic front, Stats Canada said the labor productivity of Canadian businesses rose 0.3% in the first quarter.

Earnings

Best Buy Co reported first quarter adjusted net earnings of $178 million or 42 cents per share. Analysts expected earnings of 34 cents per share for the quarter.
Revenues for the quarter were $10.10 billion compared to $8.99 billion in the year-ago quarter, slightly below the mean analysts’ estimate of $10.13 billion. The company reaffirmed its fiscal 2010 earnings guidance of $2.50 to $2.90 per share, excluding restructuring charges.

Smithfield Foods reported a fourth quarter loss of 55 cents per share compared to a profit of 2 cents per share last year. Consolidated sales edged down to $2.85 billion from $2.87 billion last year. Analysts expected a loss of 60 cents per share on revenues of $3.06 billion.

FactSet Research said its third quarter revenues grew 5% to $154.4 million. The company reported earnings of 79 cents per share, including income tax benefits of 6 cents per share, compared to 65 cents per share in the year-ago period. The consensus estimates had called for earnings of 72 cents per share on revenues of $155.12 million. The company expects fourth quarter earnings of 73-75 cents per share on revenues of $152 million to $157

Crude oil futures are trading up $1.63 at $72.25 a barrel after declining $1.42 to $70.62 a barrel in Monday’s session, when the commodity came under heavy selling pressure on the dollar’s strength.
Gold futures are trading up $10.50 to $938 an ounce. In the previous session, the precious metal fell $13.20 to $927.50 an ounce.

On the currency front, the U.S. dollar is trading 97.10 yen, weaker than the 97.84 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is trading at $1.3899.

Better-than-expected U.S. economic data, which till recently was leading to dollar weakness due to an increase in risk preference, now seems to have a positive impact on the dollar again. Commerzbank is of the view that the dollar strength reflects market appreciation that the flexible U.S. economy is likely to fare better with the effects of the crisis than the euro zone region with its structural problems.

Additionally, the positive May employment report has given room to speculation that the Fed may soon begin to tighten its monetary policy. By the year-end, the firm expects the U.S. dollar to strengthen to $1.20 against the euro.

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The markets across the Asia-pacific region ended weaker on Tuesday, mirroring the weakness on Wall Street as fresh concerns were raised about the pace and magnitude of global recovery amid weak economic fundamentals. Lower commodity prices and valuation concerns following recent run up also impacted market sentiment.

Japan’s Nikkei 225 Average opened sharply lower below the 10,000-mark at 9,914 compared to its previous close of 10,040, and continued to tread below the unchanged line in negative territory, as investors preferred to sell stocks amid concerns about a global recovery and the stronger local currency. The index finally closed at 9,753, representing a loss of 286.79 points, or 2.86%. The broader Topix Index of all first section issues ended at 915, down 32.06 points, or 3.39%.

At the conclusion of the two-day meeting, the Bank of Japan retained its uncollateralized overnight call rate at 0.1%., which was in line with expectations. Commenting on the economic assessment, BOJ stated that amid continuing weakness in economic conditions, exports and production are beginning to level out against the backdrop of progress in inventory adjustments.

Across the board selling was witnessed on concerns about the global economic outlook. The stronger yen dragged the exporters and traders down. Lower commodity prices also affected market sentiment.

Australia’s All Ordinaries Index opened sharply lower at 4,015 compared to its previous close at 4,030, and continued to drift lower. The index remained below the unchanged line throughout the session before closing at 3,958, representing a loss of 72.50 points, or 1.80%. The benchmark S&P/ASX 200 Index followed a similar trend and ended lower at 3,963, a loss of 69.20 points or 1.72%.

Resource stocks dragged the market lower on weak commodity prices. BHP Billiton, the world's largest mining company, declined 1.46%. Rio Tinto fell 3.01%. The company closed its $15 billion rights issue today and would go ex-dividend from tomorrow. Nickel producer Mincor Resources slumped more than 8.5% on weaker nickel prices.

Among oil stocks, Woodside Petroleum lost 3.20%, Santos shed 4.85% and Oil Search fell 2.93%. Financial stocks also showed weakness, while gold stocks showed mixed sentiment.

In Hong Kong, the Hang Seng Index opened sharply lower at 18,236 compared to its previous close of 18,499, and remained below the unchanged line throughout the session before closing down 333 points or 1.80% at 18,166. Property and resource stocks led the declines.

In South Korea, the benchmark KOSPI Index ended in negative territory amid bargain hunting at lower prices, with the index closing at 1,399, representing a loss of 13.27 points, or 0.94%.

The Indian market shrugged off the weak global cues and ended in positive territory on pre-budget announcements and expectations of stimulus package in the budget. The BSE Sensex gained 82.39 points, or 0.55% to close at 14,958, and the broader Nifty Index added 33.80 points, or 0.75%, to close at 4,518.

Among the other major markets in the region, China's Shanghai Composite Index lost 13.53 points or 0.48% to close at 2,776, the Strait Times Index of Singapore fell 28.40 points or 1.23% to close at 2,288, Taiwan Weighted Index edged down 0.08% or 4.75 points to close at 6,221, and Indonesia's Jakarta Composite Index, fell 1.91% or 39.51 points to close at 2,030.

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The major European averages are holding themselves up amid some volatility in Tuesday’s session. The French CAC 40 Index is rising 0.71%, the German DAX Index is moving up 0.85% and the U.K.’s FTSE 100 Index is gaining 1%.

In corporate news, Moody's placed UBS’ long-term debt and deposit ratings under review for a possible downgrade. U.K. Retailer Tesco said it had a solid start to its financial year. The company said that its like-for-like sales in the U.K. rose 4.3%.

On the economic front, the U.K. Office of National Statistics reported that the U.K.’s consumer price index declined 2.2% in May, a slower rate of decline than the 2.3% drop reported for April. Economists had estimated a 2% decline in the headline index. The retail price index, including housing costs such as mortgage interest payments and council tax, was up 1.1% in May. The decline in prices was mainly due to softer food and non-alcoholic beverage prices.

Meanwhile, Eurostat reported that the euro area’s labor costs increased by 3.7% sequentially in the first quarter compared to a 4% increase in the previous quarter. In a separate report, the statistical agency confirmed its flash estimate for the area’s annual inflation rate for May. The euro area showed no price growth in May compared to a 0.6% increase in April and a 3.7% inflation rate in May 2008. On a monthly basis, the inflation rate was 0.1%.

German economic sentiment continued to improve for the eight straight month in June, according to survey results of the Zew Center for European Economic Research. The economic sentiment indicator rose by 13.7 points to 44.8, which is above the historical average of 26.3. Economists had expected a more modest improvement to 34.

U.S. Economic Reports

On the economic front, housing starts rose 17.2% month-over-month to 532,000 in May from a downwardly revised reading of 454,000 for April, according to a report released by the Commerce Department. Economists had expected housing starts to have increased to 485,000 from the initially estimated reading of 458,000 for April.

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Casella Waste Systems is likely to react to its announcement that its fourth quarter revenues fell 15.7% to $117.6 million. The company reported a loss of $2.67 per share compared to a loss of 31 cents per share last year. On an adjusted basis, the company’s net loss from continuing operations narrowed to 3 cents per share from 17 cents per share last year. The consensus estimates had called for a loss of 7 cents per share on revenues of $118.17 million. Additionally, the company said it expects revenues of $510-$530 million for 2010 compared to the consensus estimate of $520.65 million.

IBM is likely to react positively to an announcement from the company that it has signed a 7-year contract with Rogers Communication for IT services and support.

Celgene is expected to see some buying interest after it announced that a mid-stage study of its anti-inflammatory drug, apremilast met its primarily end point, which is achieving a 20% or better improvement according to the American College of Rheumatalogy criteria. Based on the positive results, the company said it intends to start phase III studies that include doses of 20 mg twice a day as well 30 mg twice a day doses.

Harman International may see weakness after it announced that it has commenced an underwritten public offering of 9 million shares of its common stock. The company said it intends to use the proceeds to improve its liquidity and to reduce indebtedness under its revolving credit facility. Another stock that could be in focus over an offering is McMoRan Exploration (MMR). The company said it has commenced a public offering of about 11 million shares, while it has also commenced a public offering of 50,000 shares of convertible perpetual preferred stock, which has an offering price of $1,000 per share and will be converted into common shares.

Tyco Electronics could move to the upside after it raised its third quarter sales expectations to $2.45 billion to $2.55 billion from its previous guidance of $2.35 billion to $2.45 billion. The company attributed the upside to improved sales in the consumer-related end markets served by the Electronic Components segment, foreign currency translation and additional project revenue in the Undersea Telecommunications segment. The company also increased its adjusted earnings from continuing operations guidance to 10-17 cents per share from its previous guidance of 1-6 cents per share. Analysts estimated earnings of 9 cents per share on revenues of $2.43 billion.

La-Z-Boy may see some strength after it reported adjusted fourth quarter earnings of 7 cents per share, even as sales fell 23% to $284.5 million. The consensus estimates called for a loss of 11 cents per share on revenues of $297.4 million.

Capstone Tribune may react to its announcement that it reported a fourth quarter loss of 6 cents per share compared to a loss of 7 cents per share last year. Revenues climbed 28% to $11.8 million. Analysts expected a loss of 6 cents per share on revenues of $13.4 million.

Avis Budget is likely to move in reaction to its announcement in an investor presentation that it expects second quarter volumes to decline in double-digits, while it expects a 22% drop in rental days. That said, the company said it expects conditions to improve in the second half of the year.

Caseys may also be in focus after it reported that its fourth quarter basic earnings per share from continuing operations were 31 cents per share, which includes a pre-tax charge of $9.1 million related to a previously announced settlement agreement. In comparison, the company reported earnings from continuing operation of 28 cents per share in the year-ago period. Revenues fell to $883.02 million, below last year’s $1.20 billion. Analysts expected revenues of $881.56 million.

Genesee & Wyoming could be in focus after it said it would close its Huron Central Railway by the end of October. The proposed closure is expected to result in the elimination of 45 jobs. Towards the closure, the company expects to record charges of 15 cents per share in the second quarter. Additionally, the company said it has begun to offer 4 million shares of its common stock to the public.

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