US & World Daily Markets Financial Briefing 22-07-2009

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Earnings-Induced Rally May Face Test

The major U.S. index futures are pointing to a lower opening on Wednesday, with sentiment reflecting caution following seven straight sessions of gains. That said, earnings continue to be mostly positive, with companies exercising prudence in controlling costs, which is giving a lift to their bottom lines. However, bank earnings released during the day turned out to be lackluster and this could give a reason for some traders to take profits.

Technically, the averages are in overbought zone, which introduces an element of risk. However, with the major averages breaking above their early June highs, it is likely that markets consolidate at these levels.

U.S. stocks opened higher on Tuesday on support provided by a few positive earnings reports, although traders exercised caution following seven consecutive sessions of advances. After Caterpillar (up 7.67%) helped the Dow Industrials stay above the unchanged line till the afternoon, the index moved to the downside only to fight its way back to close at 8,916, representing a gain of 67.79 points or 0.77%. The blue chip average closed at its best level since January 5th, 2009. The index is up about 1.6% in the year-to-date –period.

Technology stocks came under selling pressure for most of the session, as reflected by the Nasdaq Composite Index, which traded above the unchanged line only in early and late trading. Profit taking took a toll on the technology space, which has run up strongly since Intel (INTC) and other chipmakers relayed positive messages through their earnings report. At the close of trading, the index was up 6.91 points or 0.36% at 1,916, its highest level since October 3rd, 2008, while it has gained about 21.5% in the year-to-date period.

Meanwhile, the S&P 500 Index closed higher, aided by a late hour buying surge after spending the bulk of the session below the unchanged line. The index, which is up 5.7% thus far this year, closed Tuesday’s session up 3.45 points or 0.36% at 955.

Seventeen of the thirty Dow components ended the session higher, while twelve ended lower and one closed unchanged. Apart from Caterpillar, Merck (MRK) (up 6.12%) Boeing (BA) (up 1.94%), Cisco Systems (CSCO) (up 2.08%), Pfizer (up 2.88%), Verizon (VZ) (up 1.85%) and Exxon Mobil (XOM) (up 2.22%) were among the other notable gainers. Alcoa (AA) moved down 4.34%, United Technologies (UTX) slid 1.82%, Coca Cola (KO) fell 1.33%, Home Depot (HD) declined 1.37% and General Electric (GE) lost 1.71%.

Among the sector indexes, the Dow Jones Utility Average rose 1.02%, the Philadelphia Oil Service Index gained 1.05%. The NYSE Arca Disk Drive Index moved up 3.13% compared to a 1.17% advance by the NYSE Arca Software Index. On the other hand, the NYSE Arca Airline Index fell 3.06% and the KBW Bank Index declined 3.10%. The NYSE Arca Computer Hardware Index slipped 1.62%.

While testifying before the House Financial Services Committee, Bernanke said the near zero interest rate environment is here to stay. The Fed chiefs seem to think that the economy hit the bottom in the second quarter of 2009 and will resume moderate growth thereafter. Bernanke’s prepared speech included a discussion of the ways and means to mop up excess liquidity from the system, which is otherwise termed as the ‘exit strategy.’

The Fed Chairman is of the view that policy measures will unwind automatically as the economy recovers. He also said should there be a need, the Fed has tools available to hasten the process. Bernanke also expressed his opposition to opening up monetary policy deliberations and operations to General Accountability Office reviews. Additionally, Bernanke said Congress needs to prepare its own exit strategy from unsustainable budget deficits.

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Bay Street Stocks Could Extend Losses

Toronto stocks could drop for a second straight day, following the lead of U.S. and European markets. Energy stocks could see weakness as crude oil is lower in electronic trading.

Crude oil prices edged lower in electronic trading, losing 34 cents to $64.38 per barrel. Gold slipped $1.40 to $945.50 and copper prices were flat at $2.451.

Suncor reported second quarter earnings of C$185 million or C$0.20 per share, sharply below C$920 million or C$0.99 per share reported in the second quarter of 2008.

Financials may also decline as Morgan Stanley a reported a second quarter loss of $159 million or $1.37 per share, compared to income of $689 million or $0.61 per share, a year ago.

Silvercorp Metals announced that its offer to acquire all the outstanding shares of Klondex Mines has been terminated.
 
MatlinPatterson Global Advisers said Tuesday evening that it has submitted a proposal to buy substantially all of Nortel Network Corp.'s CDMA and LTE Access assets for US$725 million. The offer tops an earlier bid for the assets by Nokia Siemens Networks B.V. by $75 million.

Teck Resources and Husky Energy are on the earnings calendar today. In economic news, Canadian retail sales rose 1.2% in the month of May, according to Statistics Canada. This is compared to a revised 0.6% drop for April. Excluding auto, sales were up 0.7% after falling 0.5% in April.

Tuesday, the S&P/TSX Composite Index dropped 25.39 points or 0.24% to settle at 10,515.32. The drop was the first in seven sessions for the index.

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The major Asian markets ended Wednesday’s session on a mixed note, as profit taking took some sheen off the optimism generated by positive corporate earnings.

Japan’s Nikkei 225 average traded tentatively in early morning trading before taking off and moving steadily higher. The index closed up 71.14 points or 0.74% at 9,723, closing higher for the sixth straight session.

Electronics and electric machinery makers saw some strength. JFE Holdings rallied 6.11% and Keisei Electric Rail rallied close to 5%. Mitsui Chemicals rose 6.87%. The auto space showed mixed sentiment, while financial stocks ended mostly lower.

Australia’s All Ordinaries showed some tentativeness in early trading, but it rose decisively thereafter. Nevertheless, the index moved mostly sideways in a narrow range before closing up 20.60 points or 0.51% at 4,069.

Energy and material stocks once again led the advance, with BHP Billiton, Fortescue, Rio Tinto and Woodside Petroleum ending in positive territory. However, Newcrest Mining, Lihir Gold and Oil Search fell. In the banking space, ANZ Bank rose, while Commonwealth Bank and Westpac receded.
Trading in National Australia Bank was halted following news that the bank is planning to raise as much as A$2.75 billion through the sale of shares in an effort to weather its rising bad loans and also to fund potential acquisitions.

Meanwhile, Hong Kong’s Hang Seng Index, which held slightly above the unchanged line in the morning session, receded sharply in the afternoon to close down 253.56 points or 1.30% at 19.248.
Twenty-nine of the forty-two index components ended the session lower, with property, financial stocks responsible for much of the weakness. China-related stocks also ended mostly lower. On the other hand, resource stocks showed some strength.

Currency, Commodity Futures

Crude oil futures for September delivery in their first day of trading as the front month contract are down $0.91 at $64.70 a barrel. The August futures expired on Tuesday at $64.72 a barrel, up $0.74.

Gold futures are edging down $0.10 at $946.80 an ounce. In the previous session, the precious metal fell $1.90 to $946.90 an ounce. A weaker dollar and a rise in equity markets, both of which reflect increasing optimism about an economic recovery, have been responsible for much of the recent increase in oil prices. OPEC has also been suggesting that they may go in for further production cuts if the demand for OPEC oil doesn’t pick up.

That said, OPEC’s statement lacks credibility, as they have not been strictly adhering to the already announced production cuts. The recent run up increases the risk of a correction.

On the currency front, the U.S. dollar is trading at 93.33 yen compared to the 93.745 yen it fetched at the close of New York trading on Tuesday. The greenback is currently valued at $1.4191 versus a euro.

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The major European markets have turned lower in Wednesday’s session despite showing strength in early trading. Profit taking has introduced weakness after the markets advanced for seven consecutive sessions. The French CAC 40 Index and the German DAX Index are moving down 0.86% and 0.49%, respectively, while the U.K.’s FTSE 100 Index is declining 0.30%.

On the economic front, the French National Institute for Economics and Statistical Studies said French consumer spending rose 1.4% month-over-month in June after edging down 0.2% in the previous month. Economists had estimated a mere 0.3% increase. Spending on durable goods rose 1.3% compared to a 3.6% increase in spending on leather and textiles. Annually, consumer spending increased 1.2%.

A report released by the U.K.’s National Institute of Economic and Social Research said the U.K. economy is expected to contract 0.4% in the second quarter followed by a 0.1% contraction in the third quarter. The economy is expected to return to growth in the fourth growth, with the institute predicting 0.5% growth in the quarter.

U.S. Economic Reports

The Mortgage Bankers’ Association’s weekly report showed that its total loan applications index rose a seasonally adjusted 2.8% in the week ended July 17th to 528.8 despite the rise in the 30-year mortgage rates. The volume of applications seeking to refinance existing mortgages rose 4% and applications filed for loans to purchase homes also rose.

Federal Reserve Chairman Ben Bernanke will also testify before the Senate Banking Committee at 10 AM.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET.
Crude oil stockpiles fell by 2.8 million barrels to 344.5 million barrels in the week ended July 10th, with inventory levels remaining above the upper boundary of the average range. Gasoline inventories rose by 1.5 million barrels and were in the upper half of the average range.

Distillate stockpiles edged up by 0.6 million barrels and remained above the upper boundary of the average range. Refinery capacity utilization averaged 87.2% over the four-weeks ended July 10th compared to 86.7% in the previous week.

Earnings

Morgan Stanley reported a second quarter net loss from continuing operations of $1.36 per share. The recent quarter’s results include negative adjustments of $1.32 per share from improvement in its debt-related credit spreads and 74 cents per share from the repurchase of TARP capital. Net revenues fell 11% to $5.41 billion, ahead of the $5.35 billion revenue estimate.

Whirlpool said its second quarter earnings fell to $1.04 per share from $1.53 per share in the year-ago period. Revenues declined 18% to $4.17 billion. The consensus estimates called for earnings of 51 cents per share on revenues of $4.2 billion.

PepsiCo.’s second quarter earnings were $1.06 per share compared to $1.05 per share last year. Net revenues fell to $10.59 billion from the year-ago’s $10.95 billion. The consensus estimates called for earnings of $1 per share on revenues of $10.99 billion. The company reaffirmed its full year 2009 guidance of mid-to-high-single-digit growth in net revenue and core earnings per share.

Pfizer said its second quarter revenues totaled $10.98 billion, down 9% year-over-year. The company’s adjusted earnings were 48 cents per share, down 13% from last year. Analysts estimated earnings of 48 cents per share on revenues of $11.28 billion. The company increased its 2009 adjusted earnings per share guidance to $1.90-$2 from its earlier estimate of $1.85-$1.95, while analysts estimate earnings of $1.96 per share.

Elsewhere in the drug space, Eli Lilly said its second quarter adjusted earnings were $1.12 per share compared to the $1.02 per share consensus estimate. Total revenues were up 3% to $5.29 billion, slightly ahead of the mean analysts’ estimate of $5.28 billion. For the full year, the company estimates earnings of $4.20-$4.30 per share, higher than its initial estimate of $4-$4.25 per share.

Meanwhile, GlaxoSmithKline reported a 14% increase in its adjusted earnings per share to 31 pence per share. Revenues climbed 15% to 6.75 billion pounds. The company also raised its dividend by 8% to 14 pence per share.

Boeing said its second quarter revenues rose 1% to $17.15 billion. On a reported basis, the company’s earnings rose to $1.41 per share from $1.16 per share last year. The company’s earnings guidance for 2009 remains unchanged at $4.70-$5 per share.

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Apple may gain ground after it reported that its third quarter sales rose 12% to $8.34 billion. The company reported earnings of $1.35 per share, higher than $1.19 per share in the year-ago period. The consensus estimates had called for earnings of $1.17 per share on revenues of $8.20 billion. The company expects fourth quarter earnings of $1.18-$1.23 per share on revenues of $8.7 billion to $8.9 billion. Analysts estimate earnings of $1.30 per share on revenues of $9.1 billion.

Shares of Advanced Micro Devices sunk in Tuesday’s after hours session after it reported a loss of 49 cents per share for its second quarter compared to a loss of $1.16 per share reported in the year-ago period. On an adjusted basis, the company’s loss was 62 cents per share. Revenues declined 13% to $1.18 billion, ahead of the consensus estimate of $1.13 billion.

Yahoo also fell in the after hours session despite reporting second quarter earnings of 10 cents per share, higher than 9 cents per share in the year-ago period and exceeding the consensus estimate of 8 cents per share. Revenues, excluding traffic acquisition costs, were $1.14 billion, in line with the mean analysts’ estimates.

Starbucks may see buying interest after it reported third quarter earnings of 20 cents per share compared with a loss of 1 cent per share last year. The company’s adjusted earnings were 24 cents per share, ahead of the 19 cents per share consensus estimate. Revenues fell 7% to $2.40 billion, also above the $2.37 billion consensus estimate. For the full year, the company expects adjusted earnings of 74-75 cents per share compared to the consensus estimate of 70 cents per share.

Linear Technology rose in the after hours session despite reporting that its fourth quarter net income declined to 25 cents per share from 46 cents per share last year. Revenues were down 32% to $208 million. The consensus estimates had called for earnings of 24 cents per share on revenues of $210 million.

Winn-Dixie Stores could move to the upside after it increased its full year 2009 EBITDA guidance to $164 million, ahead of the high end of its previous estimate of $152 million. The company attributed the optimism to higher sales and gross profit margin and also includes $4.4 million due to both the positive sales impact from Hurricanes Gustav and Ike and tropical storm Fay. For 2009, the company expects net sales of $7.4 billion, while analysts estimate sales of $7.38 million. For 2010, the company expects adjusted EBITDA in the range of $170 million to $180 million.

Sallie Mae could also be in focus after it reported a second quarter loss of 32 cents per share compared with a profit of 50 cents per share in the year-ago period. The company’s core adjusted profit rose to 31 cents per share from 27 cents per share last year. Analysts had estimated a profit of 6 cents per share.

Seagate Technology may move in reaction to its announcement that it reported a loss of 16 cents per share for its fourth quarter compared to a profit of 32 cents per share in the year-ago period. The recent quarter’s results were hurt by 22 cents per share in restructuring charges. Revenues declined 19% to $2.35 billion. Analysts estimated earnings of 10 cents per share on revenues of $2.25 billion.

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