Market Outlook
Tuesday, June 1, 2010

Tuesday presents several economic reports. The schedule for today is:-

May Auto sales

10:00 ISM Manufacturing Index

10:00 Construction Spending

5:00 PM ABC Consumer Confidence Index

Also, once again, there are a couple of companies reporting their quarterly earnings:-

• Collective Brands Inc. (PSS) and

• Shanda Interactive Entertainment Ltd. (SNDA).

Stock futures have fallen again this morning after the euro fell to a new four-year low.

World stocks fell amid investor concern about the global economy as a report showed Chinese manufacturing slowed in May, and on continued fears about Europe's shaky government finances.

Major U.S. indexes are set to resume their slide due to fresh concerns about the health of Europe's economic recovery. Stocks fell late Friday ahead of the long holiday weekend after Fitch Ratings cut its view on Spain's debt.

The Dow Jones industrial average fell 122 points Friday. Dow futures were down another 114 points early Monday.

The euro fell as low as $1.2112 before easing off that low to $1.2127. Markets worldwide have been tracking the euro, the currency used by 16 countries in Europe. The euro has been seen as an indication for confidence in whether countries like Greece, Spain and Portugal will be able to cut spending to contain mounting debt without stalling a recovery.

Investors in recent weeks have used any signs of weakening around the world to sell stocks and move into safe-haven investments like the dollar and U.S. Treasuries.

Stocks were hammered last month because of the concerns about a global slowdown. The Dow had its worst May performance since 1940, falling nearly 8 percent. All 30 components of the index fell during the month and the index has dropped in nine of the past 12 trading sessions.

Asian markets fell after a new report showed China's manufacturing sector slowed last month. China has had one of the world's strongest economies in recent years, so any slowdown there could stoke fears that a global rebound is slowing.

Shares in BP PLC plunged 13 percent to 429.2 pence ($6.20) on the London Stock Exchange. Because of a bank holiday, Tuesday was the first day of London trading after the oil company's failed attempt over the weekend to block the oil leak in the Gulf of Mexico.

BP said that costs for the spill have reached $990 million.

Economic Recovery

Investors will be watching labor numbers and auto sales figures this week to determine the strength of the economic recovery. And billionaire investor Warren Buffett will be grilled at a hearing looking into the causes of the financial crisis.

In the U.S., investors are awaiting a reading on manufacturing as well. The Institute for Supply Management's monthly manufacturing index likely fell to 59 last month from 60.4 in April, according to economists polled by Thomson Reuters.

While the index would indicate manufacturing slowed slightly last month, any reading above 50 still indicates expansion in the sector. Manufacturing has shown some of the steadiest growth in the U.S. as the country emerges from recession.

A separate report is expected to show that construction spending was flat in April after growing 0.2 percent in March. The housing sector was one of the hardest hit markets during the recession and it has struggled to recover. Analysts are worried that the housing market could weaken more after the expiration of a home buyer tax credit in April.

Both the construction spending and manufacturing reports are due out at 10 a.m. EDT.

Economists expect the May unemployment rate to slide to 9.8% from 9.9% in April. The employment statistics, due this Friday, are likely to show the U.S. added as many as 500,000 jobs this month after nonfarm payrolls rose by 290,000 in April.

The number of U.S. workers filing new claims for unemployment benefits fell last week, but the drop was lower than expected and the figures still don't signal any strong improvement in the labor market. expects U.S. new vehicle sales will continue to rebound in May, rising 18% from last year and 11% from April, thanks in part to Memorial Day weekend promotions. Auto makers will report May sales figures Wednesday. The automotive-information aggregator expects General Motors Co. will top the 200,000-vehicle mark for the first time this year, with 12% growth, while cross-town rival Ford Motor Co. (F), which has been outperforming the industry as a whole for some time, is projected to reach 189,000 units, up 22%. Chrysler Group LLC is expected to show the biggest improvement, with 28% growth, and Toyota Motor Corp. (TM) the slowest growth, up 7.5%.

Buffett is scheduled to testify Wednesday before the Financial Crisis Inquiry Commission, which is probing the role of rating agencies in the recent financial crisis. Buffett, head of Berkshire Hathaway Inc. (BRK) will testify about Moody's Corp. (MCO), parents of credit-rater Moody's Investors Service.

Berkshire is a longtime shareholder in Moody's that has reduced its stake as various regulatory inquiries and a slowdown in the business of rating lucrative structured bonds has taken a toll.

When retailers post same-store sales figures Thursday, teen retailers are expected to show only a 0.7% increase, compared with a 3.7% gain expected for retailers overall, according to Thomson Reuters, and that may not bode well for signs of overall economic strength of consumers. Teen retailers had an uneven spring, usually one of their most bustling seasons, and the choppiness has raised concerns about just how well the economic recovery is faring.

Once again the CBOE Volatility Index (VIX) will probably have a big impact today.

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

• Gold futures are trading higher in London this morning, adding $8.90 at $1,223.90 an ounce in London.

• Weakness in the euro is once again providing lift for the U.S. dollar this morning. In fact, the euro plunged to yet another four-year low in European trading, hitting near $1.2143. Meanwhile, the U.S. Dollar Index tagged an annual high earlier in pre-market trading, and is currently sitting on a gain of 0.92% at 87.39.

• Heading into the open, the benchmark crude for July delivery was down 2.49 percent at $72.12 a barrel in electronic trading on the New York Mercantile Exchange.

• Equity option activity on the Chicago Board Options Exchange (CBOE) saw 893,256 call contracts traded on Friday, compared to 522,284 put contracts.

• With stock futures falling, bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.24 percent from 3.29 percent late Friday.

Overseas Markets

Overseas trading is in very poor shape this morning, as it seems that none of the foreign indexes are in positive territory.

In Europe, London's FTSE index was down over 110 points, or 2.13 percent, at 5077.86. The CAC 40 index of leading French shares was down more than 86 points, or 2.47 percent, at 3,420.99, while Germany's DAX dropped over 122 points, or 2.05 percent, to 5,841.87.

The euro was down 1.45 percent at $1.21, and the British pound fell 0.5 percent to $1.44.

Masatoshi Sato, market analyst at Mizuho Investors Securities Co. Ltd. in Tokyo, said investors remained worried about the impact of Europe's debt crisis on the global economy.

"Investors are not convinced that the crisis will end soon. With growing uncertainty over the euro zone's crisis, investors are bracing for a further slump in the euro against the dollar," Sato said.

Political uncertainty was also a negative in Tokyo, where Prime Minister Yukio Hatoyama faced mounting calls for his resignation after a small party left his coalition government in protest at the reversal of a campaign promise to move a U.S. military base off the southern island of Okinawa.

Earlier in Asia, Japan's Nikkei 225 stock average fell 56.87 points, or 0.6 percent, to close at 9,711.83 and Australia's S&P/ASX 200 dropped 0.4 percent to 4,413.1.

In Seoul, the Kospi lost 0.7 percent to 1,630.40, Taiwan's benchmark shed 1.2 percent to 7,289.33 and Hong Kong's Hang Seng retreated 1.4 percent to 19,496.95.

The signs of slowing in the manufacturing sector helped drag China shares lower, with the benchmark Shanghai Composite Index falling 0.9 percent to 2,568.28.

Sampson reported from Bangkok. Associated Press writers Shino Yuasa in Tokyo, Alex Kennedy in Singapore and AP Business Writer Elaine Kurtenbach in Shanghai contributed to this report.

The state-affiliated China Federation of Logistics and Purchasing said its purchasing managers index, or PMI, fell to 53.9 in May from 55.7 in April and 55.1 in March due to lackluster demand both at home and abroad.

In Europe, investors continued to fret over whether austerity measures to address Europe's debt mountain will send the region back into recession.

In Asia, Japan -0.6% to 9712. Hong Kong -1.4% to 19497. China -0.9% to 2568. India -2.2% to 16572.

In Europe, at midday, London -2.1%. Paris -2.3%. Frankfurt -1.7%.

Futures Trading

Futures: Dow -1.1%. S&P -1.4%. Nasdaq -1.1%. Crude -2.6% to $72.06. Gold +0.8% to $1224.20.

Ahead of the opening bell, Dow futures fell 114, or 1.1 percent, to 10,012. Standard & Poor's 500 index futures dropped 14.80, or 1.4 percent, to 1,073.70, while Nasdaq 100 index futures fell 21.25, or 1.2 percent, to 1,830.75.

US stock futures-june-1-2010

Some Interesting News-

• Fitch Ratings lifted Oracle Corp.'s (ORCL) outlook to positive and affirmed its long-term issuer default rating at A. According to Fitch, Oracle has ample liquidity, and a strong customer renewal rate despite the economic downturn. Furthermore, the ratings agency said that it may upgrade Oracle's rating if the company can successfully integrate Sun Microsystems.

• Hewlett-Packard Co. (HPQ) announced plans to spend $1 billion to automate its commercial data centers. As a result the company will eliminate about 9,000 jobs over the next several years. H-P expects to generate annualized gross savings of approximately $1 billion, and net savings after reinvestment in a range between $500 million and $700 million.

• Prudential (PRU) failed to persuade AIG (AIG) to lower the price of their AIA deal to $30.4B from $35.5B, imperiling the future of the deal. Pru had spent the last few days trying to convince AIG to renegotiate the sale of its Asian unit after several of Pru's largest shareholders called the takeover too expensive. Following AIG's rejection, Pru said it's considering its position and will make a further announcement "when appropriate." Many analysts believe Pru's best move now is to abandon the bid rather than push through with the original terms, while sources said AIG is moving forward with plans for an IPO of the unit in October. News of the failed negotiations sent Pru's shares +4% in London, AIG -3.2% premarket (7:00 ET).

• Covidien (COV) agreed to acquire ev3 (EVVV) for $2.6B, or $22.50 per share. The acquisition will enable Covidien to significantly expand its presence in the vascular market, Covidien said. The deal will dilute Covidien's 2010 earnings per share by 5 to 8 cents, but the underlying strength of Covidien's existing businesses is expected to offset some of the dilution.

• After three days of pumping heavy drilling mud into the Gulf of Mexico oil leak, BP (BP) said Saturday that its 'top kill' efforts had failed. The company is now preparing to use remotely operated vehicles to cut the leaking pipe and cap it, but the move could end up making the spill worse and the only guaranteed solution is still more than two months away, prompting BP CEO Tony Hayward to comment that "this scares everybody, the fact that we can't make this well stop flowing." Meanwhile, Rep. Bob Markey said he's not sure if BP was "lying or incompetent" in its initial estimate that 1,000 barrels/day of oil were escaping into the sea. Given BP's tainted track record, said Markey, he has "no confidence" coming measures will be successful: "I think they do not know what they were doing."

• The eurozone is facing “hazardous contagion” effects from the region’s debt crisis, said the ECB in its latest report, as growing government deficits could raise borrowing costs and clip economic growth. The ECB forecasts another €195B in bank writedowns this year and next, while the U.S. plans to urge Europe to publicly disclose the results of bank stress tests. Euro -1.4% against the dollar (7:00 ET).

• Sales of Apple's (AAPL) iPad have topped two million in less than sixty days, exceeding the sales rate for the company's Mac laptops and desktops and for the original iPhone, though falling short of the sales rate for the iPhone 3G. The news could prompt analysts to upwardly revise their sales projections, giving an already buoyant stock a further lift. Competitors are racing to join Apple in the newly-created tablet computer market, with Asustek unveiling a new tablet called the Eee Pad that will run on Microsoft (MSFT) software.

• Australian hospital operator Healthscope has become the subject of a private equity bidding war, after KKR and an unnamed firm made separate offers yesterday, each valuing Healthscope at A$1.84B ($1.54B). Sources said the unnamed firm is U.S-based Tenet Healthcare (THC), while private equity firm CVC Asia-Pacific is reportedly in talks to join KKR's bid. Monday's offers top an earlier A$1.74B bid from a consortium including Blackstone Group (BX), TPG and Carlyle.

• The European Commission has opened an investigation into the $1.3B bid by Unilever (UN) to buy Sara Lee's (SLE) personal care brands. "This merger creates significant overlaps in a number of products used by consumers on an everyday basis," said EU Competition Commissioner Joaquin Almunia. "We need to make sure that if there are competition concerns these are duly addressed."

• Deutsche Bank (DB) said it accidentally sent out erroneous sell orders for Nikkei futures contracts because of a system malfunction, causing the Nikkei to plunge briefly just seconds after the market opened. Deutsche discovered the error within minutes and canceled the trades, but not before the Nikkei average sank 1.1%. The Nikkei rebounded slightly over the rest of the day, closing -0.6%.

• France admitted that it faces a challenge in maintaining its triple-A credit rating, and announced some controversial cost-cutting measures in an effort to soothe market anxieties. France's actions follow a Friday downgrade of Spain to AA+ from AAA.

• Canada's GDP grew a better-than-expected 6.1% (annualized) in the first quarter, beating forecasts of 5.8% growth and more than double what the U.S. economy reported for the same period. The data sets the stage for what is likely to be the first post-crisis interest-rate increase among the G-7 nations.

• Three affiliated Florida banks were closed on Friday, bringing the year's total failures to date to 76 and costing the FDIC's insurance fund an estimated $203M. The banks' owner, Bank of Florida (BOFL), isn't part of the transaction, but its shares closed -60.9% in after-hours trading on Friday.

• Facebook Inc. will roll out changes in its privacy controls next week, addressing a firestorm of criticism about recent moves that exposed more of its members' personal information online.

• Finance ministers and central bank governors from the Group of 20 leading nations will gather in South Korea's Busan City next week to continue discussions on reshaping the global economy as it pulls itself out of one of its worst crises.

• Celgene Corp. (CELG) and Biogen Idec Inc. (BIIB) are among the drug makers that will detail study results at the American Society of Clinical Oncology's annual meeting, which begins next Friday in Chicago. Investors also expect information on Bristol-Myers Squibb Co.'s (BMY) drug ipilimumab to treat second-line melanoma and on Amgen Inc.'s (AMGN) Phase III data on its experimental bone drug denosumab.


Now we have another fly-in-the-ointment on which nervous investors can be bearish about. Wall Street appears to be in store for further losses as surveys showing that growth in China’s manufacturing have slowed underlining fears that Asian manufacturers and exporters remain vulnerable to the waning demand in Europe and elsewhere.

If you are in the position of stock trading remain conservative and not try to catch the absolute low, if that turns out to have been the case Friday. If the bull cycle is about to reassert itself, the 10- and 20-day averages have to stop pointing down, stabilize, flip over, and then turn up again. If they do that, there will be plenty of upside left; if they don't you can save yourself a lot of grief by waiting or become more active in making the most of the volatility by options trading.

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

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