Market Outlook
Tuesday, December 14, 2010

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

  • 7:30… NFIB Small Business Optimism Index

  • 7:45… ICSC Retail Store Sales

  • 8:30… Producer Price Index

  • 8:30… Retail Sales

  • 8:55… Redbook Chain Store Sales

  • 10:00… Business Inventories

  • 2:15 PM… FOMC Announcement

Also the following companies are reporting their quarterly earnings:-

• Best Buy Co. Inc. (BBY) and Hovnanian Enterprises Inc. (HOV)

tuesday outlook

Tuesday sees U.S. stock index futures little changed, ahead of a slew of economic data, and as investors continue to await resolution on a tax-cut deal in Washington, with futures for the S&P 500 SPc2 flat, Dow Jones DJc2 futures down 0.03 percent and Nasdaq 100 NDc2 futures up 0.11 percent at 0930 GMT.

All eyes will be on the Federal Reserve on Tuesday, expected to leave interest rates unchanged and assess the recent launch of a massive bond-buying programme to support the economy.

Also, Fed officials will likely be revising their economic outlook to reflect stronger growth after the White House and congressional Republicans agreed to extend tax breaks and provide a payroll tax cut, effectively delivering fresh fiscal stimulus.

Economic Concerns

Fed Policy Statement

The Federal Reserve's policy statement is due in the afternoon. The central bank is widely expected to hold interest rates near 0%, where they have been since the financial crisis took hold in 2008.

Retail Sales

Government reports on retail sales and inflation at the wholesale level will be released before the market opens. Economists expect U.S. retail sales to have risen 0.5% in November, according to consensus estimates from Sales jumped 1.2% in October. Excluding the automotive sector, sales are forecast to have edged up 0.6% in the month.

Producer Price Index

The producer price index for November is expected to gain 0.5%, following a 0.4% increase the month before. Core PPI -- which excludes food and energy prices -- is forecast to rise 0.2%, following a dip in October.

Business Inventories

After the market opens, another report is expected to show business inventories grew 1.1% in October.

Tax Plans

President Barack Obama's bipartisan tax plan was on its way to passing its first test in Congress on Monday but a major Wall Street firm warned that damage to America's strained finances would outweigh any short-term economic boost.

The $858 billion package, which would keep lowered income-tax rates from expiring at the end of the year, picked up 62 votes in the 100-seat Senate. Voting continued but the tax measure had effectively passed a procedural hurdle and will now go to a full vote in the chamber on Tuesday or Wednesday.

Both chambers of Congress could approve the bill by the end of the week, despite complaints from many Democrats that Obama has given away too much to the Republicans who will soon enjoy greater clout in Washington.

"I think we'll pass a bill, as opposed to simply not passing anything," House of Representatives Democratic leader Steny Hoyer said at a news conference. He said he aimed to get a bill to Obama by the end of the week.

Income taxes would rise by an average of $3,000 per household if Congress doesn't act by January 1 -- an unlikely outcome, Hoyer said.

Many economists say the deal could boost the sluggish economy, in part because of a payroll tax credit and extension of jobless benefits, at a time when Congress has shown little appetite for spending-based stimulus efforts.

They estimate the tax package could lift economic growth next year by up to a full percentage point, perhaps pushing it above 4 percent.

But Moody's Investors Service warned it could move a step closer to cutting the United States' top-notch triple-A bond rating in the next two years if the package becomes law.

"From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth," Moody's analyst Steven Hess said in a report.

The report could give additional ammunition to Democrats in the House who say the package gives away too much to the country's wealthiest 2 percent as the country is struggling with budget deficits that are higher as a percentage of the economy than any time since World War Two.

Worries about the tax bill pulled U.S. bond prices down last week but the market was reacting to other data on Monday. Investors pushed yields on the benchmark 10-year Treasury bond above 3.375 percent as strength in U.S. stock index futures weighed on Treasury prices.

Notes of Importance

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

Gold futures for February delivery rose $8.10 to $1,406.10 an ounce.

Benchmark crude futures for January delivery gained 24 cents to $88.85 a barrel.

Oil prices eased on Tuesday, as investors continued to watch for new monetary policy announcements by China to tame high inflation, and ahead of U.S. oil industry stocks data.

Bonds: The price on the benchmark 10-year U.S. Treasury edged down slightly, pushing the yield up to 3.29%.

Overseas Concerns

The European Central Bank is considering requesting an increase in its capital to help cope with the rising costs of fighting the euro zone debt crisis, euro zone central bank sources told Reuters.

Currencies: The dollar slid against the euro, the Japanese yen and the British pound.

The dollar hovered near its low for December against the euro on Tuesday, although the single currency could struggle to extend its gains much after its jump on Monday triggered a wave of stop-loss buying and forced some traders to lighten their euro short/dollar long positions ahead of the Fed's policy meeting later on Tuesday.

European Markets slipped in morning trade, halting a sharp two-week rally and retreating from two-year highs as investors booked a portion of recent hefty gains made by cyclical stocks. However, gains in defensive telecoms, utilities and healthcare stocks -- which have underperformed the broad market this year -- helped limit the fall.

European stocks were little changed in morning trading. Britain's FTSE 100 fell slightly, the DAX in Germany slid 0.1% and France's CAC 40 dropped 0.2%.

In Europe at midday, London flat. Paris -0.1%. Frankfurt -0.1%.

Asian Markets

Earlier, Asian markets ended the session up a bit. The Shanghai Composite added 0.1%, the Hang Seng in Hong Kong gained 0.5%, and Japan's Nikkei grew 0.2%.

In Asia, Japan +0.2% to 10317. Hong Kong +0.5% to 23431. China +0.1% to 2927. India +0.6% to 19799.

Futures Trading

Futures at 7:00: Dow +0.2%. S&P +0.2%. Nasdaq +0.1%. Crude +0.3% to $88.86. Gold +0.6% to $1406.60.


Company News

HCP Inc (HCP) said on Monday it would buy most of the real estate assets of privately held nursing and assisted living firm HCR ManorCare Inc from Carlyle Group [CYL.UL] in a $6.1 billion sale and leaseback deal.

Yahoo Inc (YHOO) plans to lay off more than 600 employees as early as Tuesday, two sources familiar with the situation said on Monday.

Pfizer Inc (PFE) named board member George Lorch as non executive chairman, a week after the abrupt departure of Chairman and Chief Executive Jeffrey Kindler from the world's largest drug maker.

Some Interesting News

HCP buys ManorCare assets. HCR ManorCare, a nursing and assisted living firm owned by Carlyle Group, agreed late last night to sell most of its real estate assets to HCP (HCP) for $6.1B plus a leaseback deal. HCP, a healthcare real estate investment trust, will pay $3.53B in cash, $852M in stock and $1.72B will be reinvested from the payoff of HCP's existing debt investments in ManorCare. Carlyle and ManorCare's management will remain the owners of the operating company.

Sprint may cut Clearwire voting rights. Sprint (S) said yesterday it may cut its voting rights in Clearwire (CLWR) below 50% while retaining its 54% ownership stake in order to help Sprint avoid liquidity risks in the event Clearwire runs out of money. Sprint had previously disclosed that since Clearwire is viewed as its subsidiary, a Clearwire default could cause Sprint to breach its own debt agreements. A Sprint spokeswoman said no decisions had been made about whether to reduce the voting stake but the company wanted the flexibility to do so if needed. Yesterday, cash-strapped Clearwire said it had successfully raised $675M from new notes and planned a $650M sale of exchangeable notes.

Part of Obamacare ruled unconstitutional. A federal judge ruled yesterday that a key part of President Obama's healthcare overhaul is unconstitutional, marking a significant but not necessarily fatal setback to the major legislative accomplishment. The ruling took issue with the law's requirement that most Americans buy insurance or pay a penalty, but didn't go so far as to say states or the federal government should stop implementing the law. The White House is considering an appeal, while Republicans cheered the ruling and said it bolsters their plans to pass a repeal bill in the House next year. Insurers spiked briefly on the news but subsequently leveled out; in yesterday's trading, WellPoint (WLP) -0.3%, Cigna (CI) -0.4%, Aetna (AET) +1%, UnitedHealth (UNH) +0.6%, Humana (HUM) +0.05%.

WTO sides with the U.S. The WTO sided with the U.S. in a case against China over tire imports, supporting President Obama's decision in Sept. 2009 to levy tariffs of up to 35% on Chinese tires. It's an important victory for the Obama administration as it tries to build a reputation as tough on enforcement and prepares to push for a free trade pact with South Korea. The ruling comes as a 100-strong Chinese delegation arrives in Washington for annual trade talks.

SEC widens Stanford probe. The SEC has reportedly widened its probe into an alleged $8B Ponzi scheme run by Allen Stanford, and has begun to investigate brokerage executives who invested their clients’ money in Stanford International Bank products. Lawyers said the SEC has notified several brokers that it intends to file civil fraud charges against them in connection with the probe. The SEC declined to comment.

Tax package gets Senate nod. President Obama's tax package passed a key test vote in the Senate yesterday by a margin of 83-to-15, easily surpassing the 60 votes needed. The $858B package now heads to a final Senate vote today or tomorrow, with a vote in the House expected by the end of the week. Many economists say the deal will help boost the economy, though ratings agencies warn of the potential negative impact to the country's credit profile.

IATA: Improved profit outlook, pathetic margins. The airline industry will likely post a $15.1B net profit this year, up from previous estimates of $8.9B, said the International Air Transport Association, on the back of increased passenger and cargo traffic. For 2011, higher fuel costs and slower economic growth are expected to bring net profit down to a revised $9.1B (vs. $5.3B prior forecast). Despite the increased profit outlook, the IATA warned the industry is 'balancing on a knife edge' and 'margins remain pathetic.' European airlines continue to underperform and 'any shock could stunt the recovery.'

Hedge funds see new inflows. Hedge funds pulled in around $13B in new money in November, but lost just over $11B on performance, bringing their total assets to $2.409T. It's the fifth consecutive month of inflows and a marked change from the pullbacks of the first half of the year.


On Monday, stocks finished a lackluster session mixed as investors mulled a flurry of corporate deals, and as the tax deal cleared a key Senate procedural hurdle.

Markets were unable to carry over last week's momentum, when stocks churned higher, with the S&P 500 reaching its highest level in two years on Friday.

The Nasdaq closed lower to end eight straight days of gains on Monday as some large-cap tech stocks slid in a late-day sell-off. The Dow cut its gains and the S&P 500 ended a thinly traded session flat as optimism faded over China's move to tame its growth, and as some technical indicators suggested a near-term pullback could be in the cards.

The Dow Jones industrial average .DJI gained 18.24 points, or 0.16 percent, to end at 11,428.56, well off its intraday high of 11,480.03. The Standard & Poor's 500 Index .SPX inched up a mere 0.06 of a point, or 0.00 percent, to finish at 1,240.46. But the Nasdaq Composite Index .IXIC fell 12.63 points, or 0.48 percent, to close at 2,624.91.

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