Market Outlook
Monday, October 18, 2010

Monday provides a minimum in the way of economic reports that are scheduled. The following is all that is happening:-

  • 9:00 … International Capital Flow

  • 9:15… Industrial Production

  • 10:00 … NAHB Housing Market Index

  • 4:00 PM … Geithner: 'The State of the Economy'

Also the following companies are reporting their quarterly earnings:-

  • Citigroup Inc. (C),

  • Halliburton Co. (HAL),

  • Hasbro Inc. (HAS),

  • McMoRan Exploration Co. (MMR),

  • Apple Inc. (AAPL),

  • IBM Corp. (IBM),

  • VMware Inc. (VMW), and

  • Zions Bancorporation (ZION)

monday outlook

Monday sees the U.S. stock futures lower ahead of the morning bell as investors expressed caution ahead of a slew of corporate earnings.

All eyes are on earnings this week. Seven blue-chip Dow stocks are scheduled to release third-quarter results, as are many of the big banks and tech companies over the next 5 days.

So far third-quarter results have generally come in above expectations. Of the S&P 500 companies that have posted results, 83% have topped analyst estimates, according to Thomson Reuters. But it's still early in the reporting period.

Equity markets are showing signs of earnings “fatigue,” said Morten Kongshaug, chief analyst at Danske Bank in Copenhagen. Companies have produced few earnings disappointments so far in the third quarter, but the market’s ability to continue rallying based on better-than-expected earnings is nearing exhaustion, he said.

Meanwhile, the prospect of additional quantitative easing, which had previously helped boost equities, is viewed increasingly as a “pain reliever,” but not a cure for a potentially ailing economy, Kongshaug said.

Bank stocks saw heavy pressure last week on worries that mishandled mortgages would translate into higher costs and other headaches for lenders. Shares of Bank of America Corp. (BAC) and Citigroup were among those hammered by investors.

Economic Concerns

The Federal Reserve releases industrial production and capacity utilization data for September at 1315 GMT, and the National Association of Home Builders/Wells Fargo issues October housing market index at 1400 GMT.

Notes of Importance

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

The Dow Jones Industrial Average’s (DJIA) faltered on Friday, as a pledge for action from Fed Chairman Ben Bernanke was overshadowed by the growing foreclosure crisis.

Look for the DJIA to hold support at 11,000, with resistance at 11,150.

The S&P 500 Index (SPX) should find a floor near 1,165, and resistance near 1,180.

The U.S. Dollar Index: A rebounding U.S. dollar has contributed to oil's weakness, as the U.S. Dollar Index bounced off its 2010 lows near the 76 level to reclaim its 10-day moving average. In premarket trading, the index is up 0.31% at 77.28.

Benchmark crude futuresfell 14 cents to $81.11 per barrel.

Gold futures for December delivery sank $9.40 to $1,362.60 an ounce.

Bonds:The price rose on the benchmark 10-year U.S. Treasury, pushing the yield down to 2.53%.

Equity option activity on the CBOE saw 2,416,913 call contracts traded on Friday, compared to 1,150,989 put contracts. The resultant single-session put/call ratio arrived at 0.48, while the 21-day moving average held at 0.58.

Overseas Concerns

In currencies: The dollar rose against the British pound and euro, but fell versus the Japanese yen.

European Markets

European share markets rose in morning trading, turning around earlier losses. The CAC 40 in France and FTSE 100 in Britain inched up 0.1%, and Germany's DAX rose 0.3% in morning trading.

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

Asian Markets

Earlier, Asian markets finished in negative territory. The Hang Seng in Hong Kong tumbled 1.2%. The Shanghai Composite fell 0.5%, and the Nikkei in Japan ended a shade lower.

In Asia, Japan flat. Hong Kong -1.2%. China -0.5%. India +0.1%.

Futures Trading

As of 6:35 a.m. in New York, the Dow Jones Industrial Average futures fell 28 points, or 0.25%, to 10996, the S&P 500 futures fell 3.3 points, or 0.28%, to 1171.70 and the Nasdaq 100 futures were down 1.5 points, or 0.07%, to 2093.50.

Futures: S&P -0.36%. 10-yr +0.1%. Euro -0.49% vs. dollar. Crude -0.17% to $81.79. Gold -0.8% to $1361.00.


Company News

Citigroup (C) is due to release its results before U.S. markets open Monday. Apple (AAPL) and IBM (IBM)are scheduled to post their quarterly earnings after the closing bell.

Analysts polled by Thomson Reuters expect Citi to post earnings of 6 cents per share while IBM is expected to report earnings of $2.76 per share.

Apple, which has seen its stock climb more than 25% in the past three months alone, is forecasted to report a profit of $4.09 a share.

• Stocks to watch include BP (BP)>, which said Monday it is selling its businesses in Venezuela and Vietnam to Russian oil giant TNK-BP for $1.8 billion. The stock was barely moving in premarket trading.

Hasbro Inc. (HAS)

Hasbro Inc. (HAS) said that its third-quarter net profit rose 3.2% to $155.2 million, or $1.09 per share, from the same period last year, as revenue gained 2.7% to $1.31 billion. Analysts were expecting earnings of $1.04 per share on sales of $1.29 billion. Hasbro said it believes that it should be able to grow revenue and earnings for the year, barring a further decline in consumer spending, global economic conditions, or foreign exchange.

Halliburton Co. (HAL)

Halliburton Co. (HAL) reported that its third-quarter net income rose to $544 million, or 60 cents per share, on a year-over-year basis, with revenue rising to $4.67 billion. Wall Street was looking for a profit of 56 cents per share on revenue of $4.63 billion.


Some Interesting News

BHP/Rio back out of huge iron-ore JV. Fearing strong objections from regulators, BHP Billiton (BHP) and Rio Tinto (RTP) said Monday they would forsake their $116B Australian iron-ore JV. The mutual abandonment sidesteps the hefty $275M breakup fee either would have had to pay. The pair said it was disappointed regulators didn't agree with its pro-competitive view of the proposed join-up. Focus will now move to Plan B: to share infrastructure, blend products and freely move iron ore through each other's ports.

Northeast Utilities and NSTAR agree to $17.5B merger of equals. Northeast Utilities (NU) and NSTAR (NST) agreed Monday to a merger of equals worth $17.5B - creating New England's largest utility company. Northeast shareholders will own 56% of the combined company, which will be called Northeast Utilities. Together, it will operate six electric and gas utilities in three states; have nearly 3.5M customers; 4,500 miles of electric transmission lines; 72,000 miles of electric distribution lines; and 6,000 miles of gas distribution lines.

St. Jude to acquire AGA Medical for $1.3B. St. Jude Medical (STJ) will acquire AGA Medical Holdings (AGAM) for cash and shares worth $1.3B, or $20.80/share, vs. Friday's close of $14.71. AGA Medical, with sales of $200M, develops and manufactures devices used to treat structural heart defects and vascular abnormalities using transcatheter treatments. St. Jude says their combined product lines, "will create a clear leader in the structural heart market, making St. Jude Medical the only company with programs across all major categories that include structural heart defects, left atrial appendage occlusion, transcatheter aortic valve implantation and percutaneous mitral valve repair."

Robo-signing damages should be modest. FDIC chief Sheila Bair said Sunday regulators haven't yet gauged the scope of foreclosure improprieties, but that the processing of foreclosure documents without proper review appears to be endemic. Bair added that if foreclosure documentation is largely intact, and the issue is procedural rather than fundamental, she doesn't expect banks' exposure to be significant. So far, the Street has taken a similar view, saying the temporary halts in foreclosure sales aren't likely to impact on banks in the long run. "Sorry, no free houses," Nomura's Glenn Schorr wrote in a research note Friday.

RBC buys BlueBay for $1.5B. Royal Bank of Canada (RY) said Monday it will buy U.K. fixed-income fund manager BlueBay Asset Management PLC for £963M ($1.54B), expanding the top-10 global-wealth manager's asset management solutions. The deal underscores ongoing consolidation in the global asset-management industry, as boutique firms look to tap larger players' sales channels, while banks either unload or double down on their asset management units, depending on how much capital they have. BlueBay has about $40B under management, up from just $8B when it went public in 2006.

Investors flee stocks, leaving hedge funds in driver's seat. Pension fund managers say they continue to shave their exposure to equities, fleeing stocks for bonds as they try to achieve stable returns that more-or-less keep pace with their obligations. Earlier this decade, corporate pension plans had almost 70% of their money in stocks; by July, they had cut their exposure to just 45%. Their caution, coupled with that of self-directed investors, is shifting market influence to hedge funds that often trade rapidly, contributing to volatility, and could be one reason markets have become so choppy.

Ad recovery picks up speed. Research firm Zenith Optimedia raised its forecast for 2010 global ad spending - a much-watched barometer of economic confidence - to a stronger than expected +4.8% (from +3.5%), or $450B. "We are seeing growth across the board and the recovery is steeper than we originally forecast," Zenith said; key growth areas include political ad spending, automobile, financial services and retail. U.S. ad spending is seen up 2.2%, to $151.5B, double Zenith's earlier forecast of +1.1%. • No austerity measures here... Luxury spending has rebounded to pre-crisis levels, thanks largely to wealthy Americans replenishing their wardrobes after a year of self-denial, and nouveau-riche Chinese indulging in a worldwide spending spree. According to Bain & Co.'s annual survey, global sales of designer clothes, fine leather goods, jewelry, watches and other indulgences will surge 10% to $235B in 2010, recovering from a disastrous 8% drop in 2009. U.S. sales will climb 12%, compared with 6% growth in Europe and 22% growth in Asia.

BP offloads $1.8B stake in Venezuela, Vietnam. BP (BP) will sell $1.8B worth of assets in Venezuela and Vietnam to Russian oil venture TNK-BP as it raises money to help pay for the Gulf of Mexico oil spill. Analysts reacted positively to the move, noting it bolsters BP's balance sheet while retaining 50% access to the potentially valuable assets through its stake in TNK-BP. BP is looking to raise about $30B through asset sales; today's deal brings its total thus far to $11B.


A blowout quarter from Google sent the Nasdaq up over 1 percent on Friday, while uncertainty surrounding major banks' exposure to foreclosure losses dragged the Dow lower.

The Dow Jones industrial average .DJI dropped 31.79 points, or 0.29 percent, to 11,062.78. The Standard & Poor's 500 .SPX gained 2.38 points, or 0.20 percent, to 1,176.19. The Nasdaq Composite .IXIC rose 33.39 points, or 1.37 percent, to 2,468.77.

For the week, the Dow rose 0.5 percent, the S&P 500 added 0.9 percent and the Nasdaq Composite gained 2.8 percent.

“The drama in the U.S. mortgage market (foreclosures and role of banks) has the potential to unsettle overall markets. The big question will be whether the correction of last week will continue this week or whether it will attract investors,” wrote strategists at KBC Bank in Brussels.

Investors will see another heavy tide of earnings this week, with 11 Dow components and 109 S&P 500 firms set to report


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