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Market Outlook
Tuesday, December 07, 2010



Tuesday has a few economic reports scheduled. The reports that are available are:-

  • 7:45… ICSC Retail Store Sales

  • 8:55 …Redbook Chain Store Sales

  • 10:00… IBD/TIPP Economic Optimism

  • 10:00 …ISM Manufacturing and Non-Manufacturing Semiannual Reports

  • 1:00 PM… Results of $32B, 3-Year Note Auction

  • 3:00 PM… Consumer Credit



Also the following companies are reporting their quarterly earnings:-

• AutoZone Inc. (AZO), The Talbots Inc. (TLB), AeroVironment Inc. (AVAV), Casey's General Stores Inc. (CASY), H&R Block Inc. (HRB) and The Men's Wearhouse Inc. (MW).



tuesday outlook



Tuesday sees U.S. stock poised to rally out of the gate, after President Barack Obama announced a compromise deal with Republican lawmakers that would extend the Bush-era tax cuts for 2 years.

Dow Jones industrial average (INDU), S&P 500 (SPX) and Nasdaq (COMP) futures were up between 0.7% and 0.9% ahead of the opening bell.

For the second day in a row, Wall Street had little to no domestic economic or corporate reports to work with, leaving most of the attention on the currency markets. Wall Street was also responding positively to the compromise in Washington to extend all Bush-era tax cuts for two years.

The strong gains in the premarkets come in the wake of flat trading sessions on Friday and Monday amid apprehension about the domestic economy and the European sovereign debt crisis.

Wall Street was boosted in early action by a rally for the euro ahead of a key vote in Ireland on its budget. If the Irish parliament is able to pass an emergency budget, the country will clear the way for a bailout from its European Union members from its debt crisis. The euro was up 0.41% to $1.3360 ahead of that vote.

Economic Concerns

Tax Cuts

Late Monday, an agreement moved one step closer as President Obama announced a deal with Republican leaders. The deal would extend Bush-era tax cuts for 2 years and unemployment benefits for 13 months, while lowering the payroll tax by two percentage points for a year.

"It's not perfect," Obama said of the plan. "We cannot play politics at a time when the American people are looking for us to solve problems."

Consumer Credit

A report on consumer credit Tuesday afternoon is forecast to show a decline of $2.5 billion in October, following a gain of $2.1 billion in the previous month.



Notes of Importance

There are a few further points to the mornings trading which need to be considered:-

The Dow Jones Industrial Average (DJIA) snapped a three-session winning streak on Monday, as Wall Street was divided over the implications of a potential increase in the size of the Fed's second round of quantitative easing.

Technically, support at the 11,350 level is firming for the DJIA, while the blue chip barometer continues to challenge overhead resistance in the 11,400-11,450 region.

The S&P 500 Index (SPX), the broad-market index, is holding support at the 1,220 level, while facing resistance at the 1,230 region.

• The U.S. Dollar Index : Uncertainty in the U.S. Fed's direction for monetary policy has created a bout of weakness for the U.S. dollar, sending the greenback lower versus the euro. As a result, the U.S. Dollar Index is off 0.26% at 79.37.

Gold futures for February delivery rose $12.10 to $1,428.20 an ounce, after reaching a new intraday high of $1,429.60 earlier in the session. Gold settle at a record $1,416.10 an ounce Monday.

Benchmark crude futures for January delivery gained 79 cents to $90.17 a barrel, crossing the $90 a barrel threshold for the first time since October 2008. Oil for January delivery settled at a new 2-year high Monday, at $89.38 a barrel.

Bonds: The price on the benchmark 10-year U.S. Treasury fell, pushing the yield up to 2.99%.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,250,586 call contracts traded on Monday, compared to 618,276 put contracts. The resultant single-session put/call ratio arrived at 0.49 while the 21-day moving average held at 0.57.

Overseas Concerns

Global equities advanced on Tuesday, boosted by a compromise deal to extend expiring U.S. tax cuts, while the euro rose on optimism that Irish lawmakers will pass its toughest ever budget later in the day.

The single currency region's policymakers have yet to show financial markets that they can decisively resolve its debt problem. Concerns remain that the debt crisis could spread from Greece and Ireland to Portugal and possibly Spain.

After a five-hour meeting, the bloc's finance ministers said late on Monday they would be taking no new steps to tackle the contagion, saying an existing emergency fund was sufficiently big and that a proposal to issue euro zone bonds had not even been broached.

German Chancellor Angela Merkel, speaking in Berlin, rebuffed calls for a bigger financial safety net or joint euro bonds. Yields on sovereign bonds issued by euro zone peripheral countries were mixed. Ireland's 10-year bond yields IE10YT=TWEB over benchmark German Bunds DE10YT=TWEB eased 3 basis points to 563 bps, while those on Spanish 10-year bonds ES10YT=TWEB rose 7 bps to 241 bps.

The cost of protection against an Irish debt default narrowed 8 bps to 520 bps, while Spain's protection cost rose 2 bps to 319 bps.

Dealers said trade in the bonds was very thin.

"My gut feeling is that spreads are going to carry on widening for a while yet," said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets.

"Anyone in the market who is expecting someone, somewhere to fund more support for the periphery, whether it be the EFSF or the ECB -- they're going to be disappointed."

Currencies: The dollar fell against the euro and the British pound, but was slightly higher against the Japanese yen .

The dollar was steady at 82.65 yen JPY= after slipping to a three-week low against the Japanese currency earlier in the session. The renewed strength in the yen dragged Japan's Nikkei 225 .N225 down 0.3 percent.

European Markets

European stocks gained in morning trading. Britain's FTSE 100 added 1%, the DAX in Germany jumped 1% and France's CAC 40 surged 1.8%.

In Europe at midday, London +1.0%. Paris +2.0%. Frankfurt +0.9%.

Asian Markets

Earlier, Asian markets ended the session mixed. The Shanghai Composite added 0.7% and the Hang Seng in Hong Kong jumped 0.8%, while Japan's Nikkei shaved 0.3%.

In Asia, Japan -0.3% to 10141.1. Hong Kong +0.8% to 23428. China +0.7% to 2876. India -0.2% to 19935.

Futures Trading

As of 6:33 a.m. ET, the Dow Jones Industrial Average futures jumped 86 points to 11439.00, the S&P 500 futures gained 11.60 points to 1233.70 and the Nasdaq 100 futures advanced 19 points to 2209.50.

Futures at 7:00: Dow +0.7%. S&P +0.8%. Nasdaq +0.8%. Crude +0.9% to $90.22. Gold +0.9% to $1429.40.



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Company News

3M Company (MMM) announced that it expects to earn $6.17 per share to $6.37 per share in 2011, excluding pension expenses. Wall Street is currently looking for a fiscal 2011 profit of $6.24 per share. The company also reiterated its 2010 outlook for earnings of $5.70 per share to $5.74 per share, excluding Medicare costs, in line with the consensus estimate. Looking ahead, 3M plans to continue making acquisitions of technologies and businesses, "to build new platforms for future growth."

AutoZone Inc. (AZO) reported that its first-quarter earnings rose 20% to $172.1 million, or $3.77 per share, from $143 million, or $2.82 per share, in the year-ago period. Revenue rose to $1.79 billion from $1.59 billion last year. Wall Street analysts were expecting a profit of $3.42 per share on revenue of $1.72 billion.

Some Interesting News

White House outlines tax accord. Capping weeks of negotiations, President Obama announced yesterday evening a 'framework' agreement with Republicans that includes a two-year extension on Bush-era tax cuts, keeps the dividend and capital gains tax at 15%, temporarily cuts payroll and Social Security taxes, and extends unemployment benefits. However, despite earlier reports that the deal was 'all but done,' Democratic lawmakers object to parts of the plan and will discuss the matter today. The downside here is lost revenue to the government, which would total at least $450B in 2011 and could climb to $600B, depending on the strength of the economy over the next two years. Traders expect to see a post-announcement relief rally today; S&P futures +0.8% (6:00 ET).

Nicor sells itself to AGL. Nicor (GAS) agreed to be acquired by AGL Resources (AGL) for $53/share in cash and stock, a 22% premium to Nicor's Dec. 1 close. The equity value of the deal is $2.4B. As of Sept. 30, the two natural-gas distributors combined had annual earnings of $1.1B on $5.1B of revenue. Premarket: GAS +11.2% to $51.99, AGL -0.75% (7:00 ET).

Treasury sells remaining Citi stake. The Treasury said late yesterday that it had reached an agreement to sell its remaining 2.4B shares in Citigroup (C) for $4.35 each, slightly below yesterday's $4.45 close, in a move that will net the government $10.5B. The Treasury still owns warrants on 465.1M Citigroup shares and the FDIC holds $800M of the bank’s trust-preferred securities on behalf of the Treasury. Citigroup said it's 'pleased' about the government's exit, and shares could see some upward momentum as investors leery of co-investing with the government return to the stock. Premarket: C -1.1% to $4.40 (7:00 ET).

JPMorgan doubles down on copper. It turns out the mystery buyer of more than $1B of copper is JPMorgan (JPM). The purchases account for more than 50% of all the copper stored in official London warehouses, and though the revelation that JPMorgan is the buyer has alleviated some concerns that a single trader was trying to corner the market, investors are still worried about an impending supply shortage. Copper futures +2.6% to $4.114 (7:00 ET).

BP looks to sell North Sea assets. BP (BP) is testing the waters on the sale of North Sea assets worth around $1B. Companies and bankers say BP has approached them on a pre-tender basis to gauge the potential level of interest in a portfolio of non-core fields. In July, BP strongly denied that it planned to exit the North Sea entirely, where it has around $20B of fields, but a partial sale would help the company reach its goal of $30B of divestments following the Gulf spill. Exxon (XOM) is also said to be looking to sell $2B worth of assets in the North Sea region. Premarket: BP +1.7% (7:00 ET).

Xstrata on track for $23B expansion. At an investor day in London, Xstrata (XSRAF.PK) said this morning it's on track to spend $23B on expansion through 2016, with a focus on coal, copper and nickel projects. The company didn't rule out further M&A activity, but plans to focus on organic growth and set its 2011 capex targeted at expansion at $6.8B. Separately, Xstrata's board approved the development of the Ravensworth North coal mine in Australia for a total investment of $1.36B. In London, Xstrata +3.1% (7:00 ET).

Banks vie for Chrysler Financial. Bidding has begun for Chrysler Financial, the auto lender owned by Cerberus Capital Management, and sources said a deal valued at several billion dollars could be reached in the next few weeks. ING (ING) and Toronto-Dominion Bank (TD) are reportedly among the parties in talks with Cerberus. A sale, even at a loss, would be a relief for Cerberus, which placed a huge bet on the auto industry in 2007 before watching the economic crisis cripple its investments.

China's Bright Food eyes GNC purchase. China's Bright Food Group is reportedly nearing a deal to buy U.S. vitamin retail chain GNC Holdings for $2.5B-3B, and a deal could be announced in the next few days. The deal would be the latest in a string of global acquisitions by state-backed Chinese companies. Earlier this year, GNC, which is owned by Ares Management and the Ontario Teachers' Pension Plan Board, entered into a joint venture with Bright Foods to help GNC sell its products in China.

Rare-earth miners rise on Sumitomo report. Molycorp (MCP) shares shot up 18% yesterday to $32.86 following a report that Sumitomo is in talks to buy a stake in the owner of the world’s largest non-Chinese deposit of rare-earth metals. Japan, the largest rare-earth importer, has been working to diversify its supply sources after shipments from China, which accounts for 97% of the world's rare-earth supplies, disrupted shipments of the key metals in September. Rare Element Resources (REE), a Vancouver-based rare-earth miner, saw shares jump 14% yesterday.

Conclusion

On Monday, major indexes ended mixed after drifting around breakeven for most of the day. Investors spent most of the day digesting Federal Reserve chairman Ben Bernanke's pessimistic comments about the nation's economy the night before.

Commodities surged as stocks drifted Monday. Oil prices hovered at 2-year highs, while silver hit a 30-year record high. The commodity rally continued Tuesday morning with gold hitting a fresh intraday high in premarket trade, and oil surpassing $90 a barrel.

Stocks climbed more than 2% last week as investors hoped for a deal on extending current tax rates.


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