Market Outlook
Thursday, July 01, 2010

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

• Motor Vehicle Sales

6:00 … Monster Employment Index

7:30… Challenger Job-Cut Report

8:30 … Jobless Claims

9:00 … Hearing: The Role of Derivatives in the Financial Crisis

10:00… ISM Manufacturing Index

10:00 … Construction Spending

10:00… Pending Home Sales

10:30… EIA Natural Gas Inventory

4:30 PM… Money Supply

4:30 PM … Fed Balance Sheet

Also the following company is reporting its quarterly earnings:-

• Constellation Brands Inc. (STZ)


Thursday saw U.S. stock futures slightly lower after a negative factory orders report in China caused a global retreat in stock prices overnight.

Investors are approaching the first day of third-quarter tentatively after stocks posted sharp declines during the previous three-month period.

Stock futures traded in a narrow range today as investors worry the economy is slowing down again, and they are anxious heading into Friday's key jobs report. Before the monthly employment report, traders will get a flood of economic data to examine today that will likely continue to paint a mixed picture about the pace of recovery.

Economic Concerns

Trading may be quiet ahead of Friday's government employment report. Economists surveyed by forecasting an overall loss of about 100,000 jobs for June.

A report on private sector hiring released Wednesday showed that the U.S. economy gained 13,000 private sector jobs in June. The figure was significantly less than the 61,000 increase economists had expected.

Manufacturing Activity

Investors will take in a survey on nationwide manufacturing activity, which comes out at 10 a.m. ET.

The one area of the economy that has shown signs of life throughout the year is manufacturing. The Institute for Supply Management's manufacturing index likely dipped in June, but still signaled growth in the sector. Economists expect the index fell to 59 from 59.7 in May. Any reading above 50 signals expansion.

Still, growth in manufacturing has not been enough to overcome the ongoing problems in the jobs and housing markets. The pace of recovery in recent months has fallen short of what investors had hoped, which has helped drive stocks sharply lower.

Philip Isherwood, a strategist at U.K. broker Evolution Securities, said equity markets already discount a poor ISM reading, and a drop below 50 for ISM new orders.

"Given the poor and fragile sentiment at present, it is perfectly possible that the market will react negatively to any drop in the ISM New Orders series - but this looks like a case of confirmation, and also double-counting," he said in a note to clients.

Construction Spending

A reading on construction spending also will be released. Economists expect spending to have fallen 0.9% in May after rising 2.7% in April.

Initial Claims for Jobless Benefits

A report is expected to show initial claims for jobless benefits dipped last week, but not enough to signal employers are rapidly hiring new workers. Economists polled by Thomson Reuters forecast claims fell to 452,000 last week from 457,000 a week earlier. Initial claims have remained stuck near 450,000 throughout the year, adding to worries that unemployment will remain high for the near future.

Pending Home Sales

A report on pending home sales is forecast to show that sales declined 10.5% in May after rising 6% in April, according to

Auto and truck sales for June are due throughout the day.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA) is now trading just above its June 8 low near 9,750 - more than 100 points below May's "flash crash" low. The next layer of support for the Dow rests near 9,700 - its October 2009 short-term bottom - with 9,400 offering longer-term support on a steeper decline.

The S&P 500 Index (SPX) is perched on its October 2009 low at 1,030. Short-term support for the SPX lies near 1,020, while psychological support should materialize near 1,000 on a sharp pullback.

Gold futures have given up some ground this morning. In London, the front-month contract has fallen $2.10 to $1,243.80 an ounce.

• The U.S. Dollar Index continues to slip lower this morning, as the euro remains on its feet in the wake of the European Central Bank's relief package. At last check, the index was off 0.53% at 85.57.

Benchmark crude futures have dropped 80 cents to $74.83 per barrel, with traders concerned about weak manufacturing data out of China, which could impact demand.

Bonds: Treasury prices fell, pushing the yield on the 10-year note up to 2.95% from 2.94% late Wednesday.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 991,496 call contracts traded on Wednesday, compared to 603,515 put contracts.

Overseas Markets

A Chinese manufacturing index show that factory activity slowed considerably in June, yet another sign that the global recovery appears to be slowing. The negative report out of China was combined with a European factory output report that also showed slowing.

However, the Bank of Japan's quarterly tankan survey of business sentiment showed large manufacturer sentiment turned positive for the first time in two years.

Also overseas, a Spanish bond auction of 3.5 billion euros of five-year notes went smoothly just hours after the warning from Moody's.

European Concerns

European share markets dropped in morning trading. Britain's FTSE 100 fell 1%, France's CAC 40 sank 1.5% and the DAX in Germany lost 0.7% in the early going.


The euro climbed 0.5% to $1.2294, helped by the Spanish auction.

Asian Concerns

Earlier in Asia, markets retreated. Japan's Nikkei shed 2%, the Shanghai Composite declined 1% and the Hang Seng in Hong Kong finished the session 0.6% lower.

In Asia, Japan -2.0% to 9191.6. Hong Kong -0.6% to 20129. China -1.0% to 2374. India -1.1% to 17509.

Futures Trading

As of 6:45 a.m. in New York, the Dow Jones Industrial Average futures were down 12 points, or 0.12%, to 9704, the S&P 500 index futures lost 1 point to 1025.60 and the Nasdaq 100 futures were lower by 8.75 points to 1729.25.

Futures: Dow -0.1%. S&P -0.1%. Nasdaq -0.3%. Crude -1.1% to $74.83. Gold -0.2% to $1243.


Company News

ABB bows out of Chloride bid. ABB (ABB) abandoned its pursuit of U.K.-based Chloride Group, saying it won't raise its bid for the company to match an improved £997M ($1.5B) offer by Emerson Electric (EMR). The move comes as a surprise to some investors who had expected ABB to match the bid; ABB CEO Joe Hogan explained that "while we still see considerable value in the combination of ABB and Chloride and have a high regard for the Chloride management team, we must take a disciplined approach when assessing potential acquisition."

Portugal blocks Telefonica’s Vivo bid. In an unexpected and controversial move, Portugal's government blocked Telefonica's (TEF) bid for Portugal Telecom's (PT) stake in their Vivo (VIV) joint venture. Around 74% of Portugal Telecom's shareholders had voted in favor of the €7.15B ($8.7B) bid, and the government's intervention using its "golden shares" is expected to be challenged by both Telefonica and the European Commission, and will likely lead to drawn-out legal wrangling.

Arena strikes deal for obesity drug. Arena Pharmaceuticals (ARNA) announced an agreement with Japan's Eisai Inc. in a deal worth potentially more than $1.3B to fund commercialization of an obesity drug that could become Arena's first product. Eisai will pay $50M upfront for the right to sell Arena's lorcaserin in the U.S., and will pay as much as $160M in payments for reaching certain development targets and getting the drug approved by regulators, plus a $1.16B one-time payment in the future based on the level of annual sales. Premarket: ARNA +30% (7:00 ET).

Singing the Q2 blues. The second quarter was one investors will want to forget. In a late-day selloff yesterday, the Dow closed down 1% to 9773.95, marking a 10.4% loss for the quarter and its worst quarterly performance since the beginning of 2009. Nasdaq and S&P were down 12% and 11.9% for the quarter, respectively. The outlook for Q3 is shaky, as investors continue to worry about a global trifecta of economic, fiscal and regulatory issues. "Fresh in everybody's mind is the carnage of late 2008 and early 2009," said one strategist. "Therefore, their mentality is to sell first, ask questions later and be content with earning 3% on 10-year Treasurys."

Financial reform still waiting for the fat lady to sing. The House of Representatives approved the financial reform bill yesterday (in a 237-192 vote), but the Senate postponed its vote until after the week-long July 4 recess, leaving open the possibility that the bill may undergo further compromises. The delay could also sap the bill's momentum, giving opponents time to convince on-the-fence lawmakers to vote against the measure.

AIG CEO wants to oust chairman. AIG (AIG) CEO Robert Benmosche reportedly said last week that he would quit unless Chairman Harvey Golub leaves the company. Benmosche told the insurer's board that he wanted more control over the divestment of AIG's Asian life insurance unit, including making management changes. The board didn't make a decision during the meeting.

ConocoPhillips drives away with $626M. ConocoPhillips (COP) completed the sale of its 50% stake in a truck stop joint venture, bringing in $626M in the process. The divestiture is the latest step in Conoco's $10B asset sale plan.

Toyota prepares for more recalls. Toyota (TM) is preparing to recall 270,000 luxury cars worldwide to repair a defect that could cause the engine to stall. A spokeswoman said the recalls will be carried out "as soon as we decide on the measure to minimize inconvenience for our customers."

BP hearings could become public trial. The U.S. presidential commission investigating the Gulf of Mexico spill has decided to hold hearings in affected Gulf states, and will be calling upon top BP (BP) executives, including CEO Tony Hayward. While acknowledging concerns that the hearings, set to begin July 12 in a 500-seat venue, could turn into a public trial, commission members stressed the need for local residents to be heard. Meanwhile, BP is turning to banks for additional short-term loans to help cover its spill costs. BP raised $20B in cash and credit by the end of last week, but could raise another $5B now. Premarket: BP +0.45% (7:00 ET).

Yahoo's stock buyback. Yahoo (YHOO) announced a plan to buy back $3B of stock over the next three years, sending its shares up 1.1% in after hours trading. The new buyback "is consistent with the company's commitment to returning value to shareholders," said a spokeswoman.

Moody's may downgrade Spain. Moody's warned it may downgrade Spain's triple-A sovereign rating by one or two notches because of deteriorating economic conditions: "In the short term, the government's accelerated fiscal consolidation combined with the higher borrowing costs currently facing the government, consumers, and businesses will likely depress growth." Moody's is the last major ratings firm to rate Spain as Aaa. But in a reassuring sign for markets, Spain successfully raised €3.5B ($4.3B) in an oversubscribed bond sale today.

Amedisys subject of SEC probe. Amedisys (AMED) received notification from the SEC that it is the subject of a formal investigation, and received a subpoena for documents. The company noted that "the SEC is also investigating others in the home health industry regarding matters being examined by the Senate Finance Committee."

URS wins bidding war for Scott Wilson. Engineering firm URS (URS) beat out privately-held CH2M Hill in their bidding war for U.K.-based Scott Wilson Group. CH2M Hill withdrew its offer for Scott Wilson, saying the acquisition no longer added value to the company, after URS raised its bid to £223M ($337M) yesterday. • Icahn increases stake in Mentor Graphics. Activist investor Carl Icahn raised his stake in Mentor Graphics (MENT) to 10.84%, steadily increasing his holdings from 8% as of June 11 and 9.5% as of June 22. A shareholder rights plan will be triggered when an investor acquires at least 15% of Mentor's common stock. Icahn said he had met with Mentor's management and "looks forward to further conversations and to working constructively with current management to maximize shareholder value."

Future unclear for Carlyle's Taiwan deal. Carlyle Group's plan to sell a pay-TV operator to Taiwan Mobile for $1B has been put in jeopardy by its failure to obtain regulatory approval ahead of the deal's deadline. Taiwan Mobile said both companies agreed to let the original sales agreement lapse following yesterday's missed deadline, but still wanted to complete the sale and were looking for ways to address regulatory concerns. This is the second time in two months that foreign companies have faced difficulties with Taiwanese regulators, as AIG (AIG) had to extend a $2.2B sale deadline last month after regulators raised concerns.

Hitachi offloads JV stake. Hitachi (HIT) will transfer most of its stake in an LCD joint venture to Panasonic (PC) for $717M. The move will shrink Hitachi's JV holdings to 5%, and raise Panasonic's stake to 92%.

Amazon picks up Woot.Amazon (AMZN) signed an agreement to buy, the irreverent online store which sells discounted products and operates an online community, for an undisclosed sum. The deal is expected to close in Q3, and "more details forthcoming after we pick our eyeballs up off of the floor," Woot said in its statement.


Worries of a worldwide economic slowdown have unsettled investors recently. U.S. stocks dived in the final hour of trading Wednesday, the last day of the second quarter.

For the quarter, the blue-chip Dow fell more than 10%, while the tech-heavy Nasdaq and broader S&P 500 each lost 12%.

"We're at one of those points where we're holding our breath, waiting to see if we get enough reassurance to excel," said Bruce McCain, senior vice president & chief investment strategist of Key Private Bank.

Until investors become more confident in the health of the economy, the market is likely to remain under pressure, he said. "We could stay in this trading range for a good part of this year," said McCain. "It's just a question of whether investors can maintain their nerve until we get enough evidence to point up or down in terms of the direction of the economy."

The ADP report also sparked fresh concerns that the Labor Department's upcoming monthly report will show weakness in the jobs market.

Economists forecast employers cut 110,000 jobs last month, though that number is skewed by the government laying off temporary employees hired to work on the 2010 census. The unemployment rate likely rose to 9.8 percent in June from 9.7 percent in May.

High unemployment remains one of the biggest obstacles to a strong recovery. Even those who are working appear tentative and unsure about a recovery. Consumer confidence fell sharply in June and spending has not picked up as fast as investors might have hoped.

With the market so unsettled, investors are giving up potential big gains in stocks and opting for the smaller, but safer gains that can be made in bonds.

As I have mentioned on numerous occasions this is the time to be making the most of the various market situations, whether volatile, moderate or however it comes, and trade options.

Success is simple. Do what's right, the right way, at the right time.

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