Market Outlook
Friday, June 04, 2010

Friday presents a fairly quiet day on the economic front with only several economic reports. The schedule for today is:-

8:30 Nonfarm payrolls

9:30 Fed's Lockhart: Economic Outlook

9:40 ERCI Future Inflation Gauge

Also, once again, there are several companies reporting their quarterly earnings:-

• Blyth Inc. (BTH) and

• American Woodmark Corp. (AMWD).

Stock futures traded in a narrow range and were basically flat this morning as investors avoid making any big bets before a key report on employment, which is expected to show the largest jump in nonfarm payrolls in 27 years.

"Wall Street managed to eke out a positive finish yesterday but it's arguably going to be a case of waiting for the nonfarm payrolls report before European and U.S. equity markets can decide which way to end the week," said Ben Potter, research analyst at IG Markets.

Economic Reports

The Labor Department's monthly employment report, which is due out at 8:30 a.m. EDT, is considered the biggest economic indicators on the calendar each month because unemployment is one of the biggest obstacles to a strong, sustained recovery.

US Depart. Labor

The Nonfarm Payrolls Report

A flood of temporary census workers in May led to the biggest jump in jobs in ten years, the government reported Friday.

Employers added 431,000 jobs in the month, up from 290,000 jobs added in April. It was the biggest gain in jobs since March 2000.

Census hiring was responsible for 411,000 of May's increase in employment, but private sector employers also added 41,000 jobs in the period. Government payroll jobs, other than Census type jobs, declined by 21,000 jobs during this period. It was a disappointing number for private sector hiring as economists surveyed by had forecast an overall gain of 500,000 in May.

Despite the spike in hiring, the unemployment rate slipped only modestly to 9.7% from 9.9% in April. Economists had forecast it would decline to 9.8%.

After nearly two years of constant job losses, the U.S. economy has added 982,000 jobs so far in 2010, adding workers in every month, a sign that the labor market is improving beyond the short-term Census jobs. But the modest gain shows that employers are still cautious about adding staff.


The unemployment rate in October hit 10.1 percent, a 26-year high. Some analysts think it could go a bit higher and peak at 10.2 or 10.4 percent by June. That's lower than some forecasts earlier this year of 11 percent.

About 125,000 new jobs are needed each month just to keep up with population growth and prevent the unemployment rate from rising.

The prospect of persistently high unemployment is likely to prevent consumers from going on the kinds of shopping sprees they typically do during early phases of recoveries. That's a key reason why this recovery isn't as energetic as those usually seen in the past.

Hiring isn't expected to be consistently strong enough to quickly drive down the unemployment rate this year. Economists think the rate will remain above 9 percent by the November midterm elections. That could make Democratic and Republican incumbents in Congress vulnerable.

Only 20 percent of Americans consider the economy in good condition, according to an Associated Press-GfK Poll conducted in mid-May.

Despite the slow healing process, the job market is in a much better state than it was last year. Employers were still slashing payrolls then -- 387,000 jobs were cut just in May last year. So far this year, the economy has created a net 559,000 jobs.

"Businesses are more confident that they have the financial resources to invest and hire," Zandi said. "It isn't a straight line of improvement, but the job market is headed in the right direction."

Chrysler LLC said and Ford Motor Co. last month announced plans to hire as auto sales have risen. But others are still laying off workers. Hewlett-Packard Co. said this week it is cutting 9,000 jobs in its technology services division. And chocolate-maker Hershey Co. may cut 600 jobs.


b>BP and the Oil-Spill

BP placed a cap atop an undersea oil pipe in the Gulf of Mexico, but clouds of oil surrounding the gusher made it impossible to tell Friday if the latest attempt to halt the nation's worst oil spill was having any success.

President Barack Obama was returning to the Louisiana coast later Friday to assess those efforts, his third appearance to the region since the disaster began with an oil rig explosion April 20 that killed 11 workers.

This image taken from video released by BP LLC shows oil gushing during efforts to cap the Deepwater Horizon oil well in the Gulf of Mexico, Thursday, June 3, 2010.

Addressing a crisis that threatens to undermine his presidency, Obama spoke for many Thursday in declaring himself furious at a situation that "is imperiling an entire way of life and an entire region for potentially years."

"I am furious at this entire situation because this is an example where somebody didn't think through the consequences of their actions," Obama told CNN's Larry King.

Polls show the public growing more negative toward the president's handling of the spill.

Robots a mile (kilometer) beneath the Gulf of Mexico positioned the inverted funnel-like lid over the main pipe on the leaking well on Thursday night. Live video footage, though, showed that the oil seemed unimpeded.

BP spokesman Toby Odone said he had no immediate information on whether the cap was successfully attached.

"I'd like to see us capture 90 plus percent of this flow. I think that's possible with this design," BP Chief Operating Officer Doug Suttles told CBS.

Suttles told CNN of the containment cap: "It should work." The oil giant BP (UK:BP) remained in the spotlight as shares rose more than 3% in London following reports the company had placed a cap over the leak responsible for the disastrous oil spill in the Gulf of Mexico.

**The CBOE Volatility Index (VIX) inched 2% lower on Thursday, with the index slipping below support at the round-number 30 level.

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

• The Dow Jones Industrial Average (DJIA) managed to finish its second consecutive session above its 10-day moving average.

• The S&P 500 Index (SPX) edged above the 1,100 level, but the index's 200-day trendline remains perched just overhead in the 1,105 area.

• Gold continues to pull back from resistance in the $1,230 area, slipping $10.40 to $1,199.60 an ounce in London.

• The U.S. dollar is trading slightly lower this morning against strength in the euro. As a result, the U.S. Dollar Index is down 0.03% in pre-market trading.

• Benchmark crude for July delivery is gaining ground ahead of today's jobs report. In electronic trading, the most active contract was up 29 cents at $74.90 per barrel.

• U.S. Treasury prices traded in a narrow range as investors wait for the jobs report. The yield on the benchmark 10-year Treasury note, which moves opposite its price, was unchanged at 3.37 percent compared with late Thursday.

• Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,106,467 call contracts traded on Thursday, compared to 663,326 put contracts.

Overseas Markets

Markets have been erratic for more than a month and prone to big swings sometimes even within a single trading session. Worries about whether mounting debt problems in some European countries will upend an economic recovery and the spreading oil spill in the Gulf of Mexico have pushed stocks from their 2010 highs set in late April.

The euro, which is used by 16 countries in Europe, inched higher Friday to $1.2162. However, it remains near its four-year low of $1.2112, which it set Tuesday. The euro has become an indicator for investors' confidence in Europe's economy. It has also consistently driven trading in Europe and the U.S. for the past month.

The euro was up 0.1% versus the dollar at $1.2179, while the U.S. unit rose 0.1% against the Japanese yen to 92.66 yen.

European shares turned negative as the banking sector moving lower, led by Societe Generale (SOGN.PA) on concern about its derivatives division.

Hungarian officials said the country's budget was in "much worse" condition than the previous government had stated, raising new fears about sovereign debt burdens in Europe.

European markets were higher, with Britain's FTSE 100 rising 0.8 percent, Germany's DAX index gaining 0.9 percent, and France's CAC-40 up 0.6 percent.

In Europe, at midday, London +0.1%. Paris -0.2%. Frankfurt +0.4%.

Earlier in Asia, markets finished on the lower side as Japan's Nikkei index eased 0.1% and Hong Kong's Hang Seng index lost a few points.

In Asia, Japan -0.1% to 9901. Hong Kong flat. China flat. India +0.6% to 17118.

Futures Trading

Heading into the open this morning, the Dow Jones Industrial Average (DJIA) futures are trading some 7 points above fair value. Meanwhile, futures on the S&P 500 Index (SPX) are trading more than 1 point above fair value.

***Futures measure current index values against perceived future performance.

Futures: Dow flat. S&P flat. Nasdaq flat. Crude +0.4% to $74.94. Gold -0.7% to $1201.

US Futures-june04,2010

Company News



SAIC Inc (SAI), a provider of technical services for defense and homeland security, posted a higher quarterly profit as it won contracts in cybersecurity and logistics, and said it stood by a previous full-year growth outlook.

Net income was $125 million, or 32 cents a diluted share, for its fiscal first quarter ending April 30, up 8 percent from $116 million, or 29 cents a share, a year earlier.

Analysts expected profit of 31 cents a share, according to Thomson Reuters. The share count was down 5 percent in the latest quarter, primarily reflecting repurchases.

Revenue rose 1 percent to $2.69 billion, compared with $2.75 billion expected by analysts. The company said revenue growth, excluding acquisitions, was hurt by fewer new contract starts from lower recent bookings as well as reduced demand for materials on some programs.

SAIC had recently noted stiffer competition for federal contracts and said in March that delays in contracts in a tough defense spending environment could weigh on performance.

Still, the company said its total backlog of orders rose 3 percent in the first period from the previous fourth quarter. SAIC said its book-to-bill ratio, which compares orders on the books with those filled, improved to 1.2.

The company stood by a forecast it had given in March calling for diluted per-share profit from continuing operations to rise 8 percent to 14 percent over the next year as revenue excluding acquisitions rises 3 percent to 6 percent.

Those goals represented a cut from the company's prior longer-term growth forecasts.


Krispy Kreme Doughnuts Inc. (KKD)

Krispy Kreme Doughnuts Inc. (KKD) said first-quarter net earnings more than doubled to $4.5 million, or 6 cents a share, from $1.9 million, or 3 cents a share, in the first quarter of 2009.

Revenue fell to $92.1 million from $93.4 million a year ago.

Same-store sales during the most recent quarter rose 3.4%.

Krispy Kreme also said it now expects fiscal 2011 operating income, exclusive of impairment charges and lease termination costs, of $11 million to $15 million, up from its previous forecast for $10 million to $13 million.


Quiksilver Inc. (ZQK)

Quiksilver Inc. (ZQK) announced fiscal second-quarter net earnings were $9.4 million, or 6 cents a share, compared with $2.8 million, or 4 cents a share, a year ago.

Earnings from continuing operations came in at 11 cents a share. Analysts had expected earnings of 3 cents a share.

Revenue fell to $468.3 million from $494.2 million in the year-earlier period. The consensus estimate called for $455 million in sales.

Quiksilver forecast third-quarter revenue to be down in the low teens on a percentage basis, compared with the year-ago period.

It also expects to generate per-share earnings in the low single-digit cents range.

Wall Street currently expects earnings of 5 cents a share on a 4% revenue decline to $483 million.

Some Interesting News-

• Policymakers from the Group of 20 nations expressed concern Friday about the health of the world economy as they closed ranks behind the euro zone's efforts to tackle a debt crisis that has rattled global markets.

• Martek Biosciences Corp (MATK.O) reported second-quarter earnings late Thursday that beat expectations and forecast full-year revenues above consensus.

• Washington Mutual encountered a setback yesterday in its ongoing efforts to exit bankruptcy, further delaying its reorganization timeline. WaMu was seeking approval for its disclosure statement, which requires clearance by a bankruptcy court, but the presiding judge refused to even hear arguments on the hundreds of objections to the disclosure statement. The judge ordered WaMu to report back on June 17 after discussing information requests with shareholders and bondholders who have been repeatedly rebuffed in their attempts to obtain documents and question witnesses.

• The Interior Department denied that it had extended a six-month moratorium on deepwater drilling in the Gulf of Mexico to include shallow water drilling as well. The confusion began when a Minerals Management Service official sent out several emails earlier in the day, rescinding five shallow water permits, including two that had been issued only the day before. The MMS email said "until further notice we have been informed not to approve or allow any drilling not [sic] matter the water depth." The Interior Department subsequently said shallow water drilling could continue as long as operations "satisfy the environmental and safety requirements." This, too, caused confusion, as rig operators said the new regulations have not yet been issued and could still cause substantial delays, even without a formal moratorium. Shallow drillers fell sharply on the MMS news, but rebounded into the close: ESV -2.6%, HERO +11%, NBR +3.9%.

• After shearing away a broken pipe, BP (BP) has lowered a capping device onto the leaking well in the Gulf of Mexico, and is now waiting to see whether the temporary fix has been successful. The potential progress came as both Fitch and Moody's downgraded the firm one notch and said further downgrades are possible over the company's rising liability from the Gulf spill. In an attempt to reassure investors, CEO Tony Hayward and chairman Carl-Henric Svanberg will hold a conference call today with shareholders and analysts.

• International regulators are moving toward a pact that would require banks to raise vast sums of new funds as a cushion against future losses, but the rules may not go into effect for several years, a decision that marks a major concession to the banking industry and several countries. The overhaul is expected to be a key point on this weekend's G-20 agenda, with analysts warning the changes could lower industry profits by double-digit margins.

• Javelin Pharmaceuticals (JAV) filed suit against Hospira (HSP), its intended acquirer, to compel the firm to follow through on its merger agreement, including the extension of a $2M loan to Javelin. Earlier in the day, Hospira had extended its tender offer of $2.20/share for a second time due to concerns about the state of Javelin's business. In yesterday's trading, JAV -12.5%, HSP +0.9%.

• CDI Corp. (CDI) offered to acquire RCM Technologies (RCMT) for $5.20/share in a letter sent to RCM's board on May 21 which was disclosed only yesterday. RCM rejected the proposal yesterday evening, saying it "would not be in the best interests of the company to pursue the transaction as presently structured," leaving open the possibility of a sweetened bid. In after hours trading, CDI was flat, RCMT +42.6% to $4.99.

• Several large investors are pressing Elan (ELN) to delay a planned spin-off of Elan Drug Technologies [EDT], its drug delivery business. Though most shareholders are in favor of separating the two businesses, some investors believe EDT may become more valuable if Elan slows down its timeline, holding on to the unit for 18 months or longer. CEO Kelly Martin had said last month that a spin-off would likely take place within the next 12 months. If, as many investors expect, the spin-off happens relatively soon, the transaction could net Elan between $1B-1.3B, a sum many feel underestimates the unit's value.

• Within the next two days, Google (GOOG) will start handing over to European regulators the private consumer data it accidentally collected through its Google Street View service. The information will initially be shared with authorities in Germany, France and Spain as Google tries to limit the fallout from its latest privacy misstep. Google will also publish the results of an external audit on the matter. Said CEO Eric Schmidt: "We screwed up. Let’s be very clear about that. [But] if you are honest about your mistakes it is the best defense for it not happening again.”

• AIG (AIG) CEO Robert Benmosche has reportedly asked the company's board for time to explore non-IPO options for AIA, the company's Asian unit. After a sale to Prudential (PUK) fell through, an IPO was widely seen as the most likely option for the unit, but Benmosche is said to be looking at several other possibilities, including selling parts of the business.

• Vale (VALE) will exercise its option to buy a 24.5% stake in Belvedere, an Australian hard coking coal project, from mining firm Aquila, lifting Vale's Belvedere stake to 100%. The price of the purchase has not yet been determined, but analysts estimate Aquila's stake could be worth as much as $900M.

• The Swiss Senate approved a law that moves the country one step closer to handing over the names of UBS (UBS) clients who allegedly evaded U.S. taxes. The legislation, which has suffered several setbacks, must still be approved by the lower house before it goes into effect and may possibly be put to a popular referendum, while Swiss authorities are trying to get the law fully approved before an August deadline to hand over the data.

• The pace of U.S. bankruptcies in May reached the second-highest daily level since 2005, as an improving economy failed to significantly help Americans struggling with debt payments. May saw 133,459 bankruptcy petitions, a 10% rise from the year before. If there's any silver lining to be found, bankruptcies usually peak in an economic cycle between six and eighteen months after an economy bottoms out, so the high May figure could potentially signal the road to recovery.

• McDonald's (MCD) recalled 12M "Shrek"-themed drinking glasses after discovering the cups contain the toxic metal cadmium. Cadmium is a known carcinogen that can cause bone softening and severe kidney problems.


It appears that today could very well be set up for some bear action. Volatility could be on the cards again.

As I have mentioned on numerous occasions this is the time to be making the most of trading options.

Success is simple. Do what's right, the right way, at the right time.

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