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Market Outlook
Friday, July 30, 2010

Thursday has only a few economic reports scheduled. They are:-

8:30… GDP Q2

8:30… Employment Cost Index

8:30 … ISM New York Business Index:

9:45 … Chicago PMI

9:55… Reuters/UofM Consumer Sentiment

3:00 PM … USDA Ag. Prices

Also the following companies are reporting their quarterly earnings:-

• Arch Coal Inc. (ACI),

• Chevron Corp. (CVX),

• ITT Corp. (ITT), and

• Merck & Co. Inc. (MRK).

friday outlook

Friday saw U.S. stocks set for a lower open, looking to add to the previous session's losses, as investors braced for a report on second-quarter economic growth.

"Watch today's numbers and also watch out for the annual revisions that are released," Deutsche Bank strategists wrote in a note. "It could change a lot of perceptions about the shape of the recession and subsequent recovery."

Economic Concerns

Gross domestic product, the broadest measure of the nation's economic activity, is expected to have been revised down to a 2.5% annualized rate in the second quarter from the initially reported 2.7% rate.

GDP, the measure of the economy's total quarterly output, is likely to confirm that the recovery slowed in the second quarter. The exact pace of that slowdown is what has had traders on edge in recent days. Economic data over the past few months has shown nearly all sectors of the economy have weakened as unemployment remains high and government stimulus programs end.

Economists polled by Thomson Reuters forecast the economy grew at an annual rate of 2.5 percent in the April-June quarter, slower than the 2.7 percent expansion in the first quarter.

A disappointing report would stoke fears that the economy will fall back into recession and likely erase some of the big gains seen in the stock market throughout the month.

The Chicago PMI, a regional reading on manufacturing, is forecast to have fallen to 56.3 in July from 59.1 in June, according to a consensus estimate from Briefing.com.

A revised reading on consumer sentiment from the University of Michigan is expected to have risen to 67.5 in July, up from the previously reported 66.5.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA) attempted to bounce back from a triple-digit loss yesterday, but the pressure proved to be too much. The blue-chip barometer is pointed lower once again this morning, with futures trading about 45 points below fair value as traders grow anxious ahead of data on the health of the U.S. economy in the second quarter. The Dow remains pinned between support near 10,400 and resistance in the 10,600 region, though a negative reaction to this morning's flood of economic data could send the venerable average down for a test of support near 10,350.

The S&P 500 Index (SPX) is headed for an opening drop of about 6 points. Support for the broad-market index remains near 1,095, while resistance is holding firm in the 1,115 region, which is also home to the SPX's 200-day moving average. Should 1,095 fail as support, look for the SPX's decline to slow near 1,080.

Gold futures are marginally higher, adding about $2.50 an ounce to trade at $1,173.70. The malleable metal is currently off about 1.6% for the week.

• The U.S. Dollar Index appears to be rebounding from a multi-week low in pre-market trading. The index bounced off short-term support near 81.50 in Asian trading, and is attempting to repair some of this week's damage. Heading into the open, the index is up 0.24% at 81.84.

Benchmark crude futures have dropped 52 cents to trade at $77.84 per barrel in pre-market activity. Crude prices continue to meet with resistance near the $80-per-barrel mark.

Bonds: Treasury prices rose, pushing the yield on the 10-year note down to 2.96% from 2.99% late Thursday.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,129,105 call contracts traded on Thursday, compared to 758,053 put contracts.

Survey data from the American Associate of Individual Investors points toward the largest bullish percentage (40%) since mid-June, while the bearish percentage (33.33%) rests near a one-month low. This swing toward optimism could be a sign of short-term weakness for Wall Street.

Overseas Markets

European markets fell after reports that Spain's top-notch credit rating is likely to be cut by Moody's Investors Service. The potential downgrade comes as the country's unemployment rate jumped to a 13-year high of 20.09 percent and the government continues to grapple with rising debt problems.

The European shares also slipped for a third straight session on Friday, with construction shares among top losers, as concerns over U.S. economic growth and downbeat comments from a Federal Reserve official hurt market sentiment.

By 5:11 a.m. ET, the pan-European FTSEurofirst 300 .FTEU3 index of top shares was down 0.4 percent at 1,042.42 points.

Oil giant Total SA (TOT) (FR:FP) said second-quarter net profit soared 43% to 3.1 billion euros ($4.05 billion) and expressed confidence about the second half of the year.

Its shares gained 1.7% in Paris, outperforming the CAC-40 index (FR:PX1) , which dropped 0.5% in intraday trading.

Car maker Renault SA (FR:RNO) swung to a first-half net profit, but warned about the uncertain economic outlook.

Shares of Alcatel-Lucent (ALU) (FR:ALU) rallied 8% as the telecoms-equipment giant reported in-line underlying earnings for the second quarter and forecast a stronger second half.

French power firm Electricite de France SA (FR:EDF) announced it has received a €6.9 billion offer from a Hong Kong-based consortium for its U.K. electricity distribution networks.

In London, shares of British Airways PLC (UK:BAY) gained 2.6% after the airline said its fiscal first-quarter net loss widened to 122 million pounds ($190.5 million), but it was still ahead of consensus forecasts. The firm still expects to break even for the year on a pre-tax basis.

European Concerns

European share markets declined in morning trading. The CAC 40 in France fell 0.6%, the FTSE 100 in Britain slipped 0.6% and Germany's DAX dropped 0.8%.

In Europe, at midday, London -0.6%. Paris -0.5%. Frankfurt -0.8%.

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

Asian Concerns

Earlier in Asia, markets finished lower. The Shanghai Composite fell 0.4% and the Hang Seng lost 0.3%, while the Nikkei in Japan tumbled 1.6%.

In Asia, Japan -1.6% to 9537.3. Hong Kong -0.3% to 21030. "China Shanghai Co" -0.4% to 2638. India -0.7% to 17868.

Futures Trading

As of 7:05 a.m. in New York, the Dow Jones Industrial Average futures lost 41 points, or 0.4%, to 10368 while the S&P 500 index futures lost 3.7 points to 1093.30 and the Nasdaq 100 index futures fell 8.25 points to 1849.00.

Futures: Dow -0.2%. S&P -0.3%. Nasdaq -0.4%. Crude -0.6% to $77.90. Gold +0.1% to $1172.80.

us futures-july30,2010

Company News

Merck & Co. Inc. (MRK) reported second-quarter earnings of 86 cents per share, excluding items and one-time charges, as revenue jumped 92% to $11.35 billion. Wall Street was looking for a profit of 83 cents per share and revenue of $11.45 billion. Merck said it expects adjusted 2010 earnings of $3.29 per share to $3.39 per share, which falls short of the current consensus estimate for a fiscal 2010 profit of $3.37 per share.

Coventry Health Care Inc. (CVH) reported second-quarter earnings of $1.10, excluding one-time items and a $278 million litigation charge. Revenue for the quarter fell 18% to $2.87 billion. Analysts were expecting earnings of 55 cents per share on revenue of $2.83 billion. For 2010, Coventry sees earnings of $1.72 to $1.87 per share.

ITT Corp. (ITT) posted adjusted second-quarter earnings of $1.14 per share, on revenue of $2.74 billion. Wall Street was looking for earnings of $1.07 per share. ITT said it expects third-quarter adjusted earnings to fall 6% from last year, in the range of 94 to 98 cents per share, while revenue is seen rising 1% to $2.7 billion. For the full year, the company sees adjusted earnings in a range of $4.08 to $4.18 per share.

MetLife Inc (MET), the biggest U.S. life insurance company, posted a second-quarter profit of $1.53 billion late Thursday, helped by higher premium revenue from sales domestically and abroad.

Amgen Inc (AMGN) reported better-than-expected second-quarter profit late on Thursday and the world's largest biotechnology company said the launch of its new osteoporosis drug Prolia was progressing as planned.

Some Interesting News

• Li Lu, a Chinese-American investor and hedge fund manager, could be in line to take a top investment role at Warren Buffett's Berkshire Hathaway (BRKa) (BRKb) and even succeed the legendary U.S. investor, the Wall Street Journal reported on Thursday.

The U.S. Securities and Exchange Commission charged billionaire Samuel Wyly and his brother Charles with fraud late Thursday for reaping more than $550 million of illicit gains by trading stock in four companies while they were serving as directors.

Charles River, Wuxi call off merger. Charles River Laboratories (CRL) and Wuxi PharmaTech (WX) called off their merger agreement following continued opposition from investors and proxy advisory firms. The $1.6B deal would have been the largest foreign takeover of a Chinese company, and would have allowed Charles River to expand in China, where revenue from drug-testing services is growing as much as 30% annually. Instead, Charles River will pay a $30M breakup fee to Wuxi and will begin a new $500M share buyback program. Premarket: CRL +6.4% (7:00 ET).

EDF sells U.K. unit for $9.1B. A group led by Hong Kong's Cheung Kong Infrastructure Holdings (CHEUY) is buying Electricite de France's (ECIFF.PK) U.K. power networks unit for £5.8B ($9.1B). EDF is selling the unit as part of its plans to reduce its debt, while Cheung Kong Infrastructure is working to increase its overseas investments because of difficulties in expanding in Hong Kong's mature market.

Disney offloads Miramax. At long last, Disney (DIS) announced it's selling its Miramax film studio. Filmyard Holdings, whose partners include construction tycoon Ron Tutor and investment firm Colony Capital, will buy the studio for $660M, ending months of talks with various bidders. Disney agreed to the plan after Tutor and his investment partners paid a nonrefundable $40M deposit and presented a financing plan.

Life insurers face fraud probe. New York Attorney General Andrew Cuomo has subpoenaed Prudential (PRU) and MetLife (MET) as part of a "major fraud" investigation into life insurers. The probe is focused on whether the firms misled military families into placing benefits in insurer-controlled, low-yield, potentially risky accounts which "reaped millions of secret profits for the insurers." Six other firms, including Genworth Financial (GNW) and Unum Group (UNM), have reportedly been subpoenaed as well.

DoJ sues Oracle. The Justice Department has joined an existing whistle-blower lawsuit against Oracle (ORCL), alleging the firm defrauded the federal government on a software contract in effect from 1998 to 2006 that involved hundreds of millions of dollars in sales. According to the suit, Oracle misrepresented its commercial sales practices, causing government customers to receive deals that were inferior to those Oracle gave its commercial customers. Oracle closed down 2.4% yesterday.

Google calls China blackout a miscalculation. Google (GOOG) said yesterday that its search and advertising services were being blocked in China for the first time since the company reached a compromise with Chinese regulators earlier in the month. However, Google later said the blockage was because of its own miscalculation: "Because of the way we measure accessibility in China, it’s possible that our machines could overestimate the level of blockage. That seems to be what happened last night when there was a relatively small blockage. It appears now that users in China are accessing our properties normally.”

Visa may face antitrust suit. Visa (V) disclosed it may face an antitrust suit from the Justice Department over its policy of prohibiting merchants from charging customers extra for credit card transactions. CEO Joseph Saunders said the company is "currently engaged in constructive negotiations with the department to resolve its concerns as it relates to Visa without litigation or payment of monetary damages.” Merchants already have a pending antitrust suit against both Visa and MasterCard (MA). In yesterday's trading, Visa closed down 4.3%.

Fed sees paper profit on Bear, AIG. The Federal Reserve now has a paper profit on the toxic assets it's holding from Bear Stearns and AIG (AIG). The assets are presently worth $69.1B, around $2B more than last quarter, with the unrealized gains on the Maiden Lane portfolios standing at $10.8B.

Vale buys Brazilian copper firm. Vale (VALE), the world’s largest iron-ore producer, said it plans to buy Brazilian copper producer Paranapanema for about 2B reais ($1.14B) as it seeks to diversify its metals output. The company will pay 6.30 reais per share to buy all of Paranapanema’s voting stock in a Sept. 1 auction. Vale aims to become one of the world’s largest copper producers in the medium term, rivaling companies like Xstrata (XSRAF.PK) and Anglo American Plc (AAUKY.PK).

Citigroup settles subprime charge. Citigroup (C) agreed to pay $75M to settle regulatory charges that it failed to disclose $40B in subprime exposure to investors during 2007. Gary Crittenden, Citigroup's former CFO, agreed to pay $100,000 as part of the settlement. Arthur Tildesley, a former head of investor relations, agreed to pay $80,000.

Reliance, Universal discuss theme park in India. India's Reliance ADA Group is reportedly in early stage talks with Universal Studios, a unit of GE's (GE) NBC Universal, to build a $1.5B theme park and resort in India, a move that would capitalize on rising demand for entertainment in one of the world's fastest-growing markets. A deal would help Reliance in its efforts to become a global media giant, while allowing Universal to extend its brand to a new market. (Comcast (CMCSA) is in the midst of seeking regulatory approval to buy control of NBC Universal.)

IMF: U.S. financial system at risk. Though the U.S. financial system is "slowly recovering," the IMF said it remains vulnerable to crisis, partly because lawmakers have failed to streamline the regulatory system or take bolder action. The IMF also conducted stress tests on the 53 largest banks in the U.S. and found that 12 banks, nearly all of them small or regional, would need to raise more capital.


U.S. stocks sagged in volatile trading on Thursday after weak outlooks from technology companies and downbeat comments from a Federal Reserve official gave investors little reason to buy. The cautious comments from a regional Federal Reserve president about the health of the economy and mixed earnings results spooked investors.

The Dow Jones industrial average is entering the last day of July up 7.1 percent for the month. The big gains have come on the back of strong corporate earnings and profit outlooks that contradict the economic data that point to a slowdown. The big gains during the month pushed the Dow back into positive territory for the year.

Earnings and outlooks, however, have been pushed to the background in recent days leading up to the GDP report. Economic reports and cautious words from the Federal Reserve and its chairman Ben Bernanke have also put a halt to the gains over the past few days.

Uncertainty about the GDP report has sent investors into the safety of the bond market, which drove interest rates lower.

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