Market Outlook
Monday, September 27, 2010

Monday has very little in the way of economic reports scheduled. The following is all that is happening:-

  • 8:30 … Chicago Fed National Activity Index

  • 10:30 … Dallas Fed Manufacturing Outlook

  • 12:00 PM … Chicago Fed Midwest Manufacturing Index

Also the following company is reporting its quarterly earnings:-

  • Cal-Maine Foods Inc. (CALM),

  • Jabil Circuit Inc. (JBL), and

  • Paychex Inc. (PAYX)

monday outlook

Monday sees the U.S. stock futures climb, boosted by deal activity and economic optimism.

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

With no new economic reports to be released Monday, investors are turning their attention to individual companies for insight into the health of the economy.

An upbeat mood has taken hold on Wall Street lately. U.S. stocks soared Friday, and are poised to end September with the biggest monthly gains in more than a year.

“There’s a bit of a lack of drivers behind today’s moves,” said Joshua Raymond, market strategist at City Index. “We haven’t seen traders look to cash in their gains yet and that’s a good element to have.”

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) vaulted above potential support at the 10,800 level on Friday, closing just north of 10,850. This region should provide a backstop for the DJIA heading into the week. Meanwhile, resistance lies overhead in the 10,950-11,000 area.

The S&P 500 Index (SPX), the broad-market index faces a key technical hurdle right out of the gate this morning at the 1,150 level. Should the SPX overcome this area this morning, look for 1,150 to provide support. Otherwise, the index could remain trapped between 1,150 and 1,140 for most of the week.

The U.S. Dollar Index was little changed at 79.399.

Benchmark crude futures for November delivery rose 4 cents to $76.54 per barrel.

Gold futures for December delivery were up 90 cents at $1,299 an ounce.

Bonds: The yield on the 10-year Treasury note fell to 2.57% from 2.61% late Friday.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,225,730 call contracts traded on Friday, compared to 703,287 put contracts. The resultant single-session put/call ratio arrived at 0.57, while the 21-day moving average held at 0.60.

Overseas Markets

European Concerns

European share markets were mixed in morning trading. Britain's FTSE 100 fell 0.7%, but Germany's DAX and France's CAC 40 were up 0.2% in the early going.

Europe at midday, London flat. Paris +0.1%. Frankfurt +0.1%.

In currencies: The dollar rose against the euro, and was flat versus the Japanese yen and British pound.

Asian Concerns

Earlier, Asian markets finished the session with strong gains. Japan's Nikkei and the Shanghai Composite climbed 1.4%, and the Hang Seng in Hong Kong rallied 1%.

In Asia, Japan +1.4%. Hong Kong +1%. China +1.4%. India +0.4%.

Futures Trading

As of 6:40 a.m. in New York, the Dow Jones Industrial Average futures rose 6 points, or 0.06%, to 10790, the S&P 500 futures were down 0.5 points to 1142.70 and the Nasdaq 100 futures rose 1.5 points to 2019.75.

Futures at 7:00:S&P +0.11%. 10-yr +0.17%. Euro -0.16% vs. dollar. Crude +0.43% to $76.82. Gold +0.13% to $1299.80.


Company News

Southwest Airlines Co. (LUV) has agreed to buy AirTran Airways (AAI) for about $1.4 billion. The deal values AAI at $7.69 per share - a 69% premium to the stock's close on Friday. Both companies' boards have already voted in favor of the purchase. Shares of AirTran jumped 64% premarket, and Southwest shares slipped less than 1%.

Wal-Mart (WMT) made a bid to acquire Johannesburg-based retailer Massmart Holdings Limited for roughly $4.2B billion. Massmart operates 290 stores in 13 countries in Africa. The move would bolster Wal-Mart's emerging markets strategy as it seeks to reduce its dependency on U.S. sales. "By Wal-Mart standards this is a pretty chunky deal, and shows our commitment to the market," a Wal-Mart executive said.

Some Interesting News

Unilever aims for good hair day with Alberto buy. Unilever (UL, UN) will buy Alberto-Culver (ACV) for $3.7B ($37.50/share), a 33% premium to its 12-month average. ACV's portfolio includes TRESemme and Nexxus, Alberto VO5, St. Ives and Noxzema. Unilever, headquartered in London and Rotterdam, is the world's No.3 consumer products company behind Procter & Gamble (PG) and Nestle (NSRGY.PK). The aquisition "further skews Unilever to high growth, high margin personal care categories, gives a more rounded category presence in hair care and makes it global leader in hair conditioning, No.2 in shampoo and No.3 in styling," analyst Graham Jones said.

Southwest to buy AirTran for $1.4B. Southwest Airlines (LUV) will buy AirTran (AAI) for $1.4B ($7.69/share) in cash and shares - a 69% premium to Friday's close. Each share of AirTran will be exchanged for $3.75 in cash and 0.321 shares of Southwest Airlines' common stock. The purchase opens up Atlanta, the largest domestic market Southwest doesn't already serve, as well as Washington D.C., and allows LUV to boost its presence in key markets like New York and Boston. AAI +65% premarket. LUV -0.7%.

Europe's central banks halt gold sales. European central banks have all but stopped selling gold. Through September, eurozone banks (plus Sweden and Switzerland) sold just 6.2 tons from their reserves, down 96%. Until recently, central banks had been swapping bullion for sovereign debt, which yields a steady annual return. But now, they seem to be happier with the security of gold.

QE 2.0 to arrive before year-end - economists. The Fed will boost its balance sheet by half a trillion dollars over the next half year, and keep it inflated for up to a year, economists say. In a new survey crafted to gauge sentiment on the Fed's QE policies, 70% of the respondents believed the Fed will restart quantitative easing; of those 80% think it will happen before year-end. "The trigger for the resumption of quantitative easing late this year will be an increase in unemployment back into double-digits," Moody's Mark Zandi said.

AIG, gov't talk exit. Sources say AIG (AIG) is in talks with the Treasury on how the government would exit its position in the insurer. Plans, which could emerge as early as this week, could involve a conversion of the Treasury's $49B preffered stake into common shares - which would likely raise its stake in the AIG to more than 90% from nearly 80% currently. The Treasury would then sell its shares to investors over time. AIG also owes the Fed $21B in loans, and the Fed also owns $25B in preferred shares in two of AIG's foreign life insurance units.

Euro area growth slows, rocky waters ahead. The Conference Board's leading indicator for the euro area rose another 0.4% August to 112.5 (2004 = 100), weaker than July's 0.8% increase and June's 0.5% increase. "The initial impetus of the recovery has been fading and the broad based cooling down of leading indicators is a reminder of the fragility of the recovery," the report said, predicting greater volatility in 2011 as governments phase in deficit reduction measures. The euro area LEI is now 17.8% above its March 2009 trough.

Japan moves closer to double dip. Japan export growth slowed for the sixth straight month in August, underscoring Japan's recent moves to weaken the yen, and prompting speculation that the BOJ will ease already ultra-loose monetary policy next week. Exports rose 15.8% Y/Y, short of the 19% gain economists expected, and well below 2010's peak of 45.3% in February. Japan's GDP growth fell to just 0.4% in Q2 following a 4.4% rise in Q1.

China shrugs off threat of duties. China called the House's approval of a bill that would allow the U.S. to apply import duties on goods from countries with undervalued currencies "redundant," saying it will allow the yuan to rise according to its own economic assessment and not due to U.S. pressure. The bill, which is to be voted on this week, is a first step to fulfilling threats to penalize Beijing for keeping its currency artificially weak. Meanwhile, on Sunday, Beijing said it would impose import tarrifs of up to 105% on U.S. poultry.

Sanofi coy on higher Genzyme bid. Sanofi-Aventis (SNY) says it has not changed its $69/share offer for Genzyme (GENZ), but wouldn't comment on a report that it has lined up additional financing from Citigroup (C) and Bank of America (BAC). The French drugmaker wants to reach a friendly agreement but has not ruled out a hostile offer; Genzyme rejected Sanofi's offer in August, saying it dramatically undervalued the company.

Talks between Santander, M&T stall. M&T Bank's (MTB) bid to buy Santander (STD) unit Sovereign Bank have died after they were unable to settle who would control the combined business, sources say.

New Citi trader snags big payday. Sources say Citigroup's (C) new energy trader - UBS (UBS) defect Stephen Trauber - will earn about $30M over the next three years. The deal with Trauber comes months after "pay czar" Kenneth Feinberg ended his oversight of Citigroup's pay practices. For Citigroup, beset by ongoing concerns over banker defections, the hire was considered a coup. It is also a sign that Citi believe it can pay employees without fear of government meddling.


U.S. stocks notched their fourth week of gains on Friday as investors used a rise in business spending to revive the September rally after three days of losses.

The Dow Jones industrial average .DJI was up 197.84 points, or 1.86 percent, at 10,860.26. The Standard & Poor's 500 Index .SPX finished up 23.82 points, or 2.12 percent, at 1,148.65. The Nasdaq Composite Index .IXIC was up 54.14 points, or 2.33 percent, at 2,381.22.

The marginal gains for U.S. stock futures are mirroring the small gains in Europe, according to Joshua Raymond, market strategist at City Index.

“It’s looking like a slow start to the week,” he said. “On Thursday, you’ve got the final reading of U.S. GDP and a lot of focus this week will be on that.”

No major economic data are scheduled for release on Monday in the U.S. and Europe.

Instead, traders digested newly announced deals.

Corporate takeovers are a positive sign for the economy because they mean companies are increasingly willing to take large cash reserves built up during the recession and invest them to grow operations.


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