Market Outlook
Wednesday, September 22, 2010

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

  • 7:00 …MBA Mortgage Applications

  • 10:00 …FHFA Housing Price Index

  • 10:30 …EIA Petroleum Inventories

  • 2:00 PM… Hearing: Implementation of the Dodd-Frank Act

Also the following companies are reporting their quarterly earnings:-

  • CarMax Inc. (KMX),

  • General Mills Inc. (GIS),

  • Bed Bath & Beyond Inc. (BBBY) and

  • Red Hat Inc. (RHT).

wednesday outlook

Wednesday sees U.S. stock futures fall, as investors continued to mull the Federal Reserve's latest policy statement and worried about the economic recovery.

Dow Jones industrial average (INDU), S&P 500 (SPX) and Nasdaq (COMP) futures were all lower ahead of the opening bell. Futures measure current index values against perceived future performance.

Wall Street staged a rally on Tuesday after the Fed said it would take any action necessary to support the recovery, but gains were short lived as investors mulled the Fed's economic outlook and expressed disappointment that no new policies were announced.

Wednesday's futures trading has been essentially an overnight extension of the late-day slide stocks took after the Federal Reserve said Tuesday afternoon that the U.S. economy's recovery has been slower than anticipated and the bank was ready to step in to provide assistance if necessary.

Economic Concerns

The Fed

The central bank said it was prepared to act to boost the economy if conditions worsen, but it did not announce any new measures. The Fed also said in its statement that it expects the recovery to be "modest" in the near term.

MBA Mortgage Applications

U.S. home loan demand fell for a third straight week though fixed mortgage rates slid near all-time lows, with potential buyers still unnerved by the jobs market, Mortgage Bankers Association data showed on Wednesday.

While the housing market is seen unlikely to plunge anew, it lacks traction. Unemployment and underemployment prevent many buyers from making such a big financial commitment.

Loan applications to buy homes and refinance declined last week despite average 30-year mortgage rates dropping 0.03 percentage point to 4.44 percent. At a record low dating back to 1990, the rate fell to 4.43 percent last month.

"I don't think we're going to see massive dips like we did before, but housing can't recover until employment recovers," said Margaret Kelly, chief executive of RE/MAX in Denver.

The housing market has been whip-sawed by a surge in demand before, and a plunge in demand after homebuyer tax credits ended on April 30.

Now the market enters a seasonally slower period, when sales typically slow after the school year begins and the winter approaches.

The industry group's mortgage market index that includes both purchase and refi applications fell 1.4 percent last week, seasonally adjusted, with purchase loan demand down 3.3 percent and refi requests off 0.9 percent.

Overall loan demand has grown over the past year, but refinancing far overshadows home buying, the MBA said. Applications to buy homes sank 38 percent from a year ago while refinancing requests jumped 51 percent.

About 8 of every 10 loans requested are for a refinance rather than a purchase.


The latest housing data depict a market that is scraping along the bottom.

New building rose to a four-month high in August and permits to build also increased, though single-family permits dropped for a fifth straight month.

Home sales reports later this week are seen showing improvement, from deeply depressed levels.

While borrowing costs and home prices are low, lending practices remain restrictive and a record stockpile of unsold foreclosed properties looms over the market.

"Home ownership is still the American Dream," Kelly maintains. "But what will change is the fact that for probably the last 10 years plus, people thought they could get into a home, live in it for three years, sell it and make 100 or 50 percent. That doesn't happen anymore."

As buyers become more realistic about the financial gains in housing, as well as more confident about jobs, sales will pick up, she said.

The Federal Reserve on Tuesday opened the door wider to giving more support to the economy, and reiterated its plan to keep interest rates near zero.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA) enters today above support in the 10,700 region, but below resistance in the 10,800-10,850 area.

• The U.S. Dollar Index: The Fed's concerns that the U.S. economic recovery would remain slow and underwhelming sent the U.S. dollar lower in overseas trading. Heading into the open, the U.S. Dollar Index has fallen 0.8% to 79.80, marking the index's first foray below the 80 mark since March.

Gold futures continued their march toward $1,300 an ounce. Gold for December delivery climbed $20.40 to $1,294.70 an ounce -- surpassing its intra-day trading high.

Benchmark crude futures: for October delivery fell $1.12 a barrel to $75.68. The government's weekly crude oil inventory report comes out after the market opens.

Bonds: The price on the 10-year Treasury note was slightly higher, pushing down the yield to 2.59% from 2.62% late Tuesday.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,198,654 call contracts traded on Tuesday, compared to 741,126 put contracts.

Overseas Markets

European Concerns

European share markets fell in morning trading. Britain's FTSE 100 lost 0.5%. The CAC 40 in France and Germany's DAX both declined about 0.9%

In Europe at midday, London -0.5%. Paris -1.3%. Frankfurt -0.9%.

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

Asian Concerns

Earlier in Asia, markets ended the session mixed. The Nikkei in Japan lost 0.4%, while the Hang Seng in Hong Kong and Shanghai Composite closed the session with modest gains.

In Asia, Japan -0.4%. Hong Kong +0.2%. Shanghai +0.1%. India -0.3%.

Futures Trading

As of 7:30 a.m. in New York, the Dow Jones Industrial Average futures were down 30 points, or 0.29%, to 10663, the S&P 500 futures lost 4.2 points to 1130.50 and the Nasdaq 100 futures were down 8 points to 1977.50.

Futures at 7:00am: S&P -0.22%. 10-yr +0.31%. Euro +0.87% vs. dollar. Crude +0.55% to $75.38. Gold +1.59% to $1294.50.


Company News

General Mills Inc (GIS)

General Mills Inc (GIS) reported higher quarterly earnings on Wednesday, helped by increased sales of its cereals, yogurts and snacks.

The maker of Cheerios cereal and Progresso soups said net income was $472.1 million, or 70 cents per share, in the first quarter ended on Aug. 29, up from $420.6 million, or 62 cents per share, a year earlier.

Excluding items, earnings were 64 cents per share. Net sales rose 1.5 percent to $3.53 billion. General Mills said it was on track to achieve its sales and earnings growth targets.

Adobe Systems Inc. (ADBE)

Shares of Adobe Systems Inc. (ADBE) have plunged more than 20% in premarket trading, as investors flee the company in the wake of its fourth-quarter earnings forecast. Specifically, ADBE said it expects fiscal fourth-quarter sales between $950 million to $1 billion, below the current Wall Street estimate of $1.03 billion. The company also forecast fourth-quarter earnings of 48 cents to 54 cents per share, on the low end of the consensus estimate for a profit of 53 cents per share.

Cintas Corp. (CTAS)

Cintas Corp. (CTAS) said its fiscal first-quarter profit rose to $61.3 million, as revenue increased to $923.9 million from $891.6 million last year. Analysts estimated a quarterly profit of 38 cents per share on revenue of $913.5 million.

Darden Restaurants Inc (DRI)

Darden Restaurants (DRI) announced a first-quarter profit of $113.1 million, or 80 cents per share, with sales rising to $1.81 billion. Analysts were looking for a profit of 77 cents per share on revenue of $1.83 billion.

Microsoft (MSFT) said late Tuesday that it was hiking its quarterly dividend by 23% to 16 cents a share. Shares of Microsoft fell 0.2% in pre-market trading.

Some Interesting News

Deutsche Bank dives on profit warning. Shares of Deutsche Bank (DB) are being pummeled in Frankfurt and premarket U.S. trading after Germany's No.1 bank warned it would book a Q3 loss stemming from its purchase of Postbank, and from "the poorer market conditions during the summer months." The warning was part of a prospectus for DB's €10.2B share sale to pay for the acquisition of up to 30.6% of Postbank's outstanding shares (DB already owns 30% of Postbank). DB -8% premarket.

Fed hints at QE 2.0. The Fed reiterated its commitment to near-zero interest rates yesterday, as expected, but opened the door to the possibility of more QE in the near future. In the key amendment to its policy statement, the FOMC shifted its focus from the weak economy to the possibility of disinflation: "The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate." The focus shift is important, economists say, because it allows the Fed to double down on QE without having to imply further economic weakness - which could counteract any expansionary measures.

Default risk drops to two-year low. The number of U.S. companies at significant risk of default (rated B3 or below) recently fell to a two-year low, according to Moody's. "What's interesting is the snap back," Moody's David Keisman said. Government liquidity initiatives are helping to improve credit quality and lessen default risk.

India Boeing deal marks growing military alliance with U.S. India is putting the final touches on a $5.8B deal to acquire 10 Boeing (BA) C-17 Globemaster III planes, senior government officials say. Starting with the landmark civilian nuclear deal of 2008, India and the U.S. are building a strategic alliance which security experts say could act as a counterweight against China's growing military clout.

AIG nears $4-5B sale of Japan units to Prudential. Sources say AIG (AIG) is nearing a deal to sell two Japanese life-insurance companies to Prudential Financial (PRU) for a combined $4-5B. A deal would help AIG repay the more than $90B it owes taxpayers. Earlier this year, a $35.5B deal to sell AIA to Prudential plc (PUK) disintegrated after shareholders balked at the price.

China-Japan trade spat escalates. This morning, China Premier Wen Jiabao threatened more retaliatory action unless Japan "immediately and unconditionally" releases the trawler captain accused of deliberately colliding with a Japanese coastguard ship near disputed islands in the East China Sea. Earlier this week, China severed senior-level government contacts. "The Japanese side has paid no heed to China's numerous serious representations, and so China cannot but take necessary countermeasures," Wen said. The dispute is being closely watched by other Asian countries and the U.S., who have growing concerns about China's expanding naval power.

Summers is Harvard bound. Lawrence Summers will become the third economist to leave the Obama Administration, saying Tuesday he will return to Harvard at year-end. Former Xerox (XRX) CEO Anne Mulcahy is thought to be the frontrunner to succeed Summers at the helm of the National Economic Council - which could ease criticism that the administration lacks private-sector experience and is aloof from corporate America. Friends say Summers' departure is not due to the scathing criticism, but out of fear of his tenure being revoked.

BOJ official hints at further easing. Bank of Japan policy board member Ryuzo Miyao suggested today that the BOJ will continue to loosen its purse strings, saying the central bank would take "timely and appropriate" action if downside risks to the Japanese economy materialize. In his speech, Miyao expressed deep concerns over the future of the U.S. economy, saying risks are growing that it "could grow only at a slow pace in the mid- to long-term" due in part to weak employment conditions and fragile consumer spending.

Microsoft boosts dividend, takes on more debt. Microsoft (MSFT) raised its quarterly dividend by $0.03 to $0.16, and said it would borrow up to $6B in short- and long-term debt, saying the move "reflects our commitment to returning capital to our shareholders and our confidence in the long-term growth of the company" - which it has done to the tune of $170B over the last 10 years. Still, with Microsoft facing a post Windows 7 growth conundrum, some say the raise is a sad admission of defeat. "In a world in which there are a number of companies which would augment Microsoft's current businesses, it has not found one among them that it will risk buying."

Daimler ponders $12B bid for Fiat unit. Sources say Daimler (DDAIF.PK) is mulling a $12B bid for Fiat's industrial unit, which is set to be spun off and listed in January. The unit, called Fiat Industrial, includes the Iveco truck unit and CNH Global (CNH) farm equipment company. Daimler has denied the report, and analysts think Daimler may be interested only in Iveco.

Hot tempered HSBC chief threatens to quit. HSBC (HBC) CEO Michael Geoghegan has reportedly threatened to resign if he is not promoted to chairman. With Stephen Green taking over as U.K. Trade Minister, HSBC is planning to abandon its tradition of promoting chief executives to the chairman role – prompting Geoghegan's ire.

Expect BlackPad next week. According to the WSJ, Research In Motion (RIMM) will unveil its BlackPad tablet computer at a developer conference next week, and provide details on the OS it will use. BlackPad will reportedly be released in Q4; will include a 7-inch touch screen and 1 or 2 built-in cameras; will have Bluetooth and WiFi connections; and will link to cellular networks only via a BlackBerry phone. Blackberry chip-maker Marvell (MRVL) will supply the chips.

Mortgage applications inch lower. Mortgage applications fell by 1.4% over the past week, vs. a steeper 8.9% drop a week earlier, MBA said. The 30-year fixed mortgage rate fell to 4.44%.

Home construction jumps from low base. Housing starts spiked a surprising 10.5% in August to 598K (vs. 550K consensus, 546K in July), but concerns remain regarding the direction of demand. The rise was driven by a 32% M/M increase in the condominium and apartment market; single-family homes grew just 4%. Permit applications, a sign of future activity, grew by 2% to 569K.


U.S. stocks ended mixed on Tuesday after the Federal Reserve said it’s “prepared to provide additional accommodation if needed to support the economic recovery.” The central bank also cautioned that inflation is likely to remain subdued for some time.

“What the FOMC [Federal Open Market Committee] said laid the groundwork for further quantitative easing in the future,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald.

“The Fed can do little about the “jobs” side of the equation, but remains concerned about the value of assets, which includes equities and real estate,” he said in a note to clients.

Today's trading agenda is light on scheduled items, with no major economic data out and only a few earnings reports from companies such as General Mills (GIS) and Bed Bath and Beyond (BBBY).


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