Market Outlook
Friday, August 27, 2010

8:30… GDP Q2

8:30 … Corporate Profits

9:55 … Reuters/UofM Consumer Sentiment

10:00 … Fed's Bernanke: Economic Outlook

Also the following companies are reporting theirquarterly earnings:-

• Frontline Ltd. (FRO) and

• Tiffany & Co. (TIF).

GDP

A revised reading on U.S. gross domestic product comes out before the market opens.

Economists surveyed by Briefing.com expect the reading on second-quarter GDP to show that the nation's economy grew at an annual rate of 1.4%. That would be down sharply from the previously estimated 2.4% growth rate.

"A weak GDP will make a double dip more likely," said James Dailey, portfolio manager at the Harrisburg, Pennsylvania-based TEAM Asset Strategy Fund. Dailey said a reading below 1 percent was "certainly plausible."

"Direct stimulus from the government has declined, and now we're going back to economic fundamentals, which are stressed with high unemployment and without income growth."

Consumer SentimentSeparately, the Reuters/University of Michigan index of consumer sentiment for August is expected to have risen slightly to 70, from 69.6 in July.

Ben Bernanke

Later in the day, Federal Reserve chairman Ben Bernanke is scheduled to speak at an annual meeting of central bankers in Jackson Hole, Wyo. It is not known what he will discuss, but investors are eager to hear the Fed chief's view on the health of the economy and what the Fed might do to stimulate activity.

"While we don't expect the chairman to brace the nation for a 'double dip,' he may warn that near-term growth could be insufficient to promote a sustained reduction in the country's 9.5% unemployment rate," said Neal Soss at Credit Suisse, in a note.

"Some investors are hoping for a magic bullet from Bernanke, but I doubt the Fed is going to announce anything of any significance," James Dailey, portfolio manager at the Harrisburg, Pennsylvania-based TEAM Asset Strategy Fund said. "I think something significant is coming, but it's too early for that now."

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

• The Dow Jones Industrial Average (DJIA) closed below the 10,000 level yesterday for the first time since July 6, as a late-session sell-off finally overwhelmed the blue-chip barometer. However, with second-quarter gross domestic product (GDP) and a speech from Federal Reserve Chairman Ben Bernanke on tap later today, the situation could change rather quickly. For support, watch the 9,950 and 9,800 levels for the Dow.

• The S&P 500 Index (SPX): Watch the 1,040 and 1,035 areas for the SPX.

• Gold futures are up $1.90 at $1,239.60 an ounce in London.

• The U.S. Dollar Index is fractionally lower in pre-market trading, slipping 0.02% to 82.92 at last check.

• Benchmark crude futures have a positive bias, with the lead contract up 20 cents at $73.56 per barrel.

• Bond: The yield on the 10-year Treasury note rose to 2.51% from 2.50% late Thursday.

• Equity option activity on the Chicago Board Options Exchange (CBOE) saw 814,966 call contracts traded on Thursday, compared to 546,917 put contracts.

• Keep a close eye on the 28-29 region for the CBOE Market Volatility Index (VIX), as a breakout above this region could mean a continued march higher for market volatility.

British gross domestic product expanded by an upwardly revised 1.2% in the second quarter, official data showed. The previous estimate put quarterly growth at 1.1%.

European Concerns

European share markets were lower in early trading. The CAC 40 in France lost 0.3%, Britain's FTSE 100 fell 0.5% and the DAX in Germany shed 0.2%.

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

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

Authorities in Tokyo have been seeking to stem the rise of the Japanese yen, which hit a 15-year high versus the U.S. dollar earlier this week.

Asian Concerns

Earlier in Asia, markets ended mixed. Japan's benchmark Nikkei index added 1.7%, and the Shanghai Composite rose 0.3%. The Hang Seng in Hong Kong fell 0.3%.

• In Asia, Japan +0.9% to 8991. Hong Kong -0.1% to 20597. China +0.3% to 2611. India -1.3% to 17998.

Futures Trading

As of 7:20 a.m. in New York, the Dow Jones Industrial Average futures climbed 17 points, or 0.17%, to 9984, the S&P 500 futures added 3.8 points to 1048.60 and the Nasdaq 100 futures rose 8.5 points to 1776.00.

• Futures: Dow +0.3%. S&P +0.3%. Nasdaq +0.4%. Crude +0.1% to $73.42. Gold +0.1% to $1238.50.

Novell Inc. (NOVL)

Novell Inc. (NOVL) reported that its fiscal third-quarter net income fell to $15.7 million, or 4 cents per share, as revenue dropped to $199 million. Excluding special items, Novell said earnings for the period were 6 cents per share. Analysts had expected the company to post earnings excluding items of 7 cents per share on $201.2 million in revenue.

Tiffany & Co. (TIF)

Tiffany & Co (TIF.N) reported a higher profit as sales in Asia and Europe soared and diamond costs fell, and the upscale jeweler raised its full-year profit forecast.

The New York-based jewelry store chain reported net income from continuing operations of $67.7 million, or 53 cents per share for its second quarter, which ended on July 31, up 19 percent from $56.8 million, or 46 cents per share a year earlier.

Companywide sales at its stores open at least a year, or same-store sales rose 5 percent. In Asia, overall sales rose 21 percent, while at its flagship store on Manhattan's Fifth Avenue, sales were up 8 percent. In Europe, they rose 21 percent.

Overall sales rose 9.2 percent to $668.8 million during the quarter.

Tiffany raised its full-year profit forecast by 10 cents per share to a range of $2.60 to $2.65, compared to the average Wall Street estimate of $2.61 per shares. Tiffany expects global sales to be up 11 percent this fiscal year.

• Dell, H-P up the ante in 3Par bidding war. Dell (DELL) submitted a sweetened offer for 3Par (PAR) yesterday morning, offering $24.30/share and topping H-P's (HPQ) rival offer, only to find itself in second place again as H-P countered with a new, higher offer of $27/share just hours later, valuing the company at $1.8B. H-P's latest bid is nearly three times the price that 3Par shares traded at two weeks ago, before takeover talks became public, but sources say H-P, which is sitting on a cash pile of nearly $15B, doesn't feel "any constraints;" in fact, the company expects Dell to try to top its latest offer and could decide to raise its bid once again. In after-hours trading, 3Par rose 6.8% to $27.80. Update: As of 7:00 ET this morning, 3Par said it will accept a newly revised bid from Dell, which is now offering to match H-P's $27/share offer.

• ArcSight looks for buyers. Cybersecurity firm ArcSight (ARST) has reportedly put itself up for sale, and has been quietly shopping itself to such tech heavyweights as Oracle (ORCL), H-P (HP), IBM (IBM) and EMC Corp. (EMC). A deal could be worth $40/share or more, valuing the company at $1.4B or higher, and sources say ArcSight is aiming to ink a deal before its Sept. 2 quarterly earnings report. Talk of a possible sale sent shares of ArcSight up 30% to $36.70 in yesterday's trading.

• Boeing delays Dreamliner, again. Boeing (BA) has once again delayed delivery of the first 787 Dreamliner, and expects the first plane to be handed over in the middle of Q1 2011 instead of by a few weeks into January 2011. The Dreamliner model is already years behind schedule, and the latest setback comes after the forced shutdown of a test facility delayed engine development. Boeing said the later delivery will not affect its financial guidance.

• All eyes on Bernanke. Analysts and economists will be watching closely as Bernanke delivers his outlook for the U.S. economy this morning at a symposium in Jackson Hole, Wyoming. Bernanke faces pressure to both send a reassuring message to markets and to provide clarification for what further steps could be taken should a second round of quantitative easing become necessary. His comments will come as even some of the most optimistic forecasters are scaling back their projections for U.S. growth.

• More recalls from Toyota. Toyota (TM) recalled another 1.13M vehicles, this time because of a flaw that regulators said could cause stalling "at any speed without warning." The voluntary recall, which affects Corolla and Matrix models from 2005-2008, follows at least three reported accidents linked to the defect. Toyota has already recalled more than 8M vehicles in the past year.

• More recalls from J&J. In the latest in a string of embarrassing recalls, Johnson & Johnson (JNJ) said it's voluntarily recalling two hip-repair implants because too many patients needed surgeries to replace the devices. J&J had sold around 93,000 of the implants before phasing out production last year, and said it will withdraw the "very few" left on the market. J&J has had to issue several recalls in the past year, and this latest addition is sure to deepen concerns about possible quality control issues at the company.

• Berkshire buys rest of Wesco Financial. In a regulatory filing, Berkshire Hathaway (BRK.A) disclosed plans to buy the 19.9% of Wesco Financial (WSC) that it doesn't already own in a transaction valued at around $514M. The news sent shares of Wesco up 11.8% in yesterday's trading. Wesco is run by Berkshire Vice Chairman Charlie Munger.

• Icahn ups Motorola stake. Carl Icahn raised his Motorola (MOT) stake to around 10.4%, buying 11.5M shares for $7.50 each this week, according to an SEC filing. Icahn has more than doubled his Motorola stake since the beginning of the year, and now holds 247.1M shares. Shares of Motorola climbed 2.3% in after-hours trading.

• Manulife, Ace eye NY Life's Asia unit. Manulife Financial (MFC) and Ace Ltd. (ACE) are among the bidders for New York Life Insurance's Hong Kong, Taiwan and South Korean assets, sources said. NY Life, which is unlisted, has reportedly hired Deutsche Bank (DB) to handle the sale of the three units, which could bring in $800M-$1B.

• Bain Capital buys Air Medical. Private equity firm Bain Capital agreed to buy Air Medical Group Holdings, the largest independent U.S. provider of emergency air medical services; the deal is said to be valued at around $1B. Air Medical is owned by private equity firms Brockway Moran and MVP Capital Partners. The deal is the latest in a string of secondary buyouts as private equity firms face pressure to utilize their available capital and to provide returns to investors such as pension funds whose portfolios may be partly underwater.

• AIG execs settle investor suits. AIG (AIG) officials, including former CEO Hank Greenberg, have agreed to pay $90M to settle lawsuits claiming they allowed investors to be deceived about problems at the company. The executives will pay the money directly to AIG, rather than to the investors, to resolve the derivative litigation.

Stocks slipped Thursday despite a better-than-expected report on initial claims for unemployment benefits. Investors have been nervous this week about the economic outlook, following two disappointing reports on the housing market.

"Investors are expecting the second reading of GDP to come in sharply lower, and that will be more bad news for the markets," said Robert Brusca, chief economist at Fact and Opinion Economics. "Bernanke's speech is a bit of wild card, so we're in a wait-and-see approach."

"After the weak economic data on jobs and housing in recent weeks, there does seem to be an air of dread around markets at the moment, and it feels like it would take some outstanding positive news to shake this off," said David Jones, chief market strategist at IG Index, in a note to clients.