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Market Outlook
Friday, October 29, 2010



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

  • 8:30 … GDP Q3

  • 8:30… Employment Cost Index

  • 8:30 … ISM New York Business Index

  • 9:45… Chicago PMI

  • 9:55… Reuters/UofM Consumer Sentiment

  • 10:30… ECRI Leading Index

  • 3:00 PM… USDA Ag. Prices

Also the following companies are reporting their quarterly earnings:-

  • Arch Coal Inc. (ACI),

  • Chevron Corp. (CVX),

  • The Estee Lauder Companies Inc. (EL),

  • Merck & Co. Inc. (MRK), and

  • Sony Corp. (SNE)


friday outlook


Friday sees U.S. stock future poised to fall Friday as investors remain cautious ahead of next week's Federal Reserve meeting, with several economic reports due ahead of the opening bell.

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

Wall Street is understandably jittery today, and not just because it's the anniversary of "Black Tuesday," the Oct. 29, 1929 stock market crash that started the Great Depression. Economic data will flood Wall Street this morning, with reports on third-quarter gross domestic product (GDP), Chicago's purchasing managers' index, and consumer sentiment slated for release. What's more, President Obama will speak later today on the state of the U.S. economy.

Economic Concerns

Investors will take in a host of economic reports Friday, including an advance reading on third-quarter U.S. gross domestic product before the market opens.

After the opening bell, reports on manufacturing activity in the Chicago area and a revised reading on consumer sentiment in October will be released.

GDP

Economists expect that the broadest measure of the nation's economic activity rose over the last 3 months at an annual rate of 2%, according to consensus estimates from Briefing.com. In the second quarter, GDP grew at a rate of 1.7%.

U.S. economic growth likely edged up in the third quarter but not enough to chip away at high unemployment or change perceptions of more monetary easing from the Federal Reserve next week.

Consumer Sentiment Index

Thomson Reuters/University of Michigan Surveys of Consumers release at 1355 GMT final October consumer sentiment index. Economists expect a reading of 68.0 compared with 67.9 in the preliminary October report.

At 1230 GMT, Labor Dept. issues Q3 Employment Cost Index. Economists in a Reuters survey expect a 0.5 percent rise, a repeat of the Q2 increase.

Regional Business Activity

The Institute for Supply Management-New York releases at 1230 GMT October index of regional business activity. In September, the index read 470.6. The Institute of Supply Management Chicago will release at 1345 GMT October index of manufacturing activity.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA): rallied back from a nearly 75-point slide on Thursday, but still finished below its 10-day moving average.

Watch for the DJIA to hold support at the 11,000-11,050 region today, while resistance should hold firm near the 11,200-11,250 area.

The S&P 500 Index (SPX) should remain between 1,170 and 1,195.

• The U.S. Dollar Index is trading higher versus nearly all of its major foreign rivals this morning, with the exception of the Japanese yen. The greenback usually dips ahead of key Federal Open Market Committee meetings, but most analysts believe that currency traders have already priced in next week's quantitative easing. As a result, the U.S. Dollar Index is up 0.32% at 77.56 in premarket trading this morning.

Benchmark crude futures for December delivery were off by 74 cents to $81.45 a barrel.

Gold futures for December delivery dropped $5.30 to $1,337.20 an ounce.

Bond: Prices on U.S. Treasuries rose Friday, pushing the yield on the benchmark 10-year note down to 2.6%, from 2.7% late Thursday.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,336,102 call contracts traded on Thursday, compared to 822,521 put contracts. The resultant single-session put/call ratio arrived at 0.62, while the 21-day moving average held at 0.60.

Overseas Concerns

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

European Markets

European share markets fell in early trading. The CAC 40 in France was down 0.7%, Germany's DAX dropped 0.3%, and Britain's FTSE 100 slid 0.5%.

In Europe, at midday, London -0.3%. Paris -0.4%. Frankfurt -0.2%.

Asian Markets

Earlier in Asia, markets ended their session lower for the day. Japan's benchmark Nikkei fell 1.8%, while the Hang Seng in Hong Kong and Shanghai Composite dipped 0.5%.

In Asia, Japan -1.8% to 9202. Hong Kong -0.5% to 23096. China -0.5% to 2979. India +0.5% to 20032.

Futures Trading

As of 7 a.m. in New York, the Dow Jones Industrial Average futures were down 29 points to 11020, the S&P 500 futures were down 4.4 points to 1174.90 and the Nasdaq 100 futures fell 4.75 points to 2121.00.

Futures at 7:00: Dow -0.3%. S&P -0.4%. Nasdaq -0.2%. Crude -0.8% to $81.52. Gold -0.3% to $1338.20.



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Company News

• Among the major companies reporting quarterly results before the start of trading are Chevron (CVX) and Merck (MRK).

• Early Friday morning, Sony (SNE) reported a net income of $237 million, driven by higher sales numbers.

• Shares of Microsoft (MSFT) were up more than 2% in premarket trading, after the software giant said late Thursday that sales and profits in the most recent quarter rose more than analysts expected.

Merck & Co. Inc. (MRK) posted a 90% decline in third-quarter earnings, with profit for the quarter plunging to $341.6 million, or 11 cents per share, from $3.4 billion, or $1.61 per share, last year. Excluding a $950 million legal reserve payment, restructuring costs and other items, Merck earned 85 cents per share in the latest quarter, as revenue soared 84% to $11.1 billion. Wall Street analysts expected Merck to earn 83 cents per share on revenue of $11.47 billion. Looking ahead, the company lifted the low end of its adjusted 2010 earnings outlook to a range of $3.31 per share to $3.39 per share.

• The reports of Microsoft Corp.'s (MSFT) demise were greatly exaggerated. After the close last night, the software giant reported a 55% jump in first-quarter profit to $5.4 billion, or 62 cents per share, with revenue rising 25% to $16.2 billion. Analysts were expecting a profit of 55 cents per share and $15.8 billion in revenue. Microsoft said that it benefited from widespread adoption of Windows 7, the newest version of its Windows operating system, and Office suite of tools.

First Solar (FSLR) reported third-quarter net income rose 16% to $177 million, or $2.04 a share, compared with net income of $153 million, or $1.79 a share, in the year-ago period. Sales jumped 66% to $798 million. Analysts had forecast First Solar to earn $1.94 a share on sales of $779 million.

Some Interesting News

Another obesity drug bites the dust. The FDA rejected Vivus' (VVUS) obesity drug Qnexa, asking the company for an assessment of Qnexa's potential to cause birth defects and for evidence proving the drug doesn't increase heart-related risks. Vivus said it remains confident in the "efficacy and safety" of Qnexa, and will have the requested documents ready for submission to the FDA in around six weeks; investors are seemingly still bullish on the drug, as shares of Vivus are +28% premarket (7:00 ET). The decision wasn't a surprise, as an FDA advisory panel had voted in July against approving Qnexa, but it's the second time in less than a week that the FDA has refused to approve a drug to treat obesity, after rejecting Arena Pharmaceuticals' (ARNA) lorcaserin drug. Contrave, an obesity drug from Orexigen Therapeutics (OREX), is up for FDA review in December, but the high bar set so far for obesity drugs casts doubts on whether Contrave can make it through the approval process.

Verizon to pay record fine. Verizon Wireless (VZ) agreed to pay a record $25M fine and refund more than $52M to customers as part of a settlement with the FCC for inaccurate billings involving "mystery fees." Verizon said it "made inadvertent billing mistakes [and] accepts responsibility for those errors." Verizon had announced earlier in the month that it would provide refunds of around $2-6 to roughly 15M customers because of the billing mistakes.

Halliburton faulted in Deepwater Horizon disaster. The presidential commission investigating the Deepwater Horizon disaster has put Halliburton (HAL) back in the hotseat. Investigators found that Halliburton was aware of problems with the cement it was planning to install in BP's (BP) Macondo well but used it anyway, possibly without alerting BP. The results of practical testing "strongly suggest" the cement mixture was unstable; though the findings don't exonerate BP, they do incriminate Halliburton, which had escaped much of the blame for the disaster until now. Halliburton issued a statement late yesterday defending its cement mix and its procedures, but shares are down another 3.7% premarket (7:00 ET) after losing 8% in yesterday's trading.

Carlyle continues buying streak. Carlyle Group continued its latest buying streak, announcing plans to take Syniverse Holdings (SVR) private for $2.6B in cash, or $31/share. The deal comes just one day after Carlyle said it would buy CommScope (CTV) for $3.9B. In July, Carlyle announced a $3.8B deal to buy U.S. nutritional supplements maker NBTY. Shares of Syniverse closed +28% to $30.50 in yesterday's trading.

Lions Gate sues Icahn. Lions Gate Entertainment (LGF) has filed suit against Carl Icahn, claiming the activist investor interfered with the company's earlier efforts to merge with studio Metro-Goldwyn-Mayer. The lawsuit said that Icahn, who has reversed course and is now pushing for a merger of the two firms, was "secretly plotting to merge the two studios - but only after he had acquired a sufficiently large position in both companies at depressed prices to ensure that he maximized his own profits." Icahn called the lawsuit "completely without merit."

Sanofi gets busy with buy, bid efforts. Sanofi-Aventis (SNY) agreed to buy Chinese drug marketer BMP Sunstone (BJGP) for $521M in cash, or $10/share, sending shares of BMP up 28% to $9.83. Sanofi said the deal will expand its footprint in China, where BMP markets two leading consumer health care brands. Separately, Sanofi offered to set up a "working group" to examine Genzyme’s (GENZ) experimental drug for multiple sclerosis, Campath, given the drug’s uncertain sales prospects. The limited due diligence Sanofi proposes appears to be an effort to break the impasse in its $18.5B hostile bid for Genzyme, as Sanofi has shown no interest in raising the price of its bid. Sanofi also reported better-than-expected Q3 earnings, with net profit up 13% to €1.61B ($2.2B) and revenue +5.7% to €7.82B. Shares of Sanofi closed +1.2% yesterday; SNY -0.4% premarket (7:00 ET).

KKR likely to leave Seagate deal. KKR (KKR) will probably withdraw from a group considering buying Seagate Technology (STX), sources said. Several other P-E firms, including TPG Capital and Bain Capital, were reportedly interested in the tech firm, but KKR became discouraged by the $4B of equity that would have been required to complete the deal. News that KKR may be pulling out of talks sent shares of Seagate down 8.4% in yesterday's trading.

China unofficially ends unofficial export ban. Industry officials said China abruptly ended yesterday its unofficial embargo of exports of rare earth minerals to the U.S., Europe and Japan. Though the resumption of the exports should go some way to alleviating strained trade relations, shipments to Japan are still encountering some difficulties and foreign companies still face shortages of the much-demanded minerals. Shares of rare earth producers outside of China had climbed during the embargo, but took a hit yesterday: REE -11.5%, MCP -12.1%.

Windows, Office drive Microsoft profit beat. Microsoft (MSFT) reported better-than-expected quarterly earnings yesterday (see detail below), with all of its divisions showing double-digit revenue growth. Analysts also noted that business spending on PCs exceeded expectations. One weak spot was Microsoft's online division, which reported an operating loss of $560M on $527M revenue; the numbers are worse than a year ago and represent a burn rate of $2B annually. Premarket: MSFT +3.1% (7:00 ET).

Defect prompts Nissan recalls. Nissan (NSANY.PK) is recalling 747,000 trucks and SUVs in the U.S. because of the risk of electrical system failure that could cause vehicles to stall. The recall includes 2004-06 Armadas and Titans, 2005-06 Infiniti QX56s and 2003-06 Frontiers, Pathfinders and Xterras. Globally, Nissan is recalling 2.2M vehicles with similar potential for failure.

General Motors preps for IPO. General Motors said it will take steps to reduce its financial leverage by $11B ahead of its public offering next month. The moves include contributing at least $6B to its pension plans, buying back $2.1B in shares from the Treasury, and paying back $2.8B borrowed from the UAW. Despite GM's progress in cleaning up its balance sheet, the company's problems haven't been addressed in their entirety, and it will be up to investors to gauge the new GM's value.

AIA gains post-IPO. AIA gained 17% in its market debut today, following its record Hong Kong IPO last week. The successful IPO will ramp up competition with insurers like Prudential (PRU) for marketshare in Asia's fast-growing life insurance business. It will also allow AIG's (AIG) management to refocus on its core business, and bring in as much as $20.5B for AIG if the bailed-out insurer chooses to exercises its over-allotment option.

Conclusion

Stocks ended flat Thursday after a strong start gave way to trepidation ahead of the Fed's meeting, and the highly-anticipated Nov. 3 vote to determine control of Congress.

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