Market Outlook
Tuesday, October 12, 2010

Tuesday has quite a few economic reports scheduled. The reports that are available are:-

  • 7:45… ICSC Retail Store Sales

  • 8:00… NABE Annual Meeting: Challenges to Economic Prosperity

  • 8:55… Redbook Chain Store Sales

  • 10:00… IBD/TIPP Economic Optimism

  • 10:00 … Employment Trends Index

  • 10:00… Consumer Confidence

  • 1:00 PM… Results of $32B, 3-Year Note Auction

  • 2:00 PM… FOMC minutes

Also the following companies are reporting their quarterly earnings:-

  • Fastenal Company (FAST),

  • CSX Corp. (CSX),

  • Intel Corp. (INTC) and

  • Linear Technology Corp. (LLTC)

tuesday outlook

Tuesday sees U.S. stocks set for a lower open, with investors seen pulling back ahead of the first big batch of third-quarter financial results due this week from several major companies, as well the release of minutes from the Federal Reserve’s September policy meeting.

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

Stocks ended with slight gains Monday, with the Dow closing above the key 11,000 level for a second straight session. Markets found early support amid ongoing speculation that the Federal Reserve will take steps to stimulate the economy, but retreated as investors shifted their focus to third-quarter earnings.

”I think a lot of people are looking towards the earnings front and the FOMC [Federal Open Market Committee] today, and that’s why they’re taking a bit of risk off the table just in case they disappoint on both sides,” said Joshua Raymond, market strategist at City Index.

Leading chipmaker Intel (INTC) reports after the closing bell Tuesday and is the first of three Dow components to deliver results this week.

Dow issues JPMorgan Chase (JPM) and General Electric (GE) are also on tap to report this week, as is Google (GOOG).

Economic Concerns

Quantitative Easing

The Federal Reserve will release the minutes from its most recent policy-setting meeting, and traders will be looking for clues as to how the central bank will act at its next meeting in early November.

There is much speculation that the Fed will expand its so-called policy of quantitative easing by announcing a new round of asset purchases. But investors were spooked after Federal Reserve's new vice chairwoman Janet Yellen warned a roomful of economists Monday of the risks associated with its easy monetary policy.

On Tuesday, Kansas City Fed President Thomas Hoenig will speak on the economic outlook and monetary policy from a National Association for Business Economics meeting in Denver. He is the only member who has voted against the committee's latest actions and is against more Treasury purchases.

The Fed will release minutes of the September meeting of the rate-setting Federal Open Market Committee at 2 p.m.

The National Association for Business Economics

A group of top business economists on Monday cut their forecast for U.S. growth through 2011, warning that high debt levels and a decline in the nation’s wealth would inhibit spending and investment. The National Association for Business Economics cut its forecast for annual growth in gross domestic product to 2.6% in 2010, down from its spring estimate of 3.2%. The group also cut its 2011 growth forecast to 2.6% from 3.2%.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA) could be headed for a rough session, as anxiety is sweeping Wall Street ahead of the release of minutes from the Federal Reserve's September policy meeting.

If the futures losses carry over into the open, we could see the Dow battling for support at 11,000. In fact, the blue chip barometer could even test support at the 10,900 or 10,800 levels if the market's reaction to the Fed minutes is harsh enough.

The S&P 500 Index (SPX), the broad-market index should find a floor near 1,160, or at 1,150 if selling pressure gains momentum.

Gold futures for December delivery dropped $8.80 to $1,345.60 an ounce.

• The U.S. Dollar Index : Strength in the U.S. dollar is sapping the commodities market this morning. Rallying against pretty much every benchmark currency, except the Japanese yen, the dollar is weighing heavily on gold and crude futures. At last check, the U.S. Dollar Index was up 0.39% at 77.75.

Benchmark crude futures for November delivery slipped 85 cents to $81.36 a barrel.

Bonds:The price rose on the benchmark 10-year U.S. Treasury, pushing down the yield to 2.35 from 2.38% late Friday. The bond market was closed Monday for Columbus Day.

Equity option activity on the CBOE saw 1,222,569 call contracts traded on Monday, compared to 728,197 put contracts. The resultant single-session put/call ratio arrived at 0.60, while the 21-day moving average held at 0.59.

Overseas Markets

Large Chinese banks dropped in Shanghai and Hong Kong after Reuters reported that China has temporarily raised reserve requirements on six banks as it tries to temper inflation without derailing a recovery.

Currencies: The dollar rose against the euro and the British pound but fell against the Japanese yen.

The dollar was mostly higher in gains tied to short covering. The euro (EURUSD) slipped 0.3% to trade at $1.3818. The dollar was off 0.2% versus the Japanese yen (USDYEN), however, to trade at 82.05 yen.

European share markets eased in morning trading. Britain's FTSE 100 lost 0.9% and the DAX in Germany was down 0.6%. France's CAC 40 tumbled 1.4%.

In Europe at midday, London -0.8%. Paris -1.2%. Frankfurt -0.5%.

Asian Concerns

Earlier Asian markets ended the session mixed. The Shanghai Composite rose about 1.2%, while the Hang Seng in Hong Kong slipped 0.4%. Japan's Nikkei sank 2.1%.

In Asia, Japan -2.1% to 9389. Hong Kong -0.4% to 23122. China +1.2% to 2841. India -0.7% to 20203.

Futures Trading

As of 7:40 a.m. in New York, the Dow Jones Industrial Average futures lost 55 points, or 0.5%, to 10908, the S&P 500 futures were down 6.7 points to 1155.60 and the Nasdaq 100 futures were lower by 9.75 points to 2015.75.

Futures: Dow -0.5%. S&P -0.6%. Nasdaq -0.5%. Crude -1.1% to $81.33. Gold -0.9% to $1342.60.


Company News

Johnson Controls Inc. (JCI) said that it expects to post fiscal 2011 earnings of $2.30 to $2.45 per share - an increase of between 17% and 25% on a year-over-year basis. Revenue is seen growing approximately 9% to $37 billion, Johnson Controls added. "We are substantially increasing our investments to drive organic growth," said CEO Stephen Roell. "Higher capital expenditures in 2011 will support the significant growth opportunities in our power solutions business and further expansion in all of our businesses in the fast-growing geographic market," he added. Analysts are forecasting fiscal 2011 earnings of $2.39 per share on sales of $36.33 billion.

Barclays Capital affirmed its "overweight" rating on Apple Inc. (AAPL). Barclays analyst Ben A. Reitzes also lifted his target price to $385 per share from $340 per share. "Even at this market cap Apple is the best growth play in the IT-hardware segment, with prospects for significant double-digit organic revenue growth for several more years," the analyst wrote.

Lions Gate Entertainment Corp. (LGF) proposed a merger with MGM in a deal that would give the latter company 55% of the combined entity, the Los Angeles Times reported. In a statement this morning, investor Carl Icahn, who is offering to buy all of Lions Gate for $7.50 per share, said he supported the proposed merger.

Google said it has agreed to invest in a proposed $5 billion transmission system that will connect offshore wind farms built along a 350-mile stretch between New Jersey and Virginia. Google's stock was flat in premarket trading.

Gap (GPS) said it is reverting to its classic logo, after a new logo it debuted on its website ignited a customer backlash.

Some Interesting News

KKR, S. Korea pension fund buy Chevron pipeline stake. KKR (KKR) teamed up with South Korea's state-run National Pension Service to buy Chevron's (CVX) 23.44% stake in Colonial Pipeline Company. The deal's pricing details weren't disclosed, but Chevron's stake is estimated to be worth $895M. The deal marks NPS' first energy infrastructure acquisition as it tries to diversify away from bond-focused portfolios to put more weight on alternative and equity investments. Chevron said the sale was part of a plan to more carefully align its assets with its strategies.

EDF open to sale of Constellation. Electricite de France (ECIFF.PK), Constellation Energy's (CEG) largest shareholder, would support the sale of Constellation to a rival, sources said. Tensions between the two companies have been rising, and were further exacerbated this weekend when Constellation abandoned its pursuit of a federal loan guarantee that was essential to a new nuclear reactor their joint venture was supposed to build. EDF had rejected sale inquiries received in the past few months, but its strategic reversal could prompt new takeover interest.

iPad comes to Wal-Mart. Wal-Mart (WMT) will start selling the iPad (AAPL) this Friday, a coup for the discount store which will now have the popular tablet in its stores ahead of the holiday shopping season. Rival Best Buy (BBY) has been selling the device since its launch in April and Target (TGT) began selling the iPad last year, but Wal-Mart insists its sales heft will compensate for being late to the game and it plans to have 2,300 stores selling the iPad by mid-November.

Microsoft hopes for mobile success with Windows Phone 7. Microsoft announced yesterday morning that it was releasing nine new phones based on Windows Phone 7, the operating system it spent two years developing and which it plans to spend $100M promoting. Initial reviews of Windows Phone 7 have been generally upbeat, as it's "far sleeker, more user friendly, and shows almost no sign of being a Windows derivative like the previous versions did.” That said, the smartphone market is already fairly crowded by Apple's (AAPL) iPhone, Google's (GOOG) Android software and others, and Microsoft's previous forays in the market have been less than successful.

Oracle, IBM reach Java pact. Oracle (ORCL) and IBM (IBM) announced yesterday they would collaborate on Java development efforts using the OpenJDK project, rather than the initiative IBM had sponsored called Apache Harmony. An IBM executive said the pact "should remove some of the uncertainty about the future of Java," while an Oracle executive said the agreement was "a reflection of the strategic reality we both face" in enabling Java to keep pace with hardware developments. Even so, Oracle still has an outstanding suit against Google (GOOG) claiming Android illegally uses code from Java, and Java's future will remain uncertain until the two tech giants find a way to settle their dispute.

Bain Capital buys Gymboree. Shares of Gymboree (GYMB) closed up 22.4% yesterday to $64.83 after Bain Capital announced it would purchase the specialty retailer in a deal valued at $1.8B. Under the terms of the $65.40/share agreement, Gymboree may solicit acquisition proposals from third parties until Nov. 20. Cheap valuations and healthy balance sheets have made specialty apparel companies attractive takeover targets, and news of the deal helped boost shares of rivals Children's Place (PLCE +2.45%) and Carter's (CRI +3.2%).

Google, Marubeni plan undersea power cable JV. Google (GOOG) and Japanese trading house Marubeni agreed to create a joint venture to develop an undersea power cable network along the U.S. Eastern seaboard. The JV will hold around $6B in funding commitments, and will include participation from Swiss investment fund Atlantic Grid Holding Co. Google will hold a 37.5% stake in the JV and Marubeni will hold a 15% stake.

NYSE "glitch" delays close for some stocks. A NYSE spokesman said the exchange experienced a "network connection glitch" yesterday that prevented the close of 165 stocks, including J&J (JNJ), BP (BP) and Ford (F). All 165 stocks were eventually closed. No word on what caused the glitch.


U.S. stocks ended with marginal gains Monday, while the bond market was closed for the Columbus Day holiday. The Dow Jones Industrial Average (DJIA) rose 3.86 points to end at 11,010.3, while the broader S&P 500 index (SPX) gained 0.17 point to finish at 1,165.32.

There are growing expectations that Fed policy makers could move as early as November to ramp up the quantitative-easing program.

“We do not believe the Fed would have fueled speculation of additional easing action unless they were strongly inclined to deliver," wrote economists at Royal Bank of Scotland in a research note.

“Though divisions among the committee over providing further monetary stimulus will be evident in the September policy discussion, we expect the FOMC minutes will, on balance, solidify expectations that QE II [quantitative easing] is on the way,” they said.

Meanwhile, Intel’s results could set the tone for the remainder of earnings season, Raymond said.

More heavyweights are set to release earnings later this week. Wednesday features earnings from J.P. Morgan Chase & Co. (JPM) and Google Inc. (GOOG) reports Thursday and General Electric Co. (GE) will unveil results on Friday.


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