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Market Outlook
Friday, May 28th, 2010

8:30 ISM New York Business Index

8:30 Personal Income and Outlays

9:45 Chicago PMI

9:55 Reuters/UofM Consumer Sentiment

3:00 PM USDA Ag. Prices

There are no major companies reporting their quarterly earnings today.

Friday is shaping up to be a quiet day for the stock market ahead of the Memorial Day weekend. Futures have risen slightly this morning after the major indexes surged a day earlier.

The Dow Jones industrial average climbed nearly 285 points, its second biggest gain of the year. The big jump came as concerns eased somewhat about the health of Europe's economy after China said it doesn't plan to sell any European debt it holds.

If European debt worries ease further, the focus could return to the U.S. economy. Reports throughout the month continued to show the country’s economy is growing, albeit slowly. Earlier this year, stocks climbed steadily because economic and earnings reports showed consistent improvement.

A new report Friday is expected to say consumer spending rose in April, but at a slower pace than March. At the same time, growth in personal income likely accelerated last month.

Economists polled by Thomson Reuters forecast personal incomerose 0.3 percent last month, after climbing 0.6 percent in March. Personal income likely rose 0.5 percent in April after rising 0.3 percent in March, economists forecast.

Economists predict a final reading of the Reuters/University of Michigan consumer sentiment index will be unchanged at 73.3 from a preliminary reading reported earlier this month.

Finally, the CBOE Volatility Index (VIX) is set to close its first week below the 30 level since the end of April.

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

• Gold futures are up $2 at $1,216.40. an ounce in London. Gold futures are on pace to gain roughly 3.4% this week, rallying back above the psychologically important $1,200 level.

• The U.S. Dollar Index is up 0.76% for the week, although the index is off 0.16% and holding above the 86 levels in pre-market trading.

• Heading into the open, the July contract for crude futures are up nearly 1%, or 7.4% for the week, at $75.27 per barrel as confidence returns to the European markets.

• Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,268,412 call contracts traded on Thursday, compared to 659,448 put contracts.

Overseas Markets

Overseas trading is poised for three days of solid gains, as nearly all of the foreign indexes are in positive territory.

In Asia, regional indexes are mostly heading higher, after China denied that it was reviewing its euro bond holdings.

European stocks gained ground in early trading, adding to a brisk two-day recovery rally as investors continued to scoop up beaten-down shares while fears over further sell-off of euro assets are being ignored at the moment.

• In Asia, Japan +1.3%. Hong Kong +1.7%. China flat. India +1.2%.

• In Europe, at midday, London +0.5%. Paris +0.1%. Frankfurt +0.4%.

Bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.33 percent from 3.36 percent late Thursday.

Overseas, Britain's FTSE 100 rose 0.7 percent, Germany's DAX index rose 0.5 percent, and France's CAC-40 gained 0.2 percent. Japan's Nikkei stock average rose 1.3 percent.

Futures Trading

Ahead of the opening bell, Dow Jones industrial average futures rose 3, or less than 0.1 percent, to 10,238. Standard & Poor's 500 index futures rose 0.40, or less than 0.1 percent, to 1,101.50, while Nasdaq 100 index futures rose 0.50, or less than 0.1 percent, to 1,864.25.

• Futures: Dow +0.1% to 10242. S&P +0.1% to 1102.Crude +0.8% to $75.15. Gold +0.1% to $1,213.10-year Tsy +0.1%. Euro +0.2%. Yen -0.1%.

Guess(GES) shares plunged Thursday in after-market trades even after the company reported first-quarter profit that more than doubled, overshadowed by disappointing guidance.

During the quarter Guess earned $51.7 million, or 54 cents a share, compared with $33.1 million, or 35 cents, in the year-ago period. Analysts were calling for a profit of 49 cents a share. Sales grew 22% to $539.3 million from $441.2 million, while same-store sales surged 9.7%.

But the apparel retailer's stock price was losing 8.3% to $35 in after-market trading Thursday, giving up its gains from the regular session.

Looking ahead, Guess expects to register second-quarter earnings in the range of 65 cents to 68 cents a share, and full-year earnings between $2.80 and $2.80 a share. Both targets fell short of Wall Street's forecast.

J Crew Group Inc (JCG)

Apparel retailer J Crew Group Inc (JCG) posted a quarterly profit on Thursday that topped Wall Street estimates and raised its full-year outlook.

The company, which caters to urban professionals willing to pay extra to make subtle fashion statements, boosted its full-year earnings forecast to $2.35 to $2.45 per share from $2.20 to $2.30 per share previously.

New York-based J Crew said fewer markdowns and promotions helped first-quarter net income rise to $44.7 million, or 68 cents per share, from $20.4 million, or 32 cents, in the year-ago quarter.Analysts, on average, were looking for a profit of 57 cents per share in the recently completed quarter, according to Thomson Reuters.

Revenue rose 20 percent to $413.9 million.

It forecast second-quarter earnings of 40 cents to 45 cents per share.

Shares rose 1.5 percent to $44.50 after closing up 4.1 percent at $43.86 on the New York Stock Exchange.

Business software maker Novell Inc (NOVL) posted a second-quarter profit in line with Wall Street expectations, and forecast current quarter revenue that may miss analysts' estimates.

The world's No. 2 maker of the open source Linux operating system posted second-quarter net income of $19.9 million, or 6 cents a share, compared with $15.6 million, or 5 cents a share, a year ago.

Revenue fell to $204 million, but nearly met expectations of $204.9 million, according to Thomson Reuters.

For the third quarter, the company expects revenue between $205 million and $210 million and said proforma operating margin will be similar to the second quarter levels.

Shares of the company were down 1 percent at $5.85 in trading after the bell. They closed at $5.90 Thursday on Nasdaq.

Company News

Shares of Monsanto Co. (MON) plunged Thursday after the seed company cut its full-year outlook by more than 20%.

The St. Louis, Mo.-based company lowered its adjusted full-year earnings guidance to a range of $2.40 to $2.60 a share, with free cash flow coming in between $400 million and $500 million as a result of the restructuring of its Roundup weed-killer business. Previously, the company had projected full-year adjusted earnings to fall in the low-end of a range between $3.10 and $3.30 a share, whilst analysts polled by Thomson Reuters, had expected the company to post fiscal 2010 earnings of $3.13.

The company said it plans to “reposition” its Roundup brand, and will narrow the brand portfolio in an effort to offer more of a “simple, quality product that meets their [farmers’] needs at a price closer to generics,” the company said in a release.

"By reducing the uncertainty associated with Roundup, we free Monsanto to grow on its fundamentals," chairman and chief executive Hugh Grant said in a statement. "What matters to our long-term growth is our seeds-and-traits business, which is on track."

The move comes as a result of fundamental structural changes that the glyphosate industry has undergone, Grant continued. Glysophate is the active ingredient in the company’s Roundup line of agricultural herbicides, and Grant noted that Chinese glyphosate capacity was “profoundly overbuilt.”

"There's good news for farmers in all of this -- we're going to bring simplicity to weed management," Grant said. "Weed resistance is real, but managing it doesn't have to be complex. The right tools exist today, and we're going to make it easy and more affordable for farmers to access those tools as a package, with Roundup as the cornerstone."

Shares of Monsanto were down $3.66 or 6.95% to $49.00 a share on Thursday afternoon on the New York Stock Exhange. Year-to-date, the stock is down 40.64%.

Some Interesting News-

• Apple Inc (AAPL) shares rose 1.4 percent in light premarket trading after Asian and European customers mobbed stores as the iPad tablet computer debuted outside the United States.

• British insurer Prudential Plc (PRU) said it was trying to negotiate the $35.5 billion price it agreed to pay for American International Group Inc's (AIG) Asian unit amid fears that shareholders might block the deal as too expensive.

• Royal Dutch Shell (RDS)(RDS) said it would pay $4.7 billion in cash to buy privately held East Resources Inc for substantially more exposure to crucial shale gas plays in North America.

• The U.S. House of Representatives approved a bill backed by Boeing Co (BA) that would force consideration of illegal subsidies in the multibillion-dollar race between Boeing and Europe's EADS (EAD.PA) to sell refueling aircraft to the U.S. Air Force.

• Guess Inc (GES) fell more than 9 percent in extended trading Thursday after the clothing retailer forecast second-quarter revenues below estimates.

• U.S. stocks rallied Thursday after China reassured investors by saying it isn't planning to sell European bond holdings, and Spain passed a €15B austerity package. DJIA surged 285 points, finishing +2.85%. S&P was up 3.3% and Nasdaq gained a market-leading 3.7%. Still, going into the month's final session, U.S. stocks look ready to post the worst May since 1962.

• Royal Dutch Shell (RDS) said Friday it will acquire privately-held East Resources Inc. for $4.7B in cash, giving it substantially more exposure to North American natural gas plays. East Resources owns and operates more than 2,500 producing oil and gas wells in New York, Pennsylvania, West Virginia, and Colorado, and has been operating in the much-coveted Marcellus Shale for 25 years. The acquisition is the second-biggest oil and gas deal this year, after BP's (BP) acquisition of deepwater assets from Devon Energy (DVN) for $7B in March. Last December, ExxonMobil (XOM) agreed to buy XTO Energy (XTO), the No. 1 U.S. natural gas producer, for $31B.

• Prudential (PUK) confirmed Friday it has entered discussions with AIG (AIG) regarding the status of its proposed acquisition of AIG's Asia arm, AIA Group. Prudential is looking to drop the $35.5B price tag to about $30B in a move to placate large shareholders opposed to the deal. Meanwhile, the U.S. Treasury categorically denied a report it is urging AIG to accept a lower price, and has agreed to take on 11% ($5.5B) or more of the new company if it would help tip the scales.

• Sources contacted by federal prosecutors investigating Goldman Sachs (GS) say they are focusing on Timberwolf, the infamous "sh**ty deal" repeatedly cited in a tense Senate hearing last month. David Mapley, who claims his Australian hedge fund collapsed shortly after Goldman sold it $100M of securities in Timberwolf, says the deal was "a fraudulent concoction," adding, "We examined the whole trade, what led up to the trade, the way it was marketed and everything about it was inaccurate. You think you're buying one thing and what you see is totally different." Separately, sources say Goldman is trying to settle with the SEC on a charge other than fraud, and a fine of hundreds of millions of dollars.

• BP (BP) said this morning top kill efforts could continue for another 24-48 hours, and pegged the cost of tackling the disaster so far at $930M, up from $760M on May 24.

"If the well were successfully 'killed,' it is expected that cementing operations would then follow. The top kill procedure has never before been attempted at these depths and its ultimate success is uncertain," BP said. Reading between the lines, though, Washington blog surmises that top kill has failed, and says BP is hoping adding additional materials to the mix will do a better job than the heavy mud which has thus far failed to plug the leak. On Thursday, a federal panel of scientists said the spill would eclipse the Exxon (XOM) Valdez disaster of 1989 as the worst in U.S. history. Also Thursday, President Obama accepted the resignation of his top oil regulator, accepted blame for failures before and after the sinking of the Deepwater Horizon, and vowed tougher regulations for the oil industry.

• The government ordered a temporary halt to drilling at 33 deepwater exploration rigs Thursday, part of its response to the massive BP (BP) oil spill. Unlike the six-month extension of the ban on new deepwater drilling permits, and cancellation of a much-anticipated lease sale offshore Virginia, the halt on existing deep-sea rigs threatens to affect proven oil discoveries rather than untested areas, leaving companies struggling to figure out how they would be affected. About 24% of total U.S. oil production and about 5% of gas output comes from wells in Gulf waters more than 1,000 feet deep.

• Congress is laying the groundwork for a possible federal bailout of faltering multi-employer pension plans that are jointly run by companies and unions. The plans, common in certain industries, cover almost 25% of all workers who have a private pension. Opponents argue targeted aid would lead to a broader bailout of the whole class of pensions, potentially costing taxpayers tens of billions of dollars.

• Toys R Us filed for an $800M IPO Friday morning. Toys R Us was bought in 2005 by KKR (KFN), Bain, and Vornado (VNO) for $6.6B. Underwriters: GS, JPM, BAC, CS, DB, C, WFC, MFG.

• Pequot hedge fund founder Arthur Samberg, without admitting guilt or denying wrongdoing, agreed to pay nearly $28M to settle SEC charges that he engaged in insider trading of Microsoft (MSFT) shares. In a note to a former Microsoft employee who joined Pequot just before MSFT's April 2001 earnings announcement, Samberg wrote: "I shouldn't say this, but you have probably paid for yourself already!"

• The House approved a Boeing-backed bill that would force consideration of illegal subsidies in the multibillion-dollar competition between Boeing and Europe's EADS for the Air Force's $50B tanker aircraft contract. Earlier this week, Boeing accused EADS of courting Iran and other countries at odds with the U.S., and said this should be taken into account in the tanker competition too.

• The Census Bureau's second Q1 GDP estimate came in at a lower-than-expected 3%, down from 3.2% in the advance estimate and short of the 3.4% growth economists expected. Most sectors posted negative revisions in the second estimate, and it appears economists overestimated inventory growth contributions. Inflation remains a non-starter, with the GDP deflator revised up to 1% from 0.9%. Although headline GDP fell short of expectations, it still reflects a continuation of the recovery. Meanwhile, corporate profits rose a robust 42.7%, following a 51.8% jump in Q4.

• Sources say Ford (F) will likely shutter its Mercury brand, launched by Edsel Ford during the Great Depression. While Mercury sales are clearly weak, it's difficult to estimate or quantify the loss of brand recognition and customer loyalty, a lesson GM learned when it closed down Pontiac. Meanwhile, Ford is preparing an aggressive relaunch of the Explorer.

Conclusion

Triple digit moves became very common during the month as investors tried to come-to-grips with concerns that mounting debt in Europe might upend a global economic recovery. Because of those worries, most of the big moves during the month were drops. The Dow has fallen 6.8 percent in May.

Domestic economic reports have taken a back seat to questions about whether countries like Greece, Spain and Portugal will be able to implement steep budget cuts to contain growing deficits. Analysts say even if the countries are successful in reducing debt, cost-cutting could be a major drag on the economy.

Traders spent most of May driving down the euro, which has become a gauge of confidence for Europe's economy. The euro hit a four-year low and was down as much as 9 percent during the month. But, it did inch higher Friday. It rose to $1.2406.Movements in the euro often dictated movement of stocks worldwide. Major European and Asian indexes rose modestly Friday.

The U.S. markets will be closed Monday for Memorial Day.