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Market Outlook
Friday, August 06, 2010



Friday has only a couple of economic reports scheduled. They are:-

8:30… Nonfarm payrolls

9:00… Hearing: Community Reinvestment Act

3:00 PM… Consumer Credit

Also the following company is reporting its quarterly earnings:-

• China Sunergy Co. Ltd. (CSUN) and

• Dynegy Inc. (DYN).

friday outlook

Friday saw U.S. stock futures flat, as investors braced for a key reading on the jobs situation.

Stock futures traded in a tight range as investors avoid any big bets before the Labor Department's monthly employment report.

The key report is expected to show a decline in July nonfarm payrolls and offer more clues on the pace of the economic recovery.


Economic Concerns

Nonfarm Payrolls

High unemployment is often cited as the single most important component slowing an economic recovery. A lack of hiring has kept people concerned about their jobs, which in turn leads them to cut down their spending. A drop in consumer spending has helped lead to a slowdown in growth over the past few months.

nonfarm payrolls-july-2010

The July jobs report is widely expected to show a negative headline jobs number as temporary U.S. Census workers continue to be laid off. Economists surveyed by Thomson Reuters estimate that the nation's economy lost 87,000 jobs last month and the unemployment rate rose 0.1 percentage points to 9.6%.

Economists believe the U.S. Government laid off approximately 145,000 workers last month and local and state governments, due to budget cuts, laid off an additional 30,000 workers. With that taken into consideration, it's expected that the private sector created somewhere between 50,000-100,000 jobs last month.

The private sector jobs number will likely weigh heavier on investors' minds than the broader headline figure because of lingering concerns that private companies remain hesitant in hiring.

So investors will more be focused on hiring by private employers, which accounts for the bulk of jobs in the country. Economists expect private employers added 90,000 jobs last month after adding 83,000 a month earlier. Expanding hiring by private employers would likely ease recent concerns that the economy could fall back into recession.

Economic data over the past three months has pointed to a slowdown in growth, and investors are unsure just how much more the recovery will weaken. A disappointing employment report would probably add to fears that the recovery will worsen during the second half of the year.

Investors will also be digging into other details in the report for cues about the health of the economy. Average hourly earnings likely rose 0.1 percent last month after falling 0.1 percent in June, while the average work week remained unchanged at 34.1 hours.

The work week details are also considered important because it shows how much work employers are squeezing out of current staff. If it climbs too high, productivity of current workers gets exhausted and employers must then turn to hiring new employees to handle the extra work.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA) has remained trapped between support at 10,600 and resistance at 10,700 for most of the week.

The S&P 500 Index (SPX) has traded between 1,115 and 1,130 for most of the week.

Gold futures: The front-month gold contract continues to meet with resistance near $1,200 an ounce. In London, gold futures are down $3.10 at $1,196.20 an ounce.

• The U.S. Dollar Index is hovering close to breakeven ahead of this morning's nonfarm payrolls report. At last check, the index was up 0.11% at 80.91.

Benchmark crude futures are pulling back this morning, as traders remain skittish ahead of today's jobs data. In electronic trading, the front-month crude contract is down 27 cents at $81.74 per barrel.

Bond prices also showed little movement leading up to the jobs report. The yield on the 10-year Treasury note, which moves opposite its price, was unchanged at 2.91 percent compared with late Thursday.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 983,113 call contracts traded on Thursday, compared to 593,738 put contracts.

• On the Chicago Board of Trade, September wheat futures gained 9 cents, or 1%, to $7.95 a bushel. The contract rallied in the previous session after Russia imposed a temporary ban on its grain exports amid a devastating drought.

Overseas Markets

The Europe Stoxx 600 index (ST:SXXP) edged up 0.1% to 261.67 points. Investors digested several reports from European banking and insurance groups.

Royal Bank of Scotland Group PLC (RBS) (UK:RBS) , the U.K. bank that's 83%-owned by the government, said it returned to profit in the second quarter. Shares of RBS advanced 1.8% in London trading.

German insurance firm Allianz SE (DE:ALV) reported a 46% drop in second-quarter net profit, but its operating profit rose 23% to 2.19 billion Euros. The company's shares gained 0.8% in Frankfurt.

In Belgium, shares of banking group Dexia SA (BE:DEXB) dropped 3.4% after it reported a decline in quarterly net profit.

On the economic front, Italy's gross domestic product expanded by 0.4% in the second quarter compared to the first three months of the year, meeting forecasts, preliminary data showed. GDP grew by 1.1% year on year, slightly short of expectations.

European Concerns

European share markets headed higher in morning trading. Britain's FTSE 100, Germany's DAX and France's CAC 40 were all up about 0.4%.

In Europe, at midday, London +0.6%. Paris +0.5%. Frankfurt +0.5%.

The dollar rose versus the euro, the British pound and the Japanese yen.

The euro was flat at $1.3174.

Asian Concerns

Earlier in Asia, markets ended mixed. The Shanghai Composite jumped 1.4% and the Hang Seng rose 0.6%, but Japan's Nikkei slipped 0.1%.

In Asia, Japan -0.1% to 9642. Hong Kong +0.6% to 21679. China +1.4% to 2658. India -0.2% to 18144.

Futures Trading

As of 6 a.m. in New York, the Dow Jones Industrial Average futures were down 1 point, or 0.01%, to 10634, the S&P 500 futures were up 0.9 points to 1124.40 and the Nasdaq 100 futures were down 2 points to 1899.00.

Futures: Dow flat. S&P +0.1%. Nasdaq +0.1%. Crude -0.3% to $81.75. Gold -0.2% to $1196.40.

us futures-aug06,2010



Company News

Fannie Mae (FNM) reported a second-quarter net loss of $1.2 billion late Thursday, down from a net loss of $11.5 billion in the first quarter of 2010 and a net loss of $14.8 billion in the same period a year earlier. The quarterly net loss attributable to common stockholders was $3.1 billion, or 55 cents per share.

Kraft Foods (KFT) reported a second-quarter profit of 60 cents per share, excluding items, besting the Street's forecast for earnings of 52 cents per share. Sales rose 25% to $12.3 billion. Kraft also kept its 2010 adjusted profit forecast of at least $2 per share.

Activision Blizzard Inc. (ATVI) announced a second-quarter profit of $219 million, or 17 cents per share, on total revenue of $967 million. Excluding special items and sales, Activision earned $72 million, or 6 cents per share, on revenue of $683 million. By that measure, analysts had forecast Activision to earn 5 cents per share on $719.8 million in sales.

AIG (AIG) is expected to post a quarterly profit when it releases its latest financial results before the opening bell. Analysts, however, don't expect the company to offer much guidance about when it plans to pay back the government for bailing it out.

Some Interesting News

Fannie Mae: Smaller loss, less gov't aid. Fannie Mae (FNMA.OB) posted a $1.2B net loss in Q2 and asked the government for another $1.5B in aid. Though the numbers are still ugly, this is Fannie's smallest loss in three years and its smallest quarterly request for assistance since November 2008. Delinquency rates have been dropping, but continued weakness in the housing market could dampen Fannie's efforts to turn around its 12-quarter losing streak. Separately, the White House denied reports that it planned to change its policy towards Fannie and Freddie Mac (FMCC.OB), after analysts had speculated the Obama administration might tweak rules at the mortgage giants to spark a refinancing wave.

FCC aborts net neutrality talks. The FCC abruptly ended closed-door talks with internet and telecom giants over net neutrality, saying the two sides couldn't reach a compromise on ways to regulate internet traffic. Sources said FCC officials felt the talks had been undermined by reports of a deal between Verizon (VZ) and Google (GOOG) that would allow the phone giant to prioritize some broadband traffic in exchange for a premium.

A win, and a possible loss, for Oracle. In a legal filing, SAP (SAP) said it would accept responsibility for copyright infringement by a discontinued business and pay restitution to rival Oracle (ORCL). However, SAP plans to present information showing Oracle's damages were substantially less than the $1B it claims, with damages likely to be in the "tens of millions" of dollars. Separately, sources said Oracle may have to pay damages of up to $1B in the Justice Department's software-overcharging suit, as the company may have overbilled the government by 35% or more. • BofA wants to loosen gov't leash. Bank of America (BAC) is trying to get the government to release it from a confidential memorandum of understanding put in place during the financial crisis. The 15-month-old sanctions restrain BofA from certain actions, such as raising its dividend, and subject the bank to increased regulatory scrutiny of both large decisions and day-to-day operations. Officials from the Fed and the Office of the Comptroller of the Currency have been somewhat reluctant to lift the memorandum, and are engaged in negotiations with the bank while they evaluate whether BofA satisfied all of their requirements.

Winners and losers from Russia's wheat whipsaw. After initially promising to keep grain exports stable, Russia said it would ban grain exports because of the country's worst drought in at least a century. The news lifted shares of U.S. grain merchants like Archer Daniels Midland (ADM, +5.7% in yesterday's trading) and Bunge (BG, +5.6%), but higher wheat prices will become a challenge for cereal and bread producers like General Mills (GIS, -2.2%), Kellogg (K, -1.75%) and Sara Lee (SLE, -2%). Wheat's price spike (contracts for Dec. delivery +6.5% earlier today, +25% this week) could also spur demand for the dollar and the loonie; trade balance is often overlooked in currency valuation, and North American producers stand to increase exports in the wake of Russia's moratorium.

CNOOC eyes prized BP asset. CNOOC (CEO), China's biggest offshore oil producer, may bid for one of BP's (BP) prize Latin American assets: its 60% stake in Argentina's Pan American Energy, which could be worth $20B as reserves and output have risen. BP has said it's not putting on a fire sale, but industry sources say PAE is likely up for sale because it's less critical than some of BP's other assets. Separately, BP completed cementing the Gulf of Mexico well yesterday afternoon, effectively sealing it for good, and is now monitoring the well to check the procedure's success. Premarket: BP +1.4% (7:00 ET).

RBS' profit beat. Royal Bank of Scotland (RBS) reported H1 net income of £9M ($14M), beating analysts' expectations of a £47M loss and a £1.04B loss in the year-earlier period. A reduction in bad-loan provisions and writedowns on credit market investments helped the bank return to profitability for the first time since 2007. Net interest income rose to £7.2B from £6.9B as margins widened. Premarket: RBS +1.6% (7:00 ET).

Boeing loses airplane orders. Boeing (BA) customers canceled 26 new commercial airplane orders valued at $5.8B this week, after earlier reports that Dubai Aerospace Enterprise may be forced to cancel aircraft orders because of growing financial difficulties. Boeing declined to comment.

White House stands behind Ford. The White House unveiled a $250M loan guarantee for Ford (F) yesterday as part of its push to double exports over the next five years. The loan guarantee will finance $3.1B of export sales for more than 200K Ford vehicles for buyers in Canada and Mexico. Obama also said taxpayers will be fully repaid and even make a return on the government's bailout of General Motors.

Parts shortages send companies scrambling. Continued supply shortages are crimping sales in the electronics industry, leaving companies scrambling to reconfigure products and paying up to stockpile key parts. The shortage stems from manufacturers' inability to ramp up production fast enough to meet rebounding demand. Companies that have seen a Q2 sales hit include GE (GE), which said supply constraints for its healthcare equipment cost the company $50M in sales, and Ericsson (ERIC) which said the shortages cost the company $400M-550M. The shortages, though easing, are expected to last for the rest of the year.

Goldman charges 4 cents for Indian sale. Goldman Sachs (GS) may earn a whopping 2 rupees ($0.04) in its first job managing a share sale by an Indian state-owned company. Sources said Goldman tied for the lowest bid among 17 firms vying to manage the $1.8B offer by Power Grid Corporation of India Ltd. by offering to work for a fee of 0.00000001% of the sale proceeds, vs. an average of around 4% on money raised for U.S. offerings. It's not just Goldman; many Wall Street firms are charging near-zero fees for India's state sales in hopes it will win them more investment banking work in Asia's third-largest economy.

White House economic adviser steps down. Key White House economic adviser Christina Romer said she'll step down from her post effective Sept. 3 to return to her teaching post at the University of California at Berkeley. Romer, who helped oversee the Obama administration's response to the financial crisis, is the second key economic player to leave the White House in recent months.

Conclusion

The Dow Jones Industrial Average (DJIA) edged lower on Thursday, as weekly initial jobless claims and lackluster retail sales provided little in the way of support. Wall Street has been unwilling to take much of a stand on either side of the bull/bear coin this week, as traders have remained cautious ahead of this morning's report on nonfarm payrolls and the unemployment rate.

Reports over the past two days provided conflicting signs about the jobs market, which has led to mixed days for stocks. On Wednesday, major indexes rose after payroll company, ADP, said private employers added 42,000 jobs last month, slightly more than expected. On Thursday, stocks dropped slightly after the Labor Department said new claims for unemployment benefits rose unexpectedly last week.

"All eyes will be on private payrolls given the headline distortion around census hiring," said strategists at Deutsche Bank in a note.

Economists expect the private sector added 100,000 jobs in July. This will be higher than the 83,000 jobs created in June. "A poor payrolls number today could raise fears about the U.S. recovery and this could spur investors to reduce their portfolio of risky asset classes," said Joshua Raymond, market strategist at City Index, in a note to clients.

 

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