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Market Outlook
Friday, July 23, 2010

Thursday has only a one economic report scheduled. That is:-

10:30 … ECRI Leading Index

Also the following companies are reporting their quarterly earnings:-

• Honeywell International Inc. (HON),

• Johnson Controls Inc. (JCI),

• Schlumberger Limited (SLB),

• Verizon Communications Inc. (VZ), and

• Kimberly-Clark Corp. (KMB).

prediction market

Friday saw U.S. stock futures post modest gains, buoyed by strong economic data from Germany and the U.K., as investors awaited earnings results from Honeywell and Ford as well as the results from the European bank stress tests.

U.S. stocks were set for a higher open early Friday, although Wall Street may find trouble pushing significantly higher after the previous session's massive rally.

"All eyes will be on the European stress tests and earnings, so if we get good news out of Europe today than I think the markets will continue to focus on earnings, which are coming in much better than expected," said Peter Cardillo, chief market strategist at Avalon Partners.

Economic Concerns

Banks: Pay czar Kenneth Feinberg is due to release a report on how much bank executives were paid after their firms received taxpayer bailout funds.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA) is sitting on a weekly gain of more than 2% after the blue-chip barometer soared more than 200 points on Thursday. The Dow is still staring up at stiff technical resistance in the 10,350-10,400 area, which could limit today's advance. Support, meanwhile, should manifest near 10,200, or 10,000 should Europe's banking tests spook investors.

The S&P 500 Index (SPX) is trading above support near 1,085, but the index must still contend with the 1,100 level if it is to stage any serious rally ahead of the weekend.

Gold futures are benefiting from the dollar's weakness, with the malleable metal up $2.50 at $1,198.10 an ounce in London.

• The U.S. Dollar Index continues to backslide from gains posted earlier in the week. Despite the decline of the past few sessions, the index is hovering just above support near the 82 level. Heading into the open, the U.S. Dollar Index is off 0.33% at 82.32.

Benchmark crude futures are also trading lower in electronic trading, with the lead contract off 28 cents at $79.02 per barrel. • Bonds: Treasury prices fell, pushing the yield on the 10-year note up to 2.97% from 2.93% late Thursday.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,435,420 call contracts traded on Thursday, compared to 769,983 put contracts.

The CBOE Market Volatility Index (VIX) is being squeezed into support near the 23-24 region. The VIX has not closed a session below the 23 level since May 3, though a strong rally on Wall Street could finally send the "fear" index to multi-week lows.

Overseas Markets

In Europe, report cards on the health of big banks are due to be released at noon ET. The tests are aimed at determining how well European financial firms would fare in the case of another economic downturn.

European markets were mixed ahead of the test results, which will come out after markets there close for the weekend. German shares soared, however, after a closely watched business climate index rose unexpectedly for the fifth straight month.

Traders received positive economic news from Europe for a second day. The German Ifo index posted an unexpectedly large jump in July, confirming the strong recovery in Europe's biggest economy.

The business-climate index rose to 106.2 in July from a reading of 101.8 in June, the Munich-based Ifo Institute reported.

Also boosting sentiment, Britain's gross domestic product grew by a much stronger-than-expected 1.1% in the second quarter, government data showed. Economists had forecast a quarterly rise of 0.6%.

European Concerns

European share markets struggled in the early going. The CAC 40 in France and Germany's DAX rose modestly in morning trading, while the FTSE 100 edged slightly lower.

In Europe, at midday, London -0.2%. Paris +0.4%. Frankfurt +3.1%.

The dollar was down against the euro and the British pound, but up versus the Japanese yen.

The British pound rose 1% to $1.5415 following the economic data and the euro gained 0.3% to $1.2938.

Asian Concerns

Earlier in Asia, markets finished the session with solid gains. Japan's benchmark Nikkei index gained 2.3% and the Hang Seng in Hong Kong ended 1.1% higher.

In Asia, Japan +2.3% to 9431. Hong Kong +1.1% to 20815. China +0.4% to 2572. India +0.1% to 18131.

Futures Trading

As of 6:25 a.m. in New York, the Dow Jones Industrial Average futures were up 25 points, or 0.24%, to 10292, the S&P 500 futures were up 6 points to 1858.75 and the Nasdaq 100 futures were up 3.9 points to 1091.60.

Futures: Dow +0.4%. S&P +0.5%. Nasdaq +0.5%. Crude -0.4% to $78.99. Gold +0.2% to $1197.60.

us futures-july23,2010

Company News

Ford Motor Co (F)

Ford Motor Co. (F) reported second-quarter net income of $2.6 billion, or 61 cents per share. Adjusted net income was 68 cents per share. Revenue rose to $31.3 billion, from $26.8 billion. Wall Street analysts expected earnings of 40 cents per share, on revenue of $29.5 billion. Ford expects third-quarter production to rise by 126,000 units from year-ago levels, "reflecting continued strong demand for Ford products, maintenance of competitive stock levels, and the non-recurrence of prior-year stock reductions."

Microsoft (MSFT)

Microsoft Corp. (MSFT) said that its fiscal fourth-quarter net income rose to $4.5 billion, or 51 cents per share, as revenue rose to $16.04 billion. Analysts were expecting earnings of 46 cents per share, and $15.2 billion in revenue. Shares of Microsoft (MSFT) were up slightly in the pre-market session following the company's fiscal fourth-quarter results.

Amazon (AMZN)

Amazon.com Inc.'s (AMZN) second-quarter earnings jumped 45% to $207 million, or 45 cents per share, as grew 41% to $6.57 billion. Analysts were looking for earnings of 53 cents per share on revenue of $6.5 billion. For the third quarter, Amazon predicts revenue to come in the range of $6.9 billion to $7.6 billion. Analysts had been looking for $7.16 billion for the third quarter.

** Dow component Verizon Communications Inc added 0.4 percent to $27.10 after posting quarterly earnings.

** Diversified U.S. manufacturer Honeywell International Inc (HON) recorded a 4 percent rise in profit and boosted its forecast, citing recovering demand for industrial products. Its shares were little changed.

Some Interesting News

Bank Shares. Shares of Germany's Deutsche Bank (DB) edged up 0.2%, while France's BNP Paribas (FR:BNP) fell 0.6% and Credit Agricole (FR:ACA) dropped 0.7%.

• Spanish banking giant Santander (ES:SAN) (STD) gained 1%.

• Shares of Vodafone Group gained 0.8% in London after the company reported a 5% improvement in quarterly sales and announced it will pay 1.25 billion pounds ($1.9 billion) to settle outstanding tax issues in the U.K.

• In Sweden, shares of Ericsson AB (ERIC) tumbled 5.6% after its second-quarter net profit fell short of market expectations and sales declined 8% because of supply issues and component shortages.

• Shares of oil giant BP PLC (BP) (UK:BP.) fell 0.7%. Tropical Storm Bonnie, which is projected to track into the Gulf of Mexico, has forced the firm to temporarily suspend its relief-well activities in the region.

Dell settles with the SEC. Dell (DELL) agreed to pay $100M to settle accounting charges by the SEC, and CEO Michael DEll will pay $4M to settle disclosure-related allegations. Regulators had alleged that Dell improperly hid the effect of massive payment from Intel (INTC) earlier this decade that inflated earning and misled investors. Dell neither admitted nor denied wrongdoing.

Probe turns to two BP managers. Two BP (BP) managers have been named "parties of interest" in a federal probe of the Deepwater Horizon oil rig disaster, indicating they're potential targets of the investigation. Robert Kaluza, a BP employee overseeing operations on the rig, and Patrick O'Bryan, BP's vice president in charge of drilling, are the first BP employees to be named as targets in the case; five employees of Transocean (RIG) had previously been named. While the probe continues, BP's relief efforts in the Gulf have temporarily ceased, delayed by tropical storm Bonnie which could reach the well site by tomorrow. Premarket: BP +2.3%, RIG +1.5% (7:00 ET).

SEC caves on bond ratings. The SEC moved to restore some calm to bond markets, temporarily allowing sales to go forward without credit ratings in bond offering documents. Ratings agencies S&P, Moody's and Fitch are refusing to let bond issuers use their ratings, saying the new financial reform laws create too much risk for them. Since major parts of the bond markets legally require a rating, the SEC will allow a six-month exemption, calling it a "transition period" but giving little guidance as to what will happen at the end of six month.

NY sues BofA. The State of New York has sued Bank of America (BAC) on its own, rather than joining an existing class-action suit, over the Merrill Lynch takeover and subprime mortgage exposure. The state, which has one of the nation's largest pension funds, hopes to recover more money in a stand-alone case, potentially as much as tens of millions of dollars. Premarket: BAC +0.7% (7:00 ET).

Pay czar to blast bank payments. Pay czar Ken Feinberg is expected to release a report today citing 17 financial firms for making $1.6B in "ill-advised" payments during the financial crisis. Firms on the list are said to include Goldman Sachs (GS), JPMorgan (JPM) and Citigroup (C). However, as Feinberg doesn't have the authority to demand the money be returned, the report is mostly to put political pressure on the firms and to push them to impose more limitations on payouts.

Jobless benefits extended. Obama signed a six-month extension of emergency jobless benefits yesterday, just hours after the House approved the $34B measure. The move restores aid to nearly 3M people whose checks had been cut off since the program expired in early June, but puts further pressure on an already-bloated government budget.

SEC watchdog broadens Goldman settlement probe. SEC Inspector General David Kotz has broadened an ongoing probe into the agency's settlement with Goldman Sachs (GS) to include the timing of the settlement. Some lawmakers have accused the SEC of playing politics with its lawsuit against Goldman, and the settlement was announced on the same day the Senate passed the financial reform bill.

Mattel loses Bratz ruling. A federal appeals court ruled that Mattel (MAT), maker of the Barbie doll, was wrongly granted ownership of the popular Bratz dolls and that rival MGA Entertainment can continue to sell them. The decision could lead to a new trial over control of the franchise that generated $1B in annual sales at its peak. In his ruling, Chief Judge Alex Kozinski wrote "America thrives on competition; Barbie, the all-American girl, will too."

Murphy Oil to sell refining business. Murphy Oil (MUR) said it would sell its three refineries to focus on oil and gas exploration and its U.S. retail business. Refiners have been hurt by the global economic slowdown, and Murphy called the refineries "nonstrategic assets." A sale could bring in at least $1.5B. In after-hours trading, MUR rose 2.3%.

Green Dot's dapper debut. Prepaid debit-card provider Green Dot (GDOT) priced above its $32-35 range in a $164M IPO, and saw shares rise 22.2% yesterday to $43.99. It's a windfall for owners like Wal-Mart (WMT) and investors have high hopes for Green Dot, which has doubled earnings every year since 2006. However, the excitement may have gotten out of hand, as even at the midpoint of its original IPO range, the stock's P/E of 27 was higher than competitors like Visa (V).

Investors unamazed by AMZN earnings report. Shares of Amazon (AMZN) fell over 13% in after-hours trading, following the company's Q2 earnings miss (see details below). An increase in operating expenses contributed to the EPS miss, and discounted merchandise may have played a role as well as Amazon faced increased competition from traditional stores like Wal-Mart (WMT) and over its e-reader from companies like Apple (AAPL) and Barnes & Noble (BKS).

U.K. GDP grows 1.1%. The U.K.'s economy grew a much stronger-than-expected 1.1% in Q2, according to a government release earlier this morning, handily beating estimates of +0.6% and marking the fastest growth in four years. The increase in output was due mainly to increases in business services and finance and construction. The British economy expanded by 0.3% in the previous quarter. The pound is +1.2% vs. the dollar (7:00 ET).

Hungary shuns IMF, ratings agencies hover. Hungary's prime minister Viktor Orban indicated he won't renew a safety net with the IMF and will back out of a commitment to cut the budget deficit to EU-prescribed levels next year. Hungary's belief that it can access capital markets without the IMF is a "myth," said one economist, and Moody's has put Hungary's Baa1 sovereign rating under review for possible downgrade.


Big moves were being held somewhat in check as investors worldwide await results from European bank stress tests. The tests could remove some uncertainty about how mounting government debt in many European countries could affect the financial sector. Debt problems have dragged down markets worldwide in recent months because there are worries high debt could slow a global economic recovery.

"Overall, the transparency bar has been lowered and markets will now more likely gloss over vague details about how the stress tests were constructed," Deutsche Bank strategists wrote in a note to clients. "So our best guess is that these results kick the can further down the road without fully putting the matter to bed."

Earnings have added to a string of results over the past couple of days that helped push the Dow Jones industrial average up more than 200 points Thursday. Investors have become more confident, for the moment, that upbeat profit and outlooks from companies are a better gauge of future growth than the disappointing economic reports that have regularly been released in recent months.

You are getting more on the revenue side and earnings side to indicate a soft patch as opposed to double dip with the exception of housing and jobs growth. So some of the fear that was building into the market is coming off," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

"Earnings are coming in very, very well and economic data, at least overseas, came in strong. Now all we have to do is get through the stress tests this afternoon and break through this 1104, 1105 level on the S&P 500, and we could have a nice rally on our hands," added Mendelsohn. The S&P closed at 1093.67 on Thursday.

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