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Market Outlook
Wednesday, October 27, 2010



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

  • 7:00 …MBA Mortgage Applications

  • 8:30… Durable Goods

  • 10:00…New Home Sales

  • 10:00 …Hearing: TARP Foreclosure Mitigation Programs

  • 10:30 …EIA Petroleum Inventories

  • 12:00 PM …Chicago Fed Midwest Manufacturing Index

  • 1:00 PM… Results of $39B, 5-Year Note Auction

  • 4:00 PM …Fed's Dudley: Challenges for the Nation, the Region and the Fed




Also the following companies are reporting their quarterly earnings:-

• Brinker International Inc. (EAT),

• ConocoPhillips (COP),

• The Procter & Gamble Co. (PG),

• P.F. Chang's China Bistro (PFCB),

• Sprint Nextel Corp. (S),

• Goldcorp Inc. (GG), and

• Visa Inc. (V).



wednesday outlook



Wednesday sees U.S. stocks poised to open lower as investors await reports on housing and manufacturing, as well as the latest quarterly corporate results.

Also, stock futures were broadly lower following published reports that the Federal Reserve's quantitative easing strategy may not be as forceful as what was originally anticipated.

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

Stocks ended a volatile session moderately higher Tuesday after investors weighed readings on consumer confidence and housing against a host of earnings reports.

Economic Concerns

A report from the Commerce Department on durable goods was due before the market open, while new home sales data were due after the opening bell.

The Commerce Department was expected to report that new orders for long-lasting goods rose 1.8% last month, after falling 1.3% in August, according to economists surveyed by Briefing.com. Orders outside of the automotive industry were forecast to edge up 0.2%.

A separate report was expected to show that sales of newly built single-family homes rose at an annual rate of 299,000 units in September, from 288,000 units the month before.

Quantitative Easing

The Federal Reserve's quantitative easing strategy may not be as forceful as what was originally anticipated.

This is in contrast to the Fed's previous quantitative easing strategy laid out during the financial crisis when the central bank purchased approximately $2 trillion in securities. A softer approach to QE could not have the impact that the economy needs.

A sign that traders were questioning the size of the Fed's strategy could be seen in the dollar, which was solidly up against the euro, pound and yen. Typically a large quantitative easing strategy has a weakening effect on a country's currency.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA): Despite suffering a rocky session, the Dow Jones Industrial Average (DJIA) closed Wednesday at its highest point since April 24. However, the DJIA could be poised to retreat again this morning, as a Wall Street Journal report has called into question the scale of the Federal Reserve's much-anticipated quantitative easing measures.

Technically, the blue chip barometer continues to push higher along support at its 10-day and 20-day moving averages, with short-term support at the 11,150 level gaining strength. Firmer support for the Dow lies at the 11,100 level, though the DJIA has been unable to push past growing resistance at the 11,250 region.

The S&P 500 (SPX): The 1,180 and 1,195 levels should remain focus points for support and resistance.

• The U.S. Dollar Index The U.S. dollar continues to inch higher this morning, as the U.S. Dollar Index was last seen up 0.11% at 77.80. The greenback's continued resilience is taking its toll on commodities.

Gold futures: December delivery was down $5.80 to $1,333.30 an ounce.

Benchmark crude futures for December delivery dropped 76 cents to $81.78 a barrel. The government's weekly oil inventory report was due later Wednesday.

The drop came after the U.S. Geological Survey submitted a revised estimate for the amount of conventional, undiscovered oil in the National Petroleum Reserve in Alaska. The agency said untapped oil reserves are about 90% less than previously estimated.

Bonds:Prices on U.S. Treasuries fell, pushing yields higher. The benchmark 10-year note yield rose to 2.69% from 2.64% late Tuesday. The government is expected to auction off $35 billion of 5-year notes on Wednesday.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,324,696 call contracts traded on Tuesday, compared to 795,784 put contracts. The resultant single-session put/call ratio arrived at 0.60, while the 21-day moving average held at 0.60.

Overseas Concerns

Currencies: The dollar continued to strengthen against the euro, the British pound and the Japanese yen.

European Markets

European share markets were mixed at midsession. Britain's FTSE 100 dropped 0.4%, but the DAX in Germany rose 0.2% and France's CAC 40 added 0.2%.

In Europe at midday, London -0.5%. Paris -0.2%. Frankfurt +0.1%.

Asian Markets

Earlier in Asia, markets ended their session mixed. Japan's benchmark Nikkei index rose 0.1%, and the Hang Seng in Hong Kong lost 1.9%. The Shanghai Composite ended down 1.5%.

In Asia, Japan +0.1% to 9387. Hong Kong -1.9% to 23165. China -1.5% to 2997. India -1.1% to 20005.

Futures Trading

As of 7:45 a.m. in New York, the Dow Jones Industrial Average futures were down 36 points to 11088, the S&P 500 futures were down 5.2 points to 1177.60 and the Nasdaq 100 futures fell 5.5 points to 2110.50.

Futures at 7:00am: Dow -0.2%. S&P -0.3%. Nasdaq -0.15%. Crude -0.9% to $81.83. Gold -0.4% to $1333.80.



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Company News

The Procter & Gamble Co. (PG) reported that first-quarter earnings fell 7% to $3.08 billion, or $1.02 per share, from $3.3 billion, or $1.06 a share, in the year-ago period. Sales rose 2% to $20.1 billion. Wall Street analysts expected a profit of $1 per share on revenue of $20.27 billion. Looking ahead to the second quarter, PG expects earnings of $1.05 per share to $1.11 per share and net sales growth of 3% to 5%, versus the consensus estimate for earnings of $1.11 per share. The firm also indicated that it is contending with higher commodity costs and marketing spending in the coming quarter.

Broadcom Inc. (BRCM) reported net income of $327 million, or 60 cents per share, compared to net income of $85 million, or 16 cents per share, for the same period last year. Revenue jumped 44% to $1.8 billion. Analysts were expecting earnings of 71 cents per share on revenue of $1.75 billion.

Novellus Systems Inc. (NVLS) reported third-quarter net income of $76.3 million, or 82 cents per share, on revenue of $367.2 million. Excluding charges, Novellus said earnings for the quarter were 88 cents per share. Analysts had expected a profit of 84 cents per share, and $355.8 million in revenue.

• Comcast also beat analyst expectations, reporting earnings per share of 30 cents, a decrease from the 33 cents posted in the third quarter of 2009.

• Sprint reported a loss of 30 cents per share, a steeper drop than expected by analysts.

• After the market closes, Visa (V) will post its earnings report.

Some Interesting News

Compellent considers a sale. Compellent Technologies (CML) has reportedly held preliminary talks with investment banks about its options, including a possible sale of the company. The data storage provider's revenue has grown rapidly over the past few years, and the recent bidding war between Dell (DELL) and Hewlett-Packard (HPQ) over 3Par highlights the strong demand for the few assets in the high-end storage area network market. Potential suitors could include Dell, H-P, IBM (IBM), Oracle (ORCL) and others. Shares of Compellent closed +11% yesterday on heavy volume, and added another 7.6% in after-hours trading.

Cardinal denies buyout talks. Cardinal Health (CAH) flatly denied buyout rumors, telling shareholders the company "is not in discussions with any party regarding an acquisition of Cardinal Health." Some of the speculation had stemmed from a widening of the spread of Cardinal's credit default swaps, which could have signaled a pending LBO requiring the company to take on heavy debt. Cardinal's direct denial of the possibility pared the stock's gains, with shares closing +1.8% after reaching a high of +5.6% yesterday. Shares subsequently lost 2% in after-hours trading.

Investors dismiss rumor of Apple buying Sony. Yesterday's market chatter included a rumor that Sony (SNE) might be bought by Apple (AAPL). While Apple can certainly afford the price tag of a possible deal, it's not exactly a logical tie-up: Apple's strengths are product and brand management, not turning around a giant and struggling company. Investors seemed to agree, for the most part dismissing the rumor as just that. Shares of Sony closed up a modest 1% in yesterday's trading, down from an intraday high of +3%. Further rumors are likely to follow, as analysts try to guess what Apple will do with its hefty $51B cash pile.

Constellation, EDF to part ways. Constellation Energy (CEG) and Electricite de France (ECIFF.PK) agreed to part ways following the deterioration of their partnership over the last several months. EDF will acquire Constellation's 50% ownership in their five-year old joint venture, known as UniStar, and Constellation will receive $250M in stock and cash. The separation agreement also eliminates a disputed requirement under which EDF would have been forced to buy 12 power plants from Constellation for as much as $2B.

Deutsche Bank posts quarterly loss. Deutsche Bank (DB) posted a Q3 net loss of €1.2B ($1.7B), down from a €1.4B profit the year before but better than analysts' expectations of a €1.5B loss. The loss was largely tied to Deutsche Bank's increased stake in Deutsche Postbank; excluding Postbank, net profit came in at €1.1B. Deutsche Bank said it's on track to deliver €10B in pre-tax profits in 2011, and remains committed to paying shareholder dividends despite the Postbank costs it's carrying. Premarket: DB +1.4% (7:00 ET).

Glaxo reaches drug settlement. GlaxoSmithKline (GSK) agreed to pay $750M and plead guilty to a criminal charge to settle a federal investigation of manufacturing deficiencies at its former plant in Puerto Rico. Glaxo had disclosed in July that it had reached an agreement in principle to settle the probe, but the final settlement was only announced yesterday afternoon. Justice Department officials said there was no evidence of patient harm, but it was critical to pressure companies to follow the rules. The former Glaxo employee who sparked the federal probe by filing a suit against the company will receive $96M from the settlement under a federal whistleblower law. Premarket: GSK -1.6% (7:00 ET).

Creditors back Dubai World restructuring. Dubai World said it has received full approval from creditors to restructure nearly $25B in debt. The agreement ends more than ten months of negotiations, but some creditors are unhappy with the terms, which include extending payments years into the future, with minimal commitment to raise cash through asset sales; "It appears that Dubai's government has only deferred the debt concerns," said one analyst.

HSBC said to be mulling Northern Trust bid. Shares of Northern Trust (NTRS) rose 5.3% yesterday after a report in the Daily Mail suggested HSBC (HBC) may be planning to make a bid. An offer of $65/share would represent a 35% premium to Northern Trust's close yesterday, and a deal would boost HSBC's assets while giving it a lead in the fledgling prime custody arena.

Banks appeal to Supreme Court on Fed disclosure. The Clearing House Association, a who's who of big banks, asked the Supreme Court yesterday to review a March ruling requiring the Fed to disclose who used the discount window during the crisis. The Justice Department said the Fed itself won't be joining in the appeal. The association, which includes banks such as Bank of America (BAC), Citigroup (C), and JPMorgan (JPM), said disclosure of the information "threatens to harm the borrowing banks by allowing the public to observe their borrowing patterns during the recent financial crisis and draw inferences - whether justified or not - about their current financial conditions."

Icahn intensifies MGM effort. Carl Icahn intensified his efforts to derail a proposed tie-up between studio Metro-Goldwyn-Mayer and Spyglass Entertainment. Icahn, who wants MGM to combine with Lions Gate Entertainment (LGF), offered to buy $1.6B in MGM secured loans at a price of 53 cents per $1 of principal. Icahn had previously offered to buy up to $963M of MGM senior debt on condition shareholders vote down the Spyglass proposal. Both offers will expire at Friday's voting deadline for the Spyglass plan.

CFTC regular urges action on silver probe. At a CFTC hearing yesterday, commissioner Bart Chilton pressured the agency to take action in its high-profile, two-year-old investigation of the silver market. Chilton said market players have made "repeated" and "fraudulent efforts to persuade and deviously control" silver prices, and he believes there have been violations of CFTC rules that deserve to be prosecuted. Though Chilton declined to name specific offenders, sources said that the agency began to look into allegations earlier this year that JPMorgan (JPM), one of the largest silver traders, was involved in manipulative trading.

Google goes building shopping. Google (GOOG) is apparently close to buying New York City's 111 Eighth Ave. building, one of the largest buildings in Manhattan, for nearly $2B. Google already rents over 550K square feet in the 2.9M square foot building that covers an entire city block; the purchase could help facilitate the company's growth plans for New York City.

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