US & World Daily Markets Financial Briefing 31-07-2009

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The major U.S. index futures are pointing to a lower opening on Friday, with the sentiment souring after the release of second quarter GDP report, which showed a slower-than-expected contraction, but the previous periods’ figures were revised lower. Additionally, personal consumption expenditure, the lifeline of economic growth, fell by much more than economists had expected. Disappointing earnings from Chevron (CVX) may also weigh on the Dow.

The markets may also react to the manufacturing survey results from the Chicago region, due out later in the day. Profit taking following recent gains introduces downside risks, as traders look for more confirmation on then much-anticipated recovery.

Positive earnings reported by companies worldwide that led to rallies in the rest of global markets supported the U.S. markets also on Thursday, as the major averages opened higher and saw further gains in early trading. Thereafter, the major averages showed sideways movement until late trading, when they gave back some of their gains. The indexes closed the session notably higher.

At the close of trading, the Dow Industrials was up 83.74 points or 0.92% at 9,155, the S&P 500 Index was up 11.60 points or 1.19% at 987 and the Nasdaq Composite was up 16.54 points or 0.84% at 1,984.

Twenty-six of the thirty Dow components ended the session higher, with General Electric (GE) (up 6.93%), Alcoa (AA) (up 4.09%), DuPont (DD) (up 4.30%), Caterpillar (CAT) (up 3.78%) and Bank of America (BAC) (up 3.33%) leading the Dow’s gains. On the other hand, Travelers Co. (TRV) and Exxon Mobil (XOM) receded in reaction to their earnings results. McDonald’s (MCD) fell 1.45%.

Among the sector indexes, the Philadelphia Oil Service Index rose 2.65% compared to a 1% gain by the NYSE Arca Oil Index, a 2.73% advance by the NYSE Arca Gold Bugs Index and a 3.28% rally by the Dow Jones U.S. Basic Materials Average. The NYSE Arca Securities Broker/Dealer Index and the KBW Bank Index moved up 2.05% and 3.41%, respectively.

In the technology space, the Philadelphia Semiconductor Index was up only modestly, while the NYSE Arca Disk Drive Index gained 2.06% and the NYSE Arca Hardware Index rose close to a percentage point.

Technically, the major averages are overbought, with the relative strength index of the Nasdaq Composite on a daily chart at 94.06, which is the highest level since January 2000. The strong momentum indicated by the momentum indicator suggests that overbought conditions may persist for some time. The Nasdaq Composite has gap support between 1,892 and 1,956, while on the upside, the index is likely to face resistance around 2,020 and 2,150.

That said, the CBOE Volatility Index is at very low levels around 25, with the trend of the fear gauge reflecting less trepidation on the part of the traders, thereby reduced volatility. Given the fact that economic fundamentals aren’t convincing enough, a careful following of the index is advised to alert on any potential sell-off that could follow this irrational run up.

The results of the 7-year note auction conducted by the Treasury yesterday was encouraging, with the yield coming in 3 basis points less than expected and the bid-to-cover ratio was at 2.63.

Meanwhile, initial claims for unemployment benefits totaled 584,000 in the week ended July 25th to 584,000. The previous week’s figures were revised up by 5,000 to 559,000. The week was the first one in recent times, where the numbers weren’t influenced by seasonal distortions brought about by the differing time schedules of auto plant shutdowns. Continuing claims for the week ended July 18th fell 54,000.

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Toronto Stocks Could Give Back Some Of Yesterday's Rally

Bay Street stocks could give back some of yesterday's rally in early trading on Friday as Canadian GDP fell more than expected. Oil prices are modestly lower, which could weigh on energy stocks.

On the economic front, Statistics Canada reported that the Canadian Gross Domestic Product decreased 0.5% In May. GDP was expected to fall 0.4%, compared to a 0.1% drop in April.

Crude oil prices dropped 45 cents to $66.49 per barrel and gold fell $1.30 to $936.00 an ounce, while copper jumped 2.85 cents to $2.5925 a pound.

Eldorado Gold reported second quarter net income of US$25.9 million or US$0.07 per share, compared with US$25.2 million or US$0.07 per share in the year-ago quarter.

Sierra Wireless reported second quarter net loss of US$5.87 million or US$0.19 per share, compared to net income of US$10.97 million or US$0.35 per share in the same quarter of last year. Analysts expected the company to report earnings of US$0.26 per share.
 
Norbord reported a second-quarter net loss of US$18 million or US$0.04 per share compared to a loss of US$36 million or US$0.24 per share in the second quarter of 2008.

MethylGene reported second quarter net loss of C$6.92 million or C$0.19 per share, compared to net loss of C$7.4 million or C$0.20 per share last year.

Manulife Financial is being sued by pension funds in Quebec and Ontario for C$500 million, according to the National Post.

On Thursday, the S&P/TSX Composite Index climbed 221.39 points or 2.11% to settle at 10,676.72. The rally took the main index away from a 12-day low.

Across the border, the U.S. Commerce Department revealed GDP fell at a pace of 1% for the second quarter. Economists had expected GDP to fall at a 1.5 percent pace. This follows a 6.4-percent contraction in the first quarter.

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The major Asian markets were uniformly higher on Friday after positive earnings and the reception to the 5-year note auction resulted in a scintillating rally on Wall Street overnight.

Japan’s Nikkei 225 average opened higher and moved sideways before legging up further in the afternoon to close at a near 10–month high of 10,257, representing a gain of 191.62 points or 1.89%. The breadth among the index components was tilted in favor of the gainers, who totaled 182, while the remaining 43 declined. Most sector stocks advanced, with the exception of utility, mining, telecom, Internet and pharma stocks

Stocks shrugged off a few economic reports that showed a weak job market and a further dip in prices. Japan's core consumer price index sank a record 1.7% year-on-year to 100.3 in June, declining for the fourth straight month, the Ministry of Internal Affairs said. The core consumer price index for the Tokyo metropolitan area, considered a bellwether for nationwide price trends, also fell at its fastest pace in July, down 1.7% to 99.7.

According to another release from the Ministry of Internal Affairs, Japan's unemployment rate rose 0.2 percentage points from the previous month to 5.4% in June, marking the fifth straight month of increase. The number of jobless rose for the eight consecutive month to 3.48 million, an increase of 830,000.

Australia’s All Ordinaries opened unchanged and rose sharply in early trading before moving steadily higher to close the session up 53.60 points or 1.28% at 4,250, marking its highest level since November 5th, 2008.

Barring consumer staple, healthcare and telecommunication stocks, which showed modest weakness, most other sectors advanced. Material, real estate and energy stocks were among the notable gainers. In mining space, Rio Tinto, BHP Billiton and Lihir Gold rose, while Fortescue declined and Newcrest Mining ended unchanged. The four major banks advanced strongly. QBE Insurance receded following an announcement from Elders Ltd. that it will sell its entire insurance business and place over 100 million of its shares to QBE Insurance Group Ltd for A$315 million.

Currency, Commodity Futures

Crude oil futures are trading up $0.12 at $67.06 a barrel after advancing $3.59 to $66.94 a barrel in Thursday’s session. The recent increase in crude oil prices was mainly due to a stronger demand from refineries and is not seen as the result of a tightening of supplies.

With the weekly inventory data showing a build in distillate inventories, it is likely that demand from refineries will slow down in the coming weeks. This poses additional downside risk of a price correction toward the $60-a-barrel.

Gold futures, which rose $10.10 to $937.30 an ounce in the previous session, are currently advancing $1.20 to $938.50 an ounce.

Among currencies, the U.S. dollar is trading at 95.465 yen compared to the 95.56 yen it fetched at the close of New York trading on Thursday. The greenback is trading at $1.4120 versus a euro compared to yesterday’s $1.4075.

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The major European markets opened lower and showed some volatility in early trading. Currently, the averages are trading lower, with the French CAC 40 Index losing 2.21 points or 0.49%, the German DAX Index moving down 10.54 points or 0.35% and the U.K. FTSE 100 Index declining 0.10%.

In corporate news, Anglo American said its first-half earnings fell to 1.8 billion pounds from 4.28 billion pounds in the year-ago period. Revenues fell 37.9% to 11.1 billion pounds.

French oil giant Total reported that its second quarter adjusted earnings declined to 1.7 billion euros from 3.7 billion euros last year. The company’s production declined 7.3% to 2.128 million barrels of oil equivalents.

On the economic front, the GfK NOP said its consumer confidence index for the U.K. showed a reading of –25 in July, unchanged from last year. Economists estimated a reading of –23.

Germany’s Federal Statistical Office announced that the wholesale turnover in real terms decreased 10.8% year-over-year in the second quarter compared to the 7.2% fall in the previous quarter. Nominally, wholesale turnover was down 18.4%.

The flash estimate of Eurostat showed that the euro area’s consumer price inflation rate was a negative 0.6% in July compared with a –0.1% rate in June. Meanwhile, in a separate report, Eurostat said, the region’s jobless rate rose to 9.4% in June from 9.3% in May, with the June reading marking the biggest rate since June 1999.

U.S. Economic Reports

The Commerce Department said the U.S. economy shrank at a 1% rate in the second quarter compared to a downwardly revised 6.4% GDP decline in the first quarter. Economists had expected a sharper 1.5% GDP decline in the second quarter.

The decline in first quarter GDP reflected negative contributions from non-residential fixed investment, personal consumption expenditures, residential fixed investment, private inventory investment and exports. The weakness was offset to some extent by positive contributions from federal government spending and in state and local government spending. Imports, which are a deduction from GDP calculations, declined.

Meanwhile, the Labor Department said the employment cost index rose a seasonally adjusted 0.4% in the second quarter compared to the expected increase of 0.3%. Wages and salaries increased 0.4%, slower than the 0.3% rate in the previous quarter and benefits climbed by 0.3%.

The results of the Institute of Supply Management-Chicago's business survey for July are scheduled to be released at 9:45 AM ET. Economists expect the business barometer index based on the survey to come in at 43.

In June, the business barometer index rose to 39.9 from 34.9 in May. Economists had expected a reading of 39. The new orders index climbed 4.3 points to 41.6 and the order backlog index rose more than 11 points to 37.6. Despite a 4-point increase, the employment index remained at depressed levels at 28.9. The rise in the inventories index for the second straight month seems to support the fact that inventory depletion that characterized much of the fourth quarter of 2008 and the first quarter of 2009 may be coming to an end. Reflecting the recent increase in commodity prices, the prices paid index increased by about 7 points.

Earnings

Constellation Energy (CEG) said its second quarter adjusted earnings were $1.08 per share compared to $1.82 per share in the year-ago period. Revenues fell to $3.10 billion from $4.12 million last year. Analysts estimated earnings of 76 cents per share on revenues of $3.57 billion. The company raised its earnings per share guidance to $3.10-$3.30, while it reaffirmed its 2010 earnings per share estimate at $3.05-$3.45. The consensus estimates call for earnings of $3.01 per share for 2009 and $3.12 per share for 2010.

American Electric Power (AEP) reported that its second quarter ongoing earnings were 70 cents per share, higher than 68 cents per share in the year-ago period. Revenues rose to $3.5 billion from $3.2 billion last year. Analysts estimated earnings of 60 cents per share on revenues of $3.63 billion. The company reaffirmed its 2009 earnings per share guidance of $2.75-$3.05 per share, while analysts estimate earnings of $2.86 per share.

AutoNation’s (AN) second quarter income from continuing operations was 31 cents per share, flat with last year. On an adjusted basis, income from continuing operations was 29 cents per share compared to 33 cents per share in the year-ago period. Revenues fell to $2.6 billion from the year-ago’s $3.7 billion. Analysts estimated earnings of 24 cents per share on revenues of $2.80 billion.

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Ingram Micro (IM) could be in focus after it said its second quarter earnings declined to 15 cents per share from 35 cents per share last year. The recent quarter’s results included charges amounting to 5 cents per share and $6.3 million in stock compensation expenses. Revenues fell to $6.58 billion from the prior year’s $8.82 billion last year. The consensus estimates called for earnings of 20 cents per share on revenues of $6.67 billion.

Chesapeake Energy (CHK) could also be in focus after it said its daily production rose 5% year-over-year to 2.453 billion cubic feet of natural gas equivalent. However, the company warned that it may cut production if prices remained weak.

First Solar (FSLR) is likely to see buying interest after it reported that its second quarter earnings rose to $2.11 per share from 85 cents per share in the year-ago quarter. Sales nearly doubled to $525.9 million. Analysts estimated earnings of $1.62 per share on revenues of $459.1 million.

RealNetworks (RNWK) is likely to react to its announcement that it posted a loss of $1.40 per share compared to the loss of 1 cent per share last year. The recent quarter’s results included a goodwill impairment charge of $175.6 million. Sales fell 11% to $135.7 million. The consensus estimates called for a loss of 6 cents per share on revenues of $138.4 million.

Novatel (NVTL) could move to the upside after it reported an adjusted profit of 2 cents per share for the second quarter compared to the 3 cents per share profit estimated by analysts. Revenues fell 6% year-over-year to $84.1 million, ahead of the consensus estimate of $77.4 million. The company guided third quarter earnings to 7-14 cents and revenues to $90 million to $95 million. Analysts expect a loss of 1 cent per share on revenues of $79.4 million.

MetLife (MET) could trade higher after it reported an adjusted profit of 88 cents per share for its second quarter compared to the 68 cents per share consensus estimate. Total revenues fell 31% to $8.27 billion.

Las Vegas Sands (LVS) is likely to be in focus after it reported a second quarter loss of 34 cents per share compared to a profit of 2 cents per share last year. Revenues fell 4.8% to $1.06 billion, below the consensus estimate of $1.08 billion.

Genworth Financial (GNW) is also expected to be in focus after it reported a loss of 11 cents per share for its second quarter compared to a loss of 25 cents per share in the year-ago period. Net operating income fell sharply to 2 cents per share from 49 cents per share last year. Total revenues rose to $2.48 billion from last year’s $2.40 billion. The consensus estimates had called for earnings of 16 cents per share on revenues of $2.60 billion.

NetSuite (N) may react to its announcement that its second quarter revenues rose 10% to $40.3 million. The company’s non-GAAP net income was 1 cent per share compared to last year’s loss of 1 cent per share. Analysts expected breakeven results on revenues of $40.12 million.

McAfee (MFE) could recede after it reported that its second quarter earnings declined to 18 cents per share from 30 cents per share last year. On an adjusted basis, the company would have reported earnings of 60 cents per share, ahead of the consensus estimate. Revenues rose 18% to $468.7 million. For the third quarter, the company expects earnings of 58-62 cents per share on revenues of $475 million to $495 million. Analysts estimated earnings of 59 cents per share on revenues of $478 million.

YRC Worldwide (YRCW) is likely to recede after it reported a loss of $5.20 per share for its second quarter compared to a profit of 62 cents per share last year. On an adjusted basis, the company reported a loss of $3.53 per share. Revenues fell 45% to $1.33 billion. Analysts estimated a loss of $1.71 per share on revenues of $1.59 billion.

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