Market Outlook
Monday, October 25, 2010

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

  • 8:30… Chicago Fed National Activity Index

  • 10:00 …Existing Home Sales

Also the following companies are reporting their quarterly earnings:-

  • M/I Homes Inc. (MHO),

  • RadioShack Corp. (RSH),

  • Inc. (SOHU),

  • Atheros Communications Inc. (ATHR),

  • SL Green Realty Corp. (SLG), and

  • Texas Instruments Inc. (TXN)

monday outlook

Monday sees the U.S. stock set to rise at the open, as investors prepared themselves for a busy week of earnings reports and the midterm elections.

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

Stocks ended mixed Friday, as investors balanced strong U.S. corporate earnings against currency tensions at the G-20 summit.

Economic Concerns


At a meeting in South Korea over the weekend, the G20 agreed to shun competitive currency devaluations, although it stopped short of setting targets to reduce trade imbalances.

National Association of Business Economists (NABE)

In its October industry survey, the National Association of Business Economists (NABE) said Monday that employment conditions improved in the third quarter to the highest level since the start of the 2008-2009 recession.

Looking ahead, the survey also showed expectations for hiring over the next 6 months rose to the highest level since 2006.

Existing Home Sales

The National Association of Realtors will release its September report on existing home sales at 10 a.m. ET. Analysts surveyed by expect sales to increase to an annual rate of 4.25 million, up from 4.13 million in August.

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) extended its fall rally to three weeks in a row last week, despite the blue chip barometer faltering on Friday ahead of the Group of 20 (G-20) finance ministers meeting.

The Dow continues to battle short-term resistance at the 11,150 level, though support is firming in the 11,100 area. The DJIA is also staring up at the round-number 11,200 level, and its 2010 high at 11,258.01.

The S&P 500 Index (SPX) has short-term support at 1,180, with resistance in the 1,190-1,195 region.

The U.S. Dollar Index: With the G-20 meeting failing to come up with any firm policies or resolutions, the U.S. dollar resumed its decline versus most of its foreign competitors. The Japanese yen proved especially strong, rallying to a fresh 15-year zenith versus the greenback. At last check, the U.S. Dollar Index was down 0.76% at 76.89.

Benchmark crude futures for December delivery gained $1.04 to $82.73 a barrel.

Gold futures for December delivery rose $19.60 to $1,344.70 an ounce.

Bonds: The price on the benchmark 10-year U.S. Treasury rose, pushing the yield down to 2.53% from 2.56% late Friday.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 967,911 call contracts traded on Friday, compared to 669,035 put contracts. The resultant single-session put/call ratio arrived at 0.69, while the 21-day moving average rose to 0.60.

Overseas Concerns

In currencies: The dollar edged higher against the euro, the British pound and the Japanese yen.

European Markets

European share markets rose in morning trading. Britain's FTSE 100 was up 0.62%, and Germany's DAX edged higher to 0.64%. In France the CAC 40 was up 0.47%.

Europe at midday, London +0.7%. Paris +0.5%. Frankfurt +0.7%. •

Asian Markets

Earlier, Asian markets ended the session mixed. The Shanghai Composite rose 2.57%, while the Hang Seng in Hong Kong was up 0.47%. Japan's Nikkei dropped 0.27%.

In Asia, Japan -0.3% to 9401. Hong Kong +0.5% to 23628. China +2.6% to 3051. India +0.7% to 20303.

Futures Trading

Futures at 7:00: Dow +0.6%. S&P +0.7%. Nasdaq +0.55%. Crude +0.9% to $82.46. Gold +1.4% to $1344.20. •



Company News

RadioShack Corp. (RSH) reported that its third-quarter profit rose 23% to $46 million, or 37 cents per share, as sales added 6.5% to $1.05 billion. Same-store sales rose 6.2%. Analysts were looking for earnings of 35 cents per share on sales of $1.03 billion.

Office Depot (ODP) said that Chairman and CEO Steve Odland will resign on Nov. 1. Neil Austrian will serve as interim CEO and chairman while the board searches for a replacement. The company also said that it expects third-quarter earnings of 3 cents per share on revenue of $2.9 billion. The consensus is currently expecting a third-quarter loss of 2 cents per share on revenue of $2.9 billion.

General Electric Co. (GE) won a $750 million contract to expand an electric power station in Andhra Pradesh, India. The deal includes the sale of six Frame 9FA gas turbines, three D-11 steam turbines, training, and long-term services. "This will represent the largest gas turbine combined-cycle project in India's history and will help the country meet its continuing demand for reliable electricity to support its rapidly growing economy," GE said.

Some Interesting News

CommScope in talks to go private. CommScope (CTV) confirmed this morning that it's in talks with Carlyle Group to be taken private for around $2.9B, but stressed that an agreement hasn't yet been reached. The potential $31.50/share deal represents a 36% premium to CommScope's Friday close, and comes as P-E firms like Carlyle return to takeovers after a two-year hiatus.

Perpetual spurns KKR bid, agrees to talk. Australian asset manager Perpetual agreed to enter into talks with KKR (KKR), but said the private equity group's initial A$1.75B ($1.7B) bid doesn't reflect fair value. Perpetual will provide KKR with "limited financial information" to help "establish if an offer that would deliver acceptable value to Perpetual’s shareholders is likely to be formulated." KKR is trying to tap into the expected high growth of Australia's wealth management industry, the world's fourth-largest. Talks with Perpetual represent KKR's best chance at a deal, as Perpetual's extremely loyal shareholder base makes it unlikely that a hostile bid would succeed.

Marubeni to buy BP's stakes in Gulf of Mexico. Marubeni, Japan's fifth-biggest trading firm, agreed to pay $650M to buy BP's (BP) stakes in four Gulf of Mexico oil and gas wells. The purchase will increase Marubeni's oil and gas upstream assets by 43% to 50,000 bpd of crude oil equivalent, and advances BP's goal of selling up to $30B of assets to pay for costs related to the Deepwater Horizon spill. Premarket: BP +0.8% (7:00 ET).

FDA rejects Arena's weight-loss drug. Arena Pharmaceuticals (ARNA) said on Saturday that the FDA had rejected its weight-loss drug lorcaserin. The decision is hardly a surprise, as last month an FDA advisory panel recommended against approving the drug on concerns it didn't work well and carried potential safety problems. Still, shares are down 7.4% premarket, as investors mourn the setback for what would have been Arena's first commercialized product. The company plans to hold a conference call on the matter at 8:30 ET this morning.

BofA finds foreclosure flaws. Bank of America (BAC) has found errors in 10 to 25 of the first several hundred foreclosure cases it examined starting last week. The bank said that the defects have been relatively minor so far, including misspellings of borrowers' names and an address missing one of five digits, and a spokesman insisted there has been no evidence of wrongful foreclosures. However, these "minor" errors were found while reviewing less than 1% of the first foreclosure files BofA plans to resubmit to courts, and the bank will be closely watched to see what kind of errors surface in the other 99% of the files. Premarket: BAC +1.8% (7:00 ET).

Toyota to lower dollar/yen rate. Toyota (TM) plans to lower its dollar/yen rate assumption by ¥10, to ¥80, for the second half of its fiscal year, according to the Yomiuri newspaper. The revision would translate into a reduction in earnings of about ¥150B ($1.8B) during the period. As of 7:00 ET, USD -1% vs. JPY to 80.64.

G-20 overhauls the IMF, makes vague pledge on currencies. Coming out of the G-20 meeting this weekend, finance chiefs agreed to overhaul the IMF, reallocating more than 6% of IMF voting rights to countries like China while Europe gives up two board seats. The aim is to give the IMF a bigger role in managing the world economy, and to give emerging nations a bigger role in managing the IMF. Leaders also pledged to "move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies." The joint stance on exchange rates is a first, but the practical ramifications of the pledge remain to be seen. The group agreed to delay further debate on a U.S. proposal for current account targets until next month’s summit in Seoul.

Senate unlikely to vote on yuan legislation. Following the G-20 pledge to avoid competitive currency devaluations (see details above), it's even more unlikely that the U.S. Senate will take up legislation passed by the House aimed at pressuring China to raise the value of the yuan. Congressional elections are slated for Nov. 2 and the new Congress will be seated in January, giving Treasury's Geithner more time to pursue a diplomatic approach.

Goldman sees up to $2T of Fed asset buys. Jan Hatzius, Goldman Sachs' chief U.S. economist, believes the Fed may purchase up to $2T of assets to stimulate the economy, and could announce a second round of quantitative easing on Nov. 3. In a note to clients, Hatzius wrote: "We expect an announcement of $500B or perhaps slightly more over a period of about six months. The key question, however, is not the size of the first step, but how far Fed officials will ultimately need to move to achieve their dual mandate of low inflation and maximum sustainable employment."

Singapore Exchange to buy Aussie exchange operator. Singapore Exchange Ltd. [SPXCF.PK] agreed to buy ASX Ltd., operator of the Australian stock exchange, for A$8.4B ($8.3B). The tie-up will be the first between two exchange companies in the Asia-Pacific region and will create the area’s first pan-regional stock exchange, overseeing $1.9T of shares. Shares of ASX closed at the A$41.75 offer price, though some investors are concerned the deal may not receive regulatory approval.

Friday's failures. Another seven banks were closed on Friday, bringing this year's failures to 139 so far. Six of the banks (I, II, III, IV, V, VI) were closed through assumption agreements (including $1.54B-asset Hillcrest Bank in Kansas, bought by private-equity group NBH Holdings) and the seventh couldn't find a partner and simply paid out deposits. The closures will cost the FDIC's insurance fund an estimated $478M. Though 2010's total failures will almost certainly surpass 2009's total of 140, the banks being closed this year tend to be smaller than the closures in the last couple years.


U.S. stocks capped a third straight week of gains on Friday as encouraging earnings helped the market sustain upward momentum, led by Baidu Inc (BIDU.O), the latest tech company to beat estimates.

The Dow Jones industrial average .DJI dropped 14.01 points, or 0.13 percent, to 11,132.56. The Standard & Poor's 500 Index .SPX gained 2.82 points, or 0.24 percent, to 1,183.08. The Nasdaq Composite Index .IXIC gained 19.72 points, or 0.80 percent, to 2,479.39. For the week the Dow and the S&P 500 each rose 0.6 percent, while the Nasdaq climbed 0.4 percent.


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