Market Outlook
Wednesday, November 03, 2010

Wednesday has quite a few economic reports scheduled. They are:-

  • Auto sales

  • FOMC Meeting, Day 2

  • 7:00 …MBA Mortgage Applications

  • 7:30 …Challenger Job-Cut Report

  • 8:15 …ADP Jobs Report

  • 9:00 …Treasury Quarterly Refunding

  • 10:00 …Factory Orders

  • 10:00… ISM Non-Manufacturing Index

  • 10:30… EIA Petroleum Inventories

  • 2:15 PM …FOMC Announcement (QE2?)

Also the following companies are reporting their quarterly earnings:-

• Aetna Inc. (AET), Agrium Inc. (AGU), Alpha Natural Resources Inc. (ANR), AOL Inc. (AOL), CVS Caremark Corp. (CVS), Hyatt Hotels Corp. (H), Molson Coors Brewing Co. (TAP), PulteGroup Inc. (PHM), Qwest Communications International Inc. (Q), Time Warner Inc. (TWX), TRW Automotive Holdings Corp. (TRW), WellPoint Inc. (WLP), Westlake Chemical Corp. (WLK), Force Protection Inc. (FRPT), Genco Shipping & Trading Limited (GNK), General Cable Corp. (BGC), Inc. (OSTK), Prudential Financial Inc. (PRU), QUALCOMM Inc. (QCOM), WebMD Health Corp. (WBMD), Whole Foods Market Inc. (WFMI), and Yamana Gold Inc. (AUY).

wednesday outlook

Wednesday sees U.S. stocks prepare for a busy day, after a big Republican victory in the midterm election and ahead of a key Federal Reserve meeting.

Dow Jones industrial average (INDU), S&P 500 (SPX) and Nasdaq (COMP) futures were mixed ahead of the opening bell.

Stocks closed higher Tuesday after interest rate hikes from the central banks of Australia and India sparked an early rally. But the market traded in a narrow range for most of the day as investors remained cautious amid key political and monetary events this week.

U.S. stock index futures signaled a firmer opening for Wall Street on Wednesday and Treasury futures rose in anticipation that the Federal Reserve will announce more asset purchases to stimulate the economy.

Market reaction to Republicans' victory in the midterm elections was relatively muted as investors have largely priced in an outcome that is seen as a net positive for business, with the focus firmly on the Fed meeting.

As expected, the midterm elections resulted in big gains for the Republican Party, which won control of the House by capturing at least 60 seats.

In the Senate, the GOP gained at least six seats, leaving the Democrats with a slim majority. Two seats remained undecided.

election results

Television networks projected Republicans would pick up at least 60 House seats, far more than the 39 needed for a majority that would elevate conservative John Boehner to House speaker, put Republicans in charge of House committees and slam the brakes on President Barack Obama's agenda.

A divided Congress is seen as supportive for stocks. Critics for example of the new healthcare law, which put pressure on related stocks earlier this year, hope Republicans can spearhead attempts to repeal or not fund parts of the reform.

"We got what we thought we were going to get," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams as futures hovered near breakeven. "We're not going to see much of a [market] reaction because this was priced in to happen as it did."

The shifting balance of power on Capitol Hill is largely seen as a positive for Wall Street, since Republican lawmakers are viewed as more business friendly and fiscally conservative than their Democratic rivals.

"It's going to make life a lot difficult for the president. We have a situation in which the question of how to manage fiscal policy is very much on the agenda," said Peter Dixon, economist at Commerzbank in London.

"The Republicans may try and push for preventing the (former President George W.) Bush's tax cut from collapsing, which may give the economy a lift in 2011 ... It's a bit more positive for stocks in the near term."

He said that in the long term, an assertive Republican party could also complicate trade and economic relations with China. Analysts said the more pressing matter for the market remained what the Fed says about quantitative easing at the conclusion of its two-day meeting later in the day.


Economic Concerns

Quantitative Easing (QE)

Investors are still awaiting an announcement from the Federal Reserve, which will conclude a two-day policy meeting later Wednesday. The central bank is expected to announce another round of asset purchases when it releases a policy statement at around 2:15 p.m. ET.

The policy, known as quantitative easing, is designed to put downward pressure on interest rates and pump money into the economy. It is also seen as a way for the Fed to combat deflation, a debilitating cycle of falling prices and demand.

While the details of the asset purchases remain unknown, many market participants expect the Fed to buy a total of $500 billion worth of Treasuries in $100 billion monthly increments.

The S&P has risen 11% since late August on expectations of another round of stimulus from the Federal Reserve, but stocks have been moving sideways recently as investors awaited the outcome of the election and confirmation from the Fed.

Some analysts warned that the market could be poised for a pullback if these two issues play out as expected, but others believe stocks could push higher if the Fed unveils a more aggressive plan to support the economy.

***In addition to the Fed announcement, investors will take in economic reports on the job market, activity in the services sector and factory orders.

Planned Job Cuts in October

Before the market opens, a report on planned job cuts in October is expected from outplacement firm Challenger, Gray & Christmass. A seperate report from Automatic Data Processing, which manages payrolls for 500,000 companies, is expected to show that private sector employers added jobs in October.

Factory Orders

After the opening bell, the Institute for Supply Management's services index is expected to show a modest increase. A government report is expected to show that factory orders improved in September.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA): appears poised to extend Tuesday's cautious gains, as Wall Street cheers last night's Republican victories.

Technically, the DJIA continues to trade between support near 11,050 and resistance at 11,250.

The S&P 500 (SPX): has gained almost 14 percent since September, and analysts said the result was largely priced in and may raise some doubts over fiscal spending to support the recovery, leaving stocks ripe for some profit taking.

The dollar and the S&P 500 have established a close inverse correlation in recent weeks. Their 30-day correlation stands at -0.84, with -1 being a perfect inverse correlation.

• The U.S. Dollar Index:The U.S. dollar, like the rest of Wall Street, is treading water this morning, as investors await this afternoon's FOMC policy statement. At last check, the U.S. Dollar Index was down 0.14% at 76.61.

Gold futures: for December delivery eased to $1,356.90 an ounce.

Benchmark crude futures for December delivery gained 51 cents to $84.41 a barrel.

Bonds: The price on the benchmark 10-year U.S. Treasury rose, pushing the yield down to 2.57% from 2.59% late Tuesday.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,142,902 call contracts traded on Tuesday, compared to 639,578 put contracts. The resultant single-session put/call ratio arrived at 0.56, while the 21-day moving average held at 0.61.

The CBOE Volatility Index .VIX, a favourite barometer of investors' fear, fell 1.2 percent after six sessions of gains.

"We expect (volatilites) to remain firm in anticipation of today's Fed statement and expected QE2 announcement," said Nick Tranter, head of derivatives at Execution Noble in London.

U.S. Treasuries extended gains in European trading as market participants anticipated the Fed resuming asset purchases after its policy meeting. The T-note future TYv1 rose by as much as 8/32 on the day to a one-week high of 126-26/32.

"People are positioning going into the FOMC this evening. You are seeing buying in the belly of the curve," a trader said. "What we saw in Europe yesterday was a large flattening bias and that flattened out the U.S. curve as well. We are just having a bit more follow-through."

Overseas Concerns

Currencies: The dollar eased against the euro, Japanese yen and the British pound ahead of the Fed announcement which could further weaken the greenback.

European Markets

European share markets were up slightly on news of a Republican victory in the House and in anticipation of a Fed move that would bolster the U.S. economy. Britain's FTSE 100 and the DAX in Germany gained 0.1%. France's CAC 40 added 0.2%.

In Europe at midday, London +0.2%. Paris +0.5%. Frankfurt +0.3%.

Asian Markets

Earlier in Asia, markets ended mostly higher. The Hang Seng in Hong Kong gained 2% after Hong Kong launched a gold exchange-traded fund backed by physical gold held in vaults within Hong Kong. Tokyo's Nikkei was up about 0.1% and the Shanghai Composite Index lost 0.5%.

In Asia, Japan +0.1% to 9160. Hong Kong +2.0% to 24145. China -0.5% to 3031. India +0.6% to 20466.

Futures Trading

As of 7:05 a.m. in New York, the Dow Jones Industrial Average futures rose 14 points, or 0.13%, to 11166.00, the S&P 500 futures were up 1.1 points to 1193.80 and the Nasdaq 100 futures rose 1.25 points 2151.50.

Futures at 7:00am: Dow +0.1%. S&P +0.1%. Nasdaq +0.1%. Crude +0.9% to $84.63. Gold +0.1% to $1358.80.


Company News

Time Warner Inc. (TWX) said that third-quarter net income fell 21% $522 million, or 46 cents per share, from the year-earlier quarter. Adjusted profit from continuing operations was 62 cents per share, as revenue reached $6.38 billion. Analysts were expecting a profit of 53 cents per share on $6.43 billion in revenue.

Electronic Arts Inc. (ERTS) reported a surprise adjusted second-quarter profit of $32 million, or 10 cents per share, as revenue fell 23% to $884 million. Analysts were expecting a loss of 10 cents a share on revenue of $812.7 million.

WellPoint Inc. (WLP) reported a third-quarter net profit of $739.1 million, or $1.84 per share, while total revenue dropped 5.7% to $14.33 billion. Excluding investment gains, the company earned $1.74 per share in the quarter. Analysts had expected earnings of $1.57 per share on revenue of $14.29 billion. Looking ahead, WLP expects 2010 earnings of at least $6.60 per share, or $6.45 per share on an adjusted basis. Analysts are currently expecting a 2010 profit of $6.38 per share.


Some Interesting News

Russia's Phosagro plans Potash bid. Russian fertilizer firm Phosagro is planning to make a bid for Potash (POT), according to a report in business daily Vedomosti, and has already asked PM Vladimir Putin to approve a potential deal and request half the financing from Russian banks. The other half of the financing would be supplied by Canadian banks; the size of the potential offer couldn't be determined. This latest development comes as Canada's government is set to rule on BHP's (BHP) bid for Potash today, with rumors swirling that Canada will likely block it. Premarket: POT +0.7%, BHP +0.7% (7:00 ET).

MUFG eyes RBS' project finance unit. Mitsubishi UFJ Financial Group (MTU) is said to be in talks to buy RBS' (RBS) project financing unit in a deal that could be worth $6.4B. The deal would help accelerate MUFG's overseas expansion, and put it in a strong position to lend for infrastructure projects in Europe, the Middle East and Africa. RBS would use some or all of the sale proceeds to help repay its taxpayer bailout. According to an MUFG spokesman: "No decision has been made. This is all we can say." Premarket: RBS +0.55% (7:00 ET).

Pride Int'l considers sale of company. Offshore driller Pride International (PDE) is said to be exploring strategic options, including a possible sale of the company, and has held talks with potential suitors such as Seadrill (SDRL) and Ensco (ESV). The news helped send Pride's shares up 11.5% in AH trading, but sources caution that a deal isn't certain or imminent, that Pride periodically reviews its strategic options and that the company is known for moving slowly.

Regulators probe nat-gas trades. The CFTC is investigating a range of natural-gas derivatives-trading activity that occurred during parts of 2008 and 2009, sources said. The CFTC sent subpoenas to hedge funds and other major nat-gas traders asking for information about trading that was discussed in emails, voicemails and other formats. Though subpoenas aren't uncommon, it has been several years since the CFTC sent out this many. Despite the volume of information requests, industry experts say they're not sure what exactly the CFTC is looking for.

Xstrata rounds up Sphere offer. Xstrata (XSRAF.PK) raised its bid for Australia's Sphere Minerals to A$3.00/share from A$2.50, valuing the company at A$514M ($513M) and marking a 94% premium to Sphere's pre-offer trading price. Xstrata has been pursuing Sphere since August, and has already lowered the level of acceptances needed for its offer to 50% from 90% and twice extended its offer. The new offer period ends Nov. 12, and Xstrata said there will be no further extensions. In Aussie trading, Sphere closed +19% to $2.95. In London, Xstrata +0.4% (7:00 ET).

R&D gets downsized. Research and development spending declined at major companies last year for the first time in more than a decade, according to Booz & Co's annual survey, dropping 3.5% to $503B. The top three R&D spenders were Roche (RHHBY.PK with $9.12B), Microsoft (MSFT, $9.01B) and Nokia (NOK, $8.24B). R&D spending as a percentage of revenues was up slightly from the year before, but that's only because revenues dropped even faster than R&D spending did. R&D cuts last year were concentrated in auto, computing, electronics and industrial companies, sectors that usually produce some of the highest research spending. Booz expects "the most forward-looking companies" to quickly restore R&D budgets, though it found that heavy R&D spending didn't always translate into recognition as a technology leader.

GM's tax holiday. As a result of billions of dollars of debt, a bailout and bankruptcy, GM may get a tax break worth as much as $45.4B. According to documents filed with regulators, tax-loss carry-forwards and other provisions will allow GM to use losses in prior years and other costs to shield its future profits from taxes for up to 20 years. Tax experts said that under normal conditions, a major restructuring such as the one undertaken by GM would come with limitations on tax benefits, but a little-noticed federal ruling last year exempted recipients of TARP bailout money from these limitations.

Air Products balks at Airgas' self-valuation. Airgas (ARG) said yesterday that it believes the company's value in a sale is at least $78/share, prompting suitor Air Products (APD) to say it wouldn't pay anywhere near the $6.53B Airgas thinks it's worth. Air Products has offered $65.50/share. Airgas had said previously that a transaction could happen only if it was "meaningfully in excess of $70/share," but investors may have felt that Airgas' $78/share stance was a bit too much of a stretch, as shares closed down 0.8% to $70.43 in yesterday's trading. APD closed +1.7%.

FedEx expands in India. FedEx (FDX) agreed to buy the logistics, distribution and express businesses of smaller Indian rival AFL Pvt. Ltd. and its affiliate, Unifreight India Pvt. Ltd., for an undisclosed amount of money. FedEx said the move "supports our long-term strategy to grow our international business and better serve our customers seeking to expand or enter the Indian market," where the logistics market is expected to expand to $120.4B in 2014 from $75.2B in 2009.

Google settles Buzz breaches. Google (GOOG) agreed to settle a class action suit filed by Gmail users who argued Google's Buzz violated their privacy. As part of the settlement, Google created an $8.5M fund for organizations focused on internet privacy. Still, the settlement doesn't bring Google any closer to finding success in the social media landscape.

Electronic Arts inks Facebook deal. Electronic Arts (ERTS) signed a five-year strategic deal with Facebook, where its Playfish division's social games are among the most popular. Under the terms of the deal, Facebook Credits will become the exclusive payment method for all Electronic Arts games on the social network, and EA will receive 70% of the revenue from these transactions.

Dell delves into cloud computing. Dell (DELL) announced yesterday it was buying software-as-a-service company Boomi for an undisclosed sum. Dell will use the acquisition to help expand its cloud-computing presence; earlier this year, Dell bought Ocarina Networks, which allows data to be stored online more efficiently, and lost a bidding war to H-P (HPQ) over storage technology firm 3Par.


Stocks closed higher on Tuesday on the expectations the midterm election and central bank decision would create a more business-friendly environment. The Dow Jones industrial average .DJI rose 0.6 percent, the Standard & Poor's 500 Index .SPX gained 0.8 percent and the Nasdaq Composite Index .IXIC firmed 1.1 percent.


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