Market Outlook
Monday, July 26, 2010



Monday has very little in the way of economic reports scheduled. The following is all that is happening:-

8:30 … Chicago Fed National Activity Index

10:00 … New Home Sales

Also the following company is reporting its quarterly earnings:-

• Sohu.com Inc. (SOHU),

• Lorillard Inc. (LO),

• SL Green Realty Corp. (SLG),

• Albemarle Corp. (ALB), and

• Universal Health Services Inc. (UHS).

Market Outlook

Monday sees the U.S. stock market set for a weak start, as investors braced for a report on new home sales and another round of earnings due out this week.

U.S. stock futures has wavered between small gains and losses, as traders focused on second-quarter earnings season now that European bank stress-test results are out of the way.

European markets have reacted coolly to tests measuring the health of the continent's banking system.

European markets showed little movement as investors had their first chance to react to a series of tests to determine the health of the continent's big banks. Regulators said only seven of the 91 banks tested would struggle if the continent's economy and government debt problems worsened.

U.S. investors had a chance to react to the test results Friday afternoon and sent stocks higher on the results. Because they already had a chance to trade after the news, U.S. investors had little reason to make any big moves to start the week.

Economic Concerns

New Home Sales

Investors will get one piece of economic data Monday that could affect trading. The Commerce Department is expected to report that sales of new homes rose 6.7 percent in June to an annual rate of 320,000, according to economists polled by Thomson Reuters.

The report will be released at 10 a.m. ET. Economists surveyed by Briefing.com expect that sales rose at a seasonally adjusted rate of 310,000 last month.

The housing market, which helped push the economy into recession, remains sluggish. There was a sharp drop in sales after a government tax credit for home buyers expired at the end of April. There has been concern that the market was being propped up by that credit and it will continue to struggle to recover now that there are fewer incentives for buyers.

Any improvement in new home sales could provide some relief to investors because May's figures fell to the lowest level since records began being kept in 1963. A smaller than expected drop in sales of previously occupied homes added to stocks rally Thursday.

The Energy Sector

In the energy sector, shares of Tullow Oil (UK:TLW) rose 3.2% after the firm announced it has discovered a major new oil field off the coast of Ghana.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA) vaulted 3.2% last week, taking out short-term resistance in the 10,350-10,400 region, as well as besting its 200-day moving average. The S&P 500 Index (SPX), meanwhile, toppled psychological resistance at the 1,100 level, but is still staring up at its own 200-day trendline in the 1,115 region. Look for the DJIA to struggle near 10,450, which is home to a 50% retracement of the Dow's July low and April high.

The S&P 500 Index (SPX) could meet with resistance near 1,105-1,110.

Gold futures remain bound to a tight range this morning, with the front-month contract down $1.40 at $1,186.40 an ounce.

The U.S. Dollar Index: The U.S. dollar is little changed this morning versus its major foreign rivals. Specifically, the U.S. Dollar Index was last seen lower by 0.04% at $82.43.

Benchmark crude futures are headed lower this morning, despite a relatively flat session in Asian trading. The front-month contract was last seen lower by 0.85% at $78.31 per barrel.

Bonds: Treasury prices rose, and the yield on the 10-year note was steady at 2.99%.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,123,923 call contracts traded on Friday, compared to 646,922 put contracts.

The CBOE Market Volatility Index (VIX) has pulled back to its 200-day moving average near the 23.50 level. The VIX has not closed a session below this trendline since May 3.

Overseas Markets

Global markets had a chance to react to the results of the European bank "stress tests" early Monday, as Europe and Asia were closed when the results were announced.

European Concerns

Shares of Deutsche Bank AG (DB) (DE:DBK) slipped 1.4% after it and several other German banks didn't disclose the full details of their sovereign-debt holdings. The Financial Times reported that the German financial regulator had not pressured banks to make a full disclosure of their positions.

Analysts continued to debate the credibility and rigor of the stress tests.

European share markets edged higher in the early going as investors digested the results of stress tests published after European markets closed Friday.

Britain's FTSE 100 and the CAC 40 in France were narrowly higher in the early going while Germany's DAX posted slim losses.

In Europe at midday, London -0.1%. Paris flat. Frankfurt -0.3%.

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

Asian Concerns

Earlier, Asian markets finished the session in positive territory. Japan's benchmark Nikkei index rose 0.8%, the Hang Seng in Hong Kong added 0.2% and the Shanghai Composite gained 0.7%.

In Asia,Japan +0.8%. Hong Kong +0.1%. China +0.7%. India -0.6%. London flat. Paris +0.1%. Frankfurt -0.2%.

Futures Trading

As of 6:30 a.m. in New York, the Dow Jones Industrial Average futures lost 11 points, or 0.11%, to 10375, the S&P 500 index futures were down 2.7 points to 1097.90 and the Nasdaq 100 futures were lower by 1 point to 1872.75.

Futures: Dow -0.1%. S&P -0.1%. Nasdaq flat. Crude -0.6% to $78.50. Gold +0.1% to $1188.80.

us futures-july26,2010



Company News

Earnings: It's still early in the reporting period, and 157 companies are on tap to post their results this week.

Earnings are currently on track to have risen 34% from a year ago, according to earnings tracker Thomson Reuters.

Enterprise Products Partners (EPD) posted a second-quarter net profit of $357.2 million, or 46 cents per unit, as revenue rose 39% to $7.54 billion. The company said that its midstream systems were operating at or near record levels, with natural gas pipeline volumes at a record 12.7 trillion British thermal units per day. Analysts were expecting earnings of 44 cents per share on sales of $7.56 billion.

**Gilead Sciences Inc. (GILD) announced that it will buy back at least $1 billion in common stock, and fund the purchase by issuing $2.2 billion in convertible senior notes. The company said that it will use the remainder of the senior-note issue for general corporate purposes. The repurchases will be privately negotiated and off-market transactions from buyers of the notes.

**In merger and acquisition news, Delta Petroleum Corp. (DPTR) agreed to sell various non-core assets to Wapiti Oil & Gas for $130 million. The assets include Delta's 31% working interest in the Garden Gulch field of the Piceance Basin in Colorado, as well as assets in Texas, and the firm's stake in Piper Petroleum. The proceeds from the sale will be used to reduce debt.

**Pharma stocks will be in the spotlight after The Wall Street Journal reported on Sunday, citing a person familiar with the matter, that GlaxoSmithKline (GSK) made a "very casual approach" to Genzyme Corp (GENZ) asking to be notified if Genzyme considered selling itself.

Genzyme jumped 15.4 percent to $62.52 on Friday after French drugmaker Sanofi-Aventis (SASY.PA)(SNY.N) approached the biotechnology company about an acquisition.

Some Interesting News

BP's Hayward heads for the door. According to several media reports over the weekend, BP (BP) CEO Tony Hayward plans to resign in the next day or two, will collect a pay and pension package of at least £11.8M ($18.2M), and Bob Dudley, the American coordinating BP's spill response, will likely be named as a successor. BP denied that Hayward is resigning, but U.S. officials confirmed the rumors, saying they were briefed by a senior BP representative who said Hayward would be stepping down. The company's board is scheduled to meet today to approve Hayward's departure, and an announcement would likely be made tomorrow when BP releases its Q2 results. Premarket: BP +2.5% (7:00 ET).

FCIC threatens Goldman audit. The Financial Crisis Inquiry Commission is threatening to bring in outside accountants to comb through Goldman Sachs' (GS) systems for data on derivatives. "We have a deep level of questioning about whether we’re getting the straight scoop here and whether Goldman is working with us on information that they surely have," said Phil Angelides, the FCIC's chairman; Goldman has said its accounting systems didn't break out trading revenue generated strictly from derivatives, and therefore it can't provide the requested information to the commission.

Vivendi faces fraud fine. Brazil's securities regulator may fine Vivendi (VIVDY.PK) as much as 3B reais ($1.7B) for allegedly committing fraud in its takeover of Brazilian phone company GVT. Vivendi announced it won control of GVT last November, when in fact it had purchased less than the minimum 40% stake. The fine could be the largest ever imposed by Brazil's securities regulator.

Carlyle sells Taiwan TV unit. Private-equity firm Carlyle Group agreed to sell Kbro, Taiwan's largest cable TV operator, to the controlling shareholder of Taiwan Mobile for T$65B ($2B). It's an encouraging sign for global private equity investors in Taiwan, which have struggled to recoup some of their investments.

P-E groups eye Virgin Active. Private equity groups, including KKR (KKR) and Blackstone (BX), are said to be among the potential buyers considering a purchase of Virgin Active, the British health and fitness chain. Though parent company Virgin Group is said to be considering both a sale and an IPO of the business, a sale is seen as the mostly likely option and could bring in more than £1B ($1.5B).

Google, Microsoft battle for cloud control. Google (GOOG) and Microsoft (MSFT) are competing to supply the government's General Services Administration with web-based email and other software. It's a key contract, not just because of its size (covering roughly 15,000 employee email accounts) but because the GSA often influences how other federal agencies acquire new technologies.

U.A.E. targets BlackBerry. The United Arab Emirates said Research In Motion's (RIMM) BlackBerry is operating "beyond the jurisdiction of national legislation" and is open to misuse that poses security risks. The UAE said it would seek to safeguard its consumers and laws. Coming just months after Bahrain warned against the use of BlackBerry Messenger software, the comments raise concerns that other Gulf countries may opt to curb certain BlackBerry apps, giving an advantage to rivals like Apple (AAPL).

Germany gets flak over stress tests. The results of European stress tests, published on Friday, showed that just seven of 91 banks tested across the EU failed to achieve a tier one capital ratio of 6% once their balance sheets were exposed to a series of adverse scenarios for 2010 and 2011. However, Germany is getting flak from European regulators because six of the 14 German banks tested, including Deutsche Bank (DB) and Postbank, didn't provide the expected detailed breakdown of sovereign debt holdings. The non-disclosure is likely to fuel rumors that the banks have something to hide, adding to the market uncertainty that stress tests were meant to quell. Meanwhile, banks that passed the tests must now turn to their next challenge: raising billions of dollars in long-term funding to finance new lending. Premarket: DB -2.65% (7:00 ET).

Madoff "net winners" brace for lawsuits. Madoff trustee Irving Picard is preparing to file a wave of lawsuits against Madoff investors who were "net winners," ultimately withdrawing more than they had originally deposited. Picard said these investors "made money at the expense of the people who didn't," and intends to claw back some of the funds for redistribution to other Madoff victims. The "net winners" protest they shouldn't be punished for withdrawing funds that turned out to be just a fraction of what they thought they had in their accounts.

Friday's failures. Seven banks were closed on Friday, bringing this year's total failures to 103 so far. The banks (in Florida, Georgia, South Carolina, Kansas, Minnesota, Nevada and Oregon) had about $2B in deposits combined, and their resolution will cost the FDIC an estimated $431M.

Conclusion

A report on new home sales is due out today that could help sway traders. It is expected sales edged higher from record lows in June as the housing market recovery remains erratic.

Stocks surged last week as mostly strong corporate earnings and outlooks, as well as the results of the European bank tests, added to hopes that the global economy is recovering. The Dow Jones industrial average jumped 3.2 percent last week, putting it within 4 points of getting back into positive territory for the year.

There are few earnings reports Monday, but plenty throughout the week that could help dictate trading.

Results due out Tuesday from oil company BP PLC will likely be closely watched because of reports that embattled CEO Tony Hayward will step down and the company could take a big charge to cover costs of cleaning up the oil spill in the Gulf of Mexico.

"As far as the U.S. is concerned, the key thing is still the earnings," said Mike Lenhoff, chief strategist at Brewin Dolphin Securities in London. "By the end of the week, two thirds of the S&P 500 would have reported. The results should be quite good."

"The concerns people have had about loss of recovery momentum haven't been evident in these earnings," Lenhoff said.

 

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