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Market Outlook
Wednesday, November 17, 2010



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

  • 7:00 …MBA Mortgage Applications

  • 8:00 …Fed's Rosengren: Economic Outlook

  • 8:30 …Consumer Price Index

  • 8:30 …Real Earnings

  • 8:30 …Housing Starts

  • 9:15 …St. Louis Fed Conference: Past, Present and Future of the GSE's

  • 10:00 …E-Commerce Retail Sales

  • 10:30 …EIA Petroleum Inventories

  • 10:30 …Treasury's Wolin: Global Financial Reform

  • 11:30 …Cleveland Fed CPI



Also the following companies are reporting their quarterly earnings:-

• BJ's Wholesale Club Inc. (BJ), Chico's FAS Inc. (CHS), Suntech Power Holdings Co. Ltd. (STP), Target Corp. (TGT), VanceInfo Technologies Inc. (VIT), Applied Materials Inc. (AMAT), Aruba Networks Inc. (ARUN), Hot Topic Inc. (HOTT), Limited Brands Inc. (LTD), NetApp Inc. (NTAP), NetEase.com Inc. (NTES), and PetSmart Inc. (PETM).



wednesday outlook



Wednesday sees U.S. index futures modestly higher following yesterday's steep selloff as Wall Street waits for data on consumer prices and housing starts later this morning.

Chinese monetary policy and Ireland's sovereign debt remain front and center, especially with the European Union (EU) and the International Monetary Fund (IMF) meeting to discuss options for the latter. However, traders looking for a "dead cat bounce" on Wall Street may be sorely disappointed, as futures on the DJIA and the S&P 500 Index (SPX) are trading roughly 3.5 points and 1 point below fair value, respectively.

More domestic economic data is due out later this morning, with reports on consumer inflation, petroleum supplies, housing starts, and building permits, but as we saw yesterday, even positive reports may have little impact if overseas reports worsen.

Economic Concerns

Traders will get the Labor Department's consumer price index and the Commerce Department's October housing starts data both at 8:30 a.m. ET today, both which could impact trading.

Consumer Price Index

Economists on average are looking for October's CPI data to show consumer prices rose 0.3% while core prices, which exclude the moves in food and energy, to rise 0.1%. Housing starts are expected to come in at a reading of 600,000 annualized units.

The reading on consumer prices comes at a time when chatter about the possibility of inflation has picked up as of late, mostly as a result of the Federal Reserve's quantitative easing measures that the bank recently started.

While inflation data has shown consistently no immediate threat of inflation - core producer prices were effectively flat last month according to report out Tuesday - it hasn't stopped politicians and pundits from talking repeatedly about it.

Housing Starts for October

Another government report is expected to show that housing starts fell to an annual rate of 600,000 in October, after 610,000 new single family homes broke ground in September.

Building permits, considered a leading indicator of construction activity, are forecast to rise to a rate of 570,000 in the month from 539,000.

Mortgage Crisis

The Wall Street Journal reported that the Federal Deposit Insurance Corp (FDIC) is conducting about 50 criminal investigations at U.S. banks that have failed since the start of the financial crisis.

Late on Tuesday, the chief executive of Bank of America said a quick settlement of the 50-state probe of the U.S. mortgage foreclosure crisis would be the best solution for all involved.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA) dropped like a rock on Tuesday, falling 178 points to log its worst day since Aug. 11.

Look for the DJIA to hold support at 11,000, while the SPX should see buying emerge near 1,170.

• The U.S. Dollar Index: Focus remains on the U.S. dollar and its strength versus the euro this morning, as traders await the potential fallout from Ireland's sovereign debt debacle. At last check, the U.S. Dollar Index was up fractionally at 79.24.

Gold futures for December delivery fell $1.50 to $1,336.90 an ounce.

Oil futures for December delivery slipped 34 cents to $82.00 a barrel.

Bonds: The price on the benchmark 10-year U.S. Treasury rose, pushing the yield down to 2.84%.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,568,223 call contracts traded on Tuesday, compared to 1,061,406 put contracts. The resultant single-session put/call ratio arrived at 0.68, while the 21-day moving average held at 0.60.

Overseas Concerns

In Asia, the Chinese State Council, or cabinet, said China will take forceful measures to stabilise consumer prices.

In Europe, Ireland said it would work with a European Union-IMF mission on steps to help its struggling banking sector, but the country has still baulked at asking for a bailout.

European shares edged 0.2 percent higher, with drugmakers featuring among the top risers as Actelion (ATLN.VX) jumped on takeover talk and GlaxoSmithKline gained.

Currencies: The dollar slid against the euro and the British pound, but strengthened against the Japanese yen.

European Markets

European share markets were mixed in morning trading. Britain's FTSE 100 lost 0.2%, the DAX in Germany gained 0.3% and France's CAC 40 ticked up 0.3%.

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

Asian Markets

Earlier in Asia, markets ended the session mixed. The Shanghai Composite lost 1.9% and the Hang Seng in Hong Kong dropped 2.0%, while Japan's Nikkei gained 0.2%.

In Asia, Japan +0.1% to 9812. Hong Kong -2.0% to 23214. China -1.9% to 2839. India closed.

Futures Trading

As of 6:30 a.m. in New York, the Dow Jones Industrial Average futures rose 23 points, or 0.2%, to 11007, the S&P 500 futures were up 3.5 points to 1178.20 and the Nasdaq 100 futures were up 7 points to 2097.75.

Futures at 7:00am: Dow +0.2%. S&P +0.3%. Nasdaq +0.35%. Crude -0.7% to $81.75. Gold -0.3% to $1334.50.



futures111710



Company News

General Motors Co. (GM) announced that it has increased the number of shares up for sale in the company's initial public offering (IPO) to 478 million from 365 million. GM cited strong investor demand for the increase, which could make the stock sale the largest in history. Yesterday, GM lifted the pricing range to $32 to $33 each from its previous expectation of $26 to $29. GM also lifted the amount of preferred stock it plans to sell, to as much as $4.6 billion from $3 billion. According to the Wall Street Journal, if the deal is priced at the top of the range, it would value the common and preferred stock together at $22.8 billion, exceeding Agricultural Bank of China's $22.1 billion IPO in July.

Target Corp. (TGT) reported that its third-quarter profit rose 23% to $535 million, or 74 cents per share, from $436 million, or 58 cents per share, a year earlier. Sales rose 3% to $15.2 billion with comparable sales increasing 1.6%. Analysts were looking for earnings of 68 cents per share. Looking ahead, Target said that it expects fourth-quarter same-store sales to be the best in the past three years.

BJ's Wholesale Club Inc. (BJ) reported a third-quarter profit of $23 million, or 43 cents per share, as sales climbed nearly 5% to $2.57 billion. Analysts were looking for earnings of 36 cents per share on sales of $2.57 billion. For the full year, BJ lifted its forecast to a range of $2.48 to $2.52 per share, above Wall Street's consensus estimate of $2.47 per share.

Some Interesting News

FDA panel recommends lupus drug. Human Genome Sciences (HGSI) climbed 10.5% in after-hours trading after an FDA advisory panel approved Benlysta, the first new lupus drug in 50 years and potentially HGSI's first marketable product aside from an anthrax treatment it sold to the government. Co-developer GlaxoSmithKline (GSK) rose 2.4% in AH trading; Benlysta is one of the most important new drugs in Glaxo's pipeline. The FDA will make a final ruling on the drug on Dec. 9, and while the agency isn't bound by the panel's decision, it usually follows its recommendations. Premarket: HGSI -2.2% (7:00 ET).

GM boosts IPO size. GM has increased the size of its IPO by about 30% to 478M shares in response to investor demand so strong that $70B worth of orders for GM's common shares had reportedly been placed by late yesterday. The increase follows GM's decision yesterday to increase the IPO's price range to $32-33/share and to boost the size of its convertible preferred stock offering by $1B to $4B. The increased offering may raise $15.8B, making it the second-largest in U.S. history. If an overallotment option is exercised, the IPO could bring in as much as $22.2B, including the preferred stock offering. The IPO will be priced after markets close today and GM will begin trading tomorrow.

Dynegy gets last-minute bid hike. Blackstone (BX) increased its bid for Dynegy (DYN) to $5.00/share, its "best and final offer." The $602M bid represents an 11.1% increase over its previous $4.50/share offer, which was already favored by Dynegy's board over a rival bid from Carl Icahn. Dynegy's two biggest shareholders, Seneca Capital and Carl Icahn, both came out strongly against Blackstone's improved bid: Icahn believes many bids would emerge in an open process, while Seneca said the offer is "still the WRONG PRICE at the WRONG TIME for the WRONG REASONS." Dynegy shareholders are scheduled to vote on the deal at 11:00am ET today. In yesterday's trading, DYN +8.4%, BX -3.6%.

Talks underway for Irish bank aid. Ireland is sticking to the line that it doesn't need a bailout, but European finance ministers have begun working on a possible aid package for Ireland's debt-laden banks, with some media reports suggesting the aid could be as high as €100B ($136B). EU Economic Commissioner Olli Rehn said 'technical' talks will take place in Dublin with the ECB, European Commission and IMF in an “intensification of a potential program with an accent on the restructuring of the banking sector." There were also indications that the U.K., which isn't part of the eurozone, might provide direct loans to Ireland as part of the aid efforts. Officials added that the aid package could come together in a matter of days. Premarket: AIB -4.5%, IRE -5.6% (7:00 ET).

More stress tests coming for EU banks. The European Union plans to do another set of region-wide bank stress tests, with results expected around June 2011. Debt woes have plagued some of the region's banks, and critics said the first stress tests were too soft and used a flawed methodology. The ECB signaled it wants to play a larger role in the next set of tests in order to check on system-wide risks, though some fear increased ECB involvement will only serve to increase the bureaucracy behind the testing.

IRS closes UBS tax case. The IRS withdrew its legal summons against UBS (UBS) yesterday, ending its efforts to force the Swiss bank into disclosing the names of U.S. clients suspected of tax evasion. The move was expected, and followed the Justice Department's decision to drop criminal charges against the bank last month. The IRS said it planned to move forward with criminal charges against some of the 4,000 U.S. clients whose account data was turned over in 2009, and said it was ramping up its scrutiny of other banks, though the agency declined to provide details on that point. Premarket: UBS +0.4% (7:00 ET).

Unilever approved to buy Sara Lee unit. Unilever (UL, UN) won conditional approval from the European Commission to buy Sara Lee's (SLE) shower-gel and European detergents business for €1.3B ($1.8B). As a condition of the purchase, Unilever will be required to sell Sara Lee’s Sanex deodorant brand.

Potash launches $2B buyback. Potash (POT) announced late yesterday that it would begin a $2B share buyback over a one-year period, with the intention of completing the repurchases by Dec. 31, 2010. The buyback covers approximately 14.57M common shares, or roughly 4.9% of common shares outstanding. Potash shares closed -1.9% yesterday to $134.63, a three-month low, amid a broad sell-off in commodity stocks and following the collapse of BHP's (BHP) bid for the company. In AH trading, shares +0.8%.

Roche slashes jobs in cost-cutting. Roche Holding (RHHBY.PK) will cut 4,800 jobs, or 6% of its global workforce, outsource another 700, and transfer 800, as part of cost-cutting moves designed to save the company 2.4B Swiss francs ($2.4B) annually. The restructuring, set for 2011 and 2012, will result in 2.7B francs of charges spread out over the next three years. The company hopes the move will "reinforce Roche's long-term innovation capability in the face of increased price pressures and a more challenging market environment."

Interim report on Gulf spill finds fault with BP, regulators. BP's (BP) "insufficient consideration of risk" and "a lack of operating discipline" contributed to the Gulf of Mexico oil spill, according to an interim report scheduled for release today by a team of technical experts. The report from the National Academy of Engineering stresses that further investigation is needed, but takes a sharply critical view of the companies involved with the Macondo well, especially BP. It also criticizes regulators for lacking "sufficient in-house expertise and technical capabilities" to evaluate industry safety practices. Premarket: BP -0.7%, RIG +0.1% (7:00 ET).

FDIC steps up bank probes. The FDIC has launched 50 criminal investigations of former executives and employees of banks that failed since the start of the financial crisis. The FDIC is also stepping up its efforts to use civil litigation to recover money from former bank officials, and has sent hundreds of 'demand' letters putting individuals on notice of potential claims that top $2B. This is a significant jump from last month, when 50 suits had been approved to recover $1B. However, despite the failure of more than 300 banks since 2008 and FDIC promises to get results, so far not a single high-profile banker has been criminally charged in connection with a bank's failure and just two civil lawsuits have been filed.

Policy divisions among BoE members. Members of the Bank of England's nine-member monetary policy committee split three ways over the direction of monetary policy at their meeting on Nov. 3-4, a disclosure that brings no surprises but suggests further division is in store. Minutes of the gathering, released today, show seven members voted to hold the key rate unchanged at a record low 0.5% and maintain the bank's asset-purchase program at £200B. One member wanted to increase the asset-purchase program by £50B, and another wanted to increase the key rate to 0.75%.

Failed Massey mediation sets stage for trial. Court-ordered mediation discussions between Massey Energy (MEE) and hundreds of West Virginia residents broke off yesterday evening, setting the stage for a trial in August 2011. In the long-running lawsuit, originally filed in 2004, plaintiffs alleged that Massey dumped 1.4B gallons of slurry near their homes without the necessary permits between 1978 and 1987. The suit seeks to recover $100M in compensatory damages for lost wages and health costs. AIG (AIG) and other insurance companies that cover Massey refuse to cover the claims, as they say their policies contain pollution exclusion clauses; Massey has sued the insurers.

Bidders advance on Indonesian hypermarket. Wal-Mart (WMT) and South Korea's Lotte Shopping were reportedly among the firms that advanced to a second round of bidding for Indonesian retailer Matahari's hypermarket business. Carlyle Group had expressed interest, but didn't make the cut for an auction which could bring in as much as $1B. The bidders are hoping the hypermarket chain will produce strong earnings and help them bolster their position in emerging markets as growth slows in the U.S. and western European markets.

Conclusion

Stocks fell sharply Tuesday on concerns about economic developments in Europe and China. All three major gauges fell nearly 2%, and the day's losses put stocks on track to post a decline for November.

The Dow Jones industrial average .DJI dropped 1.6 percent, the Standard & Poor's 500 Index .SPX shed 1.6 percent and the Nasdaq Composite Index .IXIC gave up 1.8 percent.

Investors have been increasingly concerned about Ireland, where fears of a debt crisis have been brewing this week. The worry is that Ireland's fiscal problems could be a sign of a wider debt contagion in Europe.

Meanwhile, investors also remain focused on the outlook for the U.S. economy, with a host of key reports due this week.

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