Market Outlook
Wednesday, October 20, 2010

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

  • 7:00 …MBA Mortgage Applications

  • 10:30… EIA Petroleum Inventories

  • 2:00 PM …Fed's Beige Book

Also the following companies are reporting their quarterly earnings:-

• Abbott Laboratories (ABT), BlackRock Inc. (BLK), The Boeing Co. ( BA), Comerica Inc. (CMA) Delta Air Lines Inc. (DAL), Eaton Corp. (ETN), Genzyme Corp. (GENZ), Manpower Inc. (MAN), Media General Inc. (MEG), Stanley Black & Decker Inc. (SWK), US Airways Group Inc. (LCC), U.S. Bancorp (USB), Wells Fargo & Co. (WFC), E*Trade Financial Corp. (ETFC), eBay Inc. (EBAY), Netflix Inc. (NFLX), Seagate Technology plc (STX), and Xilinx Inc. (XLNX).


Wednesday sees U.S. stock futures rise following the previous session's selloff, but gains were slight amid anxiety about the global economy. Investors are looking ahead to yet another batch of key earnings from Boeing, Morgan Stanley and others.

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

Investors around the world fled stocks Tuesday after China unexpectedly raised interest rates, raising concerns that cooling growth in China would drag on global growth.

The Dow Jones Industrial Average (DJIA) lost 165.07 points, or 1.5%, to 10,978.62 on Tuesday, the worst drop since early August, as investors reeled from the surprise rate hike from China and fears Bank of America (BAC) may have to repurchase bad mortgages.

“The mortgage valuation and foreclosure issue remains a serious problem, though analysts believe the problem is hundreds of millions of dollars as opposed to billions of dollars in terms of litigious action,” said David Buik, strategist at BCG Partners, who expects U.S. markets will open marginally higher on Wednesday.

Economic Concerns

Monetary Stimulus

A string of U.S. Federal Reserve officials on Tuesday indicated the central bank will soon offer further monetary stimulus to the economy, with one saying $100 billion a month in bond buys may be appropriate.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA) plunged more than 160 points on Tuesday, closing below the psychologically important 11,000 level following a surprise interest rate hike out of China.

Look for the DJIA to try to reclaim the 11,000 level, with support at 10,900 and resistance at 11,100.

The S&P 500 (SPX) fell the most since mid-August when equities were in a steep selloff. The index closed below its 10-day moving average, which some traders see as a bearish sign.

The SPX should continue to trade between 1,160 and 1,175.

• The U.S. Dollar Index has reversed course today, as investors returned cautiously to the equities market following yesterday's China-induced sell-off. So far, the index has fallen 0.6% to 77.72.

Gold futures for December delivery rose $5.40 to $1,341.40 an ounce.

Benchmark crude futures for November delivery increased $1.03 to $80.52 a barrel.

Bonds: The price on the benchmark 10-year U.S. Treasury was unchanged, and the yield held steady at 2.48%

Equity option activity on the CBOE saw 1,487,792 call contracts traded on Tuesday, compared to 1,038,752 put contracts. The resultant single-session put/call ratio arrived at 0.70, while the 21-day moving average rose to 0.59.

Overseas Concerns

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

The euro was up 0.7% against the dollar at $1.3825.

European Markets

European share markets were mixed in morning trading. The CAC 40 in France was down slightly, but the DAX in Germany and Britain's FTSE 100 posted 0.1% gains.

In Europe at midday, London +0.3%. Paris +0.6%. Frankfurt +0.2%.

Asian Markets

Earlier in Asia, markets mostly finished lower on Wednesday, as investors got their first chance to react to China's rate hike. Japan's benchmark Nikkei tumbled 1.7% and the Hang Seng in Hong Kong dropped 0.9%. Shares in Shanghai closed a shade higher.

In Asia, Japan -1.6% to 9381.6. Hong Kong -0.9% to 23557. China +0.1% to 3004. India -0.6% to 19872.

Futures Trading

As of 6:45 a.m. in New York, the Dow Jones Industrial Average futures rose 25 points, or 0.23%, to 10968, the S&P 500 futures were up 4.7 points to 1168.50 and the Nasdaq 100 futures were up 11.25 points to 2078.75.

Futures at 7:00am: Dow +0.2%. S&P +0.4%. Nasdaq +0.5%. Crude +1.1% to $80.39. Gold +0.4% to $1341.30.


Company News

Analysts are looking for Boeing to report a profit of $1.05 per share, Morgan Stanley to report earnings of 15 cents per share and Wells to report earnings of 55 cents a share, according to Thomson Reuters.

Pfizer Inc. (PFE)

Blue chip pharmaceutical concern Pfizer Inc. (PFE) is paying $240 million for a 40% stake in Laboratorio Teuto Brasileiro S.A., a leading Brazilian generic drug firm. Teuto will also receive a performance-based milestone payment. The deal includes an option by Pfizer to acquire the remaining 60% stake of Teuto's shares starting in 2014.

Juniper Networks (JNPR)

Juniper Networks (JNPR) fell 3% in after hours trading after the company reported non-GAAP net income of $171.5 million, or 32 cents per share, after the close last night. Revenue jumped nearly 23% to $1.01 billion. Analysts were expecting earnings of 32 cents per share on revenue of $1.02 billion for the period.

Yahoo! Inc. (YHOO)

Yahoo! Inc. (YHOO) reported third-quarter net income of $396.1 million, or 29 cents per share, on revenue of $1.12 billion. The company's earnings included 13 cents per share benefit from the sale of HotJobs. Analysts had expected Yahoo to report third-quarter earnings of 15 cents per share, and $1.13 billion in net revenue.

Some Interesting News

BofA stands firm against mortgage repurchases. Pimco, BlackRock (BLK), the New York Federal Reserve and others are pressuring Bank of America (BAC) to repurchase soured mortgages packaged into $47B of bonds by its Countrywide unit. The news helped push shares of BofA down 4.4% yesterday, but opinions are mixed as to whether this is a "groundbreaking development" or little more than an "empty threat." For its part, BofA has vowed to fight the demands that it repurchase loans that allegedly didn't meet underwriting guidelines, saying "we don't believe we've breached our obligations as servicer. We will examine every avenue to vigorously defend ourselves." Premarket: BAC +0.5% (7:00 ET).

Saskatchewan won't back BHP bid. According to an anonymous Saskatchewan official, the Canadian province has rejected an offer from BHP Billiton (BHP) to spend C$370M ($358M) on infrastructure investments. BHP had made the offer in hopes of winning some political support for its Potash (POT) bid, but the investment doesn't come close to offsetting the C$3B in revenue officials expect the province will lose over ten years if BHP's bid is successful. Saskatchewan is now expected to give the bid an unfavorable review later this week, though BHP is still expressing confidence that it can satisfactorily address tax-loss concerns and win regional support. Premarket: BHP +2.1% (7:00 ET).

Rio Tinto, BHP forge ahead in Australia. Rio Tinto (RTP) approved a $3.1B iron ore expansion today, pushing ahead despite industry concerns over Australia's new mining tax and the recent collapse of its planned joint venture with BHP Billiton (BHP). The move will boost Rio's output by 28% as the company ramps up to accommodate booming demand in Asia. BHP also announced today that it would boost quarterly iron ore output by 6% and is planning to expand its Australian iron ore operations. The dual announcements helped take the edge off of media reports suggesting miners risk being double-taxed under Australia's new tax. Premarket: BHP +2.1%, RTP +1.8% (7:00 ET).

China expands embargo of rare earth minerals. In a New York Times report, industry officials said China has quietly halted shipments of key rare earth minerals to the U.S., following a similar embargo on Japan which has been going on for the last month and China's previously announced intentions to reduce mineral exports next year. U.S. trade officials said they're looking into the report, which China has denied. China mines 95% of the world's rare earth minerals, which have broad commercial and military applications, and its embargo decision is likely to be particularly damaging to Western companies which are believed to keep much smaller stockpiles of rare earths than Japanese companies.

FDIC to replenish deposit fund. The FDIC will start working to return its Deposit Insurance Fund ratio to 1.35% of insured deposits, even as it cancels a three-basis-point bank fee increase scheduled for Jan. 1. The FDIC's Bair pointed to the importance of giving the industry "greater certainty regarding what rates will be over the long run." The agency also lowered its estimate of bank failure costs to $52B from $60B, and said it will hold back rebates to banks until the fund is healthier. Separately, sources said the FDIC is looking to start selling some commercial mortgage-backed securities, as soon as December or January, as bank failures mount and the agency is stuck with a higher volume of distressed-property loans.

Regulators to review Google, Yahoo Japan tie-up. Rakuten Inc. has filed a petition with the Japan Fair Trade Commission asking the antitrust regulator to review the planned tie-up between Yahoo Japan (partially owned by Yahoo (YHOO)) and Google (GOOG). The petition argued that the tie-up "would result in Google monopolizing information;" once the partnership is completed, 90% of all internet search queries in Japan will be run through Google's data centers, but regulators have dismissed concerns over the issue.

New credit card rules. The Federal Reserve announced plans to change several credit card regulations and to block certain practices that credit card firms have used to circumvent new laws. The aim is to better protect consumers and ensure card issuers "fully understand their compliance obligations," but the new rules won't go into effect until next October at the earliest.

Sanofi's Genzyme bid gets antitrust approval. U.S. antitrust regulators approved Sanofi-Aventis' (SNY) proposed acquisition of Genzyme (GENZ). Sanofi said it's $69/share hostile bid still remains subject to other conditions. Separately, a judge ruled that Apotex Corp. has to pay Sanofi $442.2M in damages for selling generic versions of anti-clotting drug Plavix in 2006, violating Sanofi's U.S. patent.

Yahoo defends strategy. Yahoo (YHOO) posted a slight earnings beat yesterday evening (details below) but revenue growth was sluggish and the company has pared back expectations for Q4. On the company's earnings conference call, CEO Carol Bartz chose to focus on Yahoo's online ad business, noting the quarter showed "good display advertising revenue growth, big gains in operating income, and margins that were double what they were last year." Shares rose 1% in after-hours trading, but pressure on Bartz is growing to turn the company around more quickly.

Judge approves Citi-SEC settlement. As expected, a federal judge signed off on Citigroup's (C) revised settlement with the SEC over allegations the firm had misled investors about subprime mortgage assets. Citigroup will pay a $75M fine, and maintain disclosure and earnings committees for three years. Executives will also be required to sign statements attesting to the accuracy of earnings statements and earnings conference call scripts. Premarket: C +0.7% (7:00 ET).

Suitors line up for BAE Systems. General Electric (GE), Honeywell (HON), United Technologies (UTX) and Goodrich (GR) are said to be among the suitors for BAE Systems' (BAESY.PK) aerospace unit. The firms are conducting due diligence, and final bids are expected in November. The unit could bring in as much as $2B.

Canada's turn to bash Google's Street View. Canada is the latest country to criticize Google's (GOOG) Street View project for violating consumer privacy. Following an investigation, Canada's Privacy Commissioner said Google collected highly sensitive personal information, including information about individuals' medical conditions, and that the incident "was the result of an engineer's careless error as well as a lack of controls to ensure that necessary procedures to protect privacy were followed." Google has been asked to boost privacy training, ensure it complies with Canadian laws, and secure or delete any Canadian information collected.


U.S. stocks posted their biggest loss in two months on Tuesday on fears banks might be on the hook for billions of dollars in souring mortgage bonds.

The Dow Jones industrial average .DJI dropped 165.07 points, or 1.48 percent, to 10,978.62. The Standard & Poor's 500 Index .SPX lost 18.81 points, or 1.59 percent, to 1,165.90. The Nasdaq Composite Index .IXIC fell 43.71 points, or 1.76 percent, to 2,436.95.

Gary Jenkins, head of fixed-income research at Evolution Securities, pointed out in a note that of 56 companies that have reported, 47 have come ahead of expectations, or 83% in percentage terms, against 75% in the second quarter.

“The revenue beat isn’t so positive, however, with only 45% of companies reporting revenue ahead of consensus,” he said, adding that the market still has to get through another 77 this week.


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