Market Outlook
Thursday, June 03, 2010

Thursday presents quite a few economic reports.

The schedule for today is:-

5:00 Monthly retail same-store sales

6:00 Monster Employment Index

7:30 Fed's Lockhart: Economic Outlook

8:15 ADP Jobs Report

8:30 Initial Jobless Claims

8:30 Productivity and Costs

10:00 ISM Non-Manufacturing Index

10:00 Factory Orders

10:30 EIA Natural Gas Inventory

11:00 EIA Petroleum Inventories

11:15 Fed's Bernanke: Small Business Financing

1:15 PM Fed's Hoenig Speaks to Bartlesville (OK.) Chamber of Commerce

4:30 PM Money Supply

4:30 PM Fed Balance Sheet

8:45 PM F ed's Fisher: Current Issues in Banking

Also, once again, there are several companies reporting their quarterly earnings:-

• Charming Shoppes Inc. (CHRS),

• Joy Global Inc. (JOYG),

• Suntech Power Holdings Co. Ltd. (STP), and

• The Cooper Companies Inc. (COO).

U.S. stock market futures pointed to a second day of gains Thursday as investors awaited a raft of economic and jobs data, along with the latest same-store sales figures from the country's retailers.

U.S. stocks rose broadly Wednesday, led by the energy sector, with a better-than-expected report on pending home sales also contributing to the third-best day of the year so far for the Dow industrials, which closed up over 225 points.


BP and the Oil-Spill

BP (BP) remained in the spotlight as the oil giant managed to dislodge a stuck saw blade and continue its latest attempt to stop the six-week oil leak in the Gulf of Mexico.

The company said Thursday that it will fund the building of six sand barriers off the coast of Louisiana, adding another $360 million to the ballooning costs of containing the spill. Shares of BP rose 3.2% Thursday in London trading.

The markets will continue to keep an eye on BP (BP), which helped spark a rebound in the beaten-down energy sector on Wednesday. The oil major's stock has lost nearly 40% of its value since the explosion in the Gulf of Mexico that caused the massive oil spill. BP said it plans to brief financial analysts on a conference call on Friday.

Economic Reports

Economic data will be in focus again today, with ADP's estimate on private-sector employment due one day ahead of the government's pivotal report on nonfarm payrolls and joblessness.

Investors are buying stock futures ahead of five key reports that should provide a sweeping view of the health of the domestic economy. Reports are expected to show the jobs market, service industry and manufacturing sector are all improving.

A key report on the service sector is expected to show growth for fifth straight month. The Institute for Supply Management's service sector index likely crept higher to 55.5 in May from 55.4 a month earlier, according to economists polled by Thomson Reuters. Any reading above 50 indicates growth.

The report, due out at 10 a.m. EDT, is considered a key gauge for the health of the jobs market because the service sector accounts for 80 percent of all workers outside of farmers.

A recovery in the service sector has been a bit slower than manufacturing, so continued signs of improvement should provide investors with confidence that the economy is strengthening.

High unemployment remains a key obstacle for a strong recovery. Upcoming jobs reports are expected to show some continued improvement.

Economists predict fewer people filed for jobless claims for the first time last week. The Labor Department is expected to say initial claims for unemployment benefits fell to 450,000 last week from 460,000 a week earlier. The report is due out at 8:30 a.m. EDT.

It would mark the second straight weekly decline in claims. However, claims still remain above the level that economists say would indicate sustained jobs growth.

Payroll company, ADP is expected to report private employers added 60,000 jobs in May. That compares with 32,000 jobs added in April.

The ADP report, due out at 8:15 a.m. EDT, comes a day ahead of the Labor Department's key jobs data. ADP data is often considered a barometer for the strength of the government's report. However, Friday's jobs report provides a fuller picture because it also includes public sector employment.

Economists forecast 513,000 jobs were added in May, compared with 290,000 added a month earlier. It would be the biggest jump in 26 years, but as many as 300,000 of the workers hired in May are expected to be temporary positions to help conduct the U.S. census.

Hiring has not picked up on a sustained basis because companies are finding ways to become more efficient. Economists forecast a separate Labor Department report on Thursday will show productivity grew at an annual pace of 3.4 percent during the first quarter. That's slightly below a previous estimate of 3.6 percent, but still indicates companies' output is growing for every hour worked. The report is due out at 8:30 a.m. EDT.

Productivity jumped 3.7 percent during 2009, which was the fastest growth in seven years.

Increasing productivity has boosted the manufacturing sector, which has shown consistent growth coming out of the recession. Economists forecast factory orders rose 1.8 percent in April after climbing 1.1 percent in March.

There is some trepidation that the manufacturing sector could face a slowdown because of the rising dollar and a potential slowdown in Europe's economy. A stronger dollar makes it more expensive to sell U.S.-produced goods overseas. Also, demand could drop in Europe where countries like Greece, Spain and Portugal are wrestling with mounting debt problems.

**The CBOE Volatility Index (VIX) will probably have a quiet day today which will be a blessing to most investors.

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

• The Dow Jones Industrial Average (DJIA) was unable to find purchase above growing resistance at the 10,250 level. The region is home to the Dow's 200-day moving average, and the blue-chip barometer has closed only one session above this area since May 19.

• The S&P 500 Index (SPX) is also grappling with the 1,100 level, with the index's own 200-day trend line perched just overhead in the 1,105 area.

• Gold continues to pull back from resistance in the $1,230 area, slipping $3.50 to $1,219.10 an ounce in London.

• The U.S. dollar and the euro gained ground on the yen in Asian trading, with the euro rebounding from multi-year lows versus the dollar. The effect has been balancing on the dollar overall, with the yen falling and the euro rising, resulting in the U.S. Dollar Index trading flat at 86.72 in pre-market trading.

• Benchmark crude for July delivery is gaining ground ahead of today's holiday-delayed U.S. inventory reports. In electronic trading, the most active contract was up 49 cents at $73.35 per barrel.

• With investors moving into riskier assets, bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.38 percent from 3.35 percent late Wednesday.

• Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,055,359 call contracts traded on Wednesday, compared to 634,767 put contracts.

Overseas Markets

World stock markets rallied hard Thursday as investor sentiment was boosted by a strong set of U.S. housing data and hopes about a pickup in the pace of U.S. jobs creation.

The euro rose again after hitting a four-year low at the beginning of the week. The euro, which has become an indicator for confidence in Europe's economy, rose to $1.2270.

European Concerns

Most of the pessimism in recent week has been related to Europe's government debt problems and the many attempts by the continent's policymakers to get a handle on the crisis.

David Buik, markets analyst at BGC Partners, said significant concern over the health of the European banking sector -- big holders of government debt -- continues to make investors "vigilant and reflective."

In its latest financial stability report, the European Central Bank warned that Europe's banking system may have to report write-downs of euro195 billion over the next 18 months.

These worries contributed to a further fall in the value of the euro currency -- on Tuesday it dropped to a fresh four-year low of $1.2112 before recovering Wednesday to $1.2240.

Further weighing on the euro this week were the mounting tensions in the Middle East following Israel's raid on a Gaza-bound aid ship and worries over an economic slowdown in China. Investors are again looking for assets considered safe -- the dollar is widely thought of as one of the world's leading safe havens, along with gold and the Swiss franc.

Overseas, European shares have posted strong gains today.

In Europe, Britain's FTSE 100 index was up 104.61 points, or 2 percent, to 5,255.93, while Germany's DAX rose 106.82 points, or 1.8 percent, to 6,088.02. The CAC 40 index in France rose 90.99 points, or 2.6 percent, to 3,592.49.

In Europe, at midday, London +1.7%. Paris +2.2%. Frankfurt +1.7%.

Earlier in Asia, Japan's benchmark Nikkei 225 stock index climbed 3.2 percent to 9,904.92, South Korea's Kospi gained 1.7 percent to 1,658.31 and Hong Kong's Hang Seng was 1.8 percent higher at 19,830.59. Shares in Australia, Taiwan and Singapore also advanced. The exception in Asia was the benchmark Shanghai Composite Index, which fell 18.77 points, or 0.7 percent, to close at 2,552.66.

In Asia, Japan +3.2% to 9914. Hong Kong +1.6% to 19787. China -0.7% to 2553. India +1.7% to 17022.

Futures Trading

Stock futures are pointing to a modest rebound in the market today, a day after major indexes plunged shortly before the close of trading.

Futures are getting a boost as the euro rebounds slightly after hitting a four-year low Tuesday. The euro, which is used by 16 European countries, has heavily influenced trading over the past month. It has particularly influenced futures trading when there are few other economic reports out for investors to review and help drive trading.

The currency has become an indicator of confidence in Europe's ability to contain a sovereign debt crisis that began in Greece, but has spread to other countries, including Spain and Portugal. The euro rose to $1.2229.

Heading into the open this morning, the Dow Jones Industrial Average (DJIA) futures are trading some 19 points above fair value. Meanwhile, futures on the S&P 500 Index (SPX) are trading more than 4 points above fair value.

Futures: Dow +0.4%. S&P +0.4%. Nasdaq +0.3%. Crude +0.6% to $73.27. Gold -0.4% to $1217.50.


Company News


Joy Global Inc (JOYG)

Mining equipment maker Joy Global Inc (JOYG) posted better-than-expected quarterly results, as its customers spent more to address the strong demand for commodities, and raised its 2010 outlook.

For 2010, the company now expects earnings of $3.85 a share to $4.00 a share, up from its prior view of $2.85 a share to $3.05 a share.

It also forecast revenue of $3.3 billion to $3.4 billion, up from its previous estimate of $2.8 billion to $3.0 billion.

"Commodity demand should continue to grow over the next several years and beyond today's limited excess mine capacity, and this should support strong fundamentals for demand and pricing for the next several years," the company said in a statement.

For the second quarter ended April 30, net income was $120.4 million, or $1.15 a share, compared with $120.5 million, or $1.17 a share, a year ago.

Net sales fell 3 percent to $896.2 million.

Analysts on average were expecting earnings of $0.77 cents a share, on revenue of $754.8 million, according to Thomson Reuters.

Shares of the company closed at $52.45 Wednesday on Nasdaq.


Suntech Power Holdings Co Ltd (STP)

Suntech Power Holdings Co Ltd (STP), China's largest solar panel maker, posted higher first-quarter profits on Thursday but its margins narrowed because of the weaker euro.

Net income rose to $20.7 million, or 11 cents per share, matching the consensus estimate from Thomson Reuters. A year earlier, net income was $1.8 million, or 1 cent per share.

Revenue rose 86 percent to $588 million.

The Wuxi, China-based company, said in May its first-quarter revenue would be between $580 million and $590 million.

Suntech, which makes most of its sales in Europe, said the decline in the euro versus the U.S. dollar cost it $24.5 million in the quarter.


Hovnanian Enterprises (HOV)

U.S. homebuilder Hovnanian Enterprises (HOV) said on Wednesday its quarterly loss narrowed sharply from a year earlier as write-downs on land decreased while demand picked up due to a federal tax credit for homebuyers.

Hovnanian posted a net loss of $28.6 million, or 36 cents per share, for the second quarter ended April 30, compared with a loss of $118.6 million, or $1.50 per share, last year.

Analysts, on average, had expected a loss of 64 cents per share on revenue of $351.95 million, according to Thomson Reuters.

Charges on land losing its value were $1.2 million this quarter compared with $310.2 million last year.

But revenue fell to $318.6 million from $398 million as home sales fell 19 percent to 1,118 homes. Housing and the broader economy started to make a tentative climb out of recession last year, but unemployment hovers at around 10 percent.

Despite the dip in revenue, Hovnanian sold more homes than it had projected internally due to the federal homebuyer tax credit, Chief Executive Ara Hovnanian said in a statement.

Nationally, the credit spurred a 6 percent increase in April's pending home sales index, but it expired on April 30, which means the surge cannot last, Credit Suisse analyst Dan Oppenheim wrote in a research note.

"This just shifted the timing of demand, and we continue to view April as a near-term peak," Oppenheim said. "We expect a sharp drop in contract signings in May and June."

Indeed, Hovnanian's May contracts fell year-over-year, the company's CEO said.

"Our slower pace of May net contracts seems to confirm that the tax credit helped pull some sales forward into earlier months this year," he said in a statement.

Based in Red Bank, New Jersey, Hovnanian is the seventh-largest homebuilder in the United States.

Hovnanian's shares closed 3 percent higher at $6.15 on the New York Stock Exchange, and slipped to $6.10 after hours.

Some Interesting News-

• Robot submarines made halting progress in BP Plc's (BP) battle to siphon off oil belching from its ruptured wellhead in the Gulf of Mexico, but tar balls and other debris from the spill pose new threats to the region's shoreline. U.S.-listed shares of BP gained 4.2 percent to $39.26 before the bell.

• Texas Instruments Inc (TXN) and five other companies will jointly boost investments in devices that use the Linux open-source software.

• General Electric Co (GE) and Japanese trading house Itochu Corp (8001.T) will invest in large wind and other renewable energy projects.

• JPMorgan's (JPM) London unit was fined a record £33.3M ($48.9M) by the U.K.'s Financial Services Authority for failing to properly separate billions of dollars of client money from the firm's accounts. "This penalty sends out a strong message to firms of all sizes that they must ensure client money is segregated in accordance with FSA rules," the FSA said in a statement. "Firms need to sit up and take notice of this action - we have several more cases in the pipeline.”

• Xstrata (XSRAF.PK) suspended $5.4B in coal and copper projects in Australia in response to the country's proposed mega-mining tax, which would tax mining profits at a 40% rate. Xstrata's decision brings the value of shelved projects to $20B in just a month. Though the news puts extra pressure on the Australian government to water down its proposal, it could also backfire and hurt Xstrata, which derived nearly 39% of its 2009 net profit from Australian operations.

• AIA, AIG's (AIG) Asian unit, could be worth $34B-36B after an initial public offering, said sources, a substantial rise from earlier estimates of $15B-20B. AIG CEO Robert Benmosche said the company has several options to consider after a deal with Prudential (PUK) fell through, but an IPO for the unit seems the most likely, and could launch as soon as this October.

• BP (BP) CEO Tony Hayward called it "an entirely fair criticism” to say the company had not been fully prepared for a deep-water oil leak. The firm's latest efforts to contain the Gulf of Mexico leak have not gone well, as a saw became stuck during a risky operation meant to cut the leaking pipe. Meanwhile, political pressure continues to intensify, with two senators calling for BP to suspend dividend payments until the company has a clearer idea of its liability and cleanup costs; analysts believe the spill could ultimately cost BP as much as $37B, and just yesterday BP agreed to pay $360M to construct six sections of a proposed barrier off Louisiana.

• Testifying before the Financial Crisis Inquiry Commission yesterday, Warren Buffett warned lawmakers not to single out the ratings agencies for criticism or to enact overly reactive reforms. Moody's (MCO) managers "made a mistake that 300 million other Americans made" in overestimating housing-related assets, said Buffett, who has held a stake in Moody's since 2000. Moody's CEO Raymond McDaniel also testified, calling his company's inaccurate ratings of mortgage-related investments "deeply disappointing." FCIC Chairman Phil Angelides slammed the ratings service as a "triple-A factory."

• Hoping to prevent a flash crash repeat, the Nasdaq stock market said it will launch its own circuit breaker system to halt trading when markets crash. "Our performance on May 6 wasn't exemplary to be frank," said a Nasdaq executive. "We want to take responsibility for the fact that there were aberrant executions on our market." While the move will bring Nasdaq more closely in line with the New York Stock Exchange, it could also complicate efforts to create market-wide safeguards.

• T&T (T) announced yesterday that it will no longer sell unlimited internet data plans to new customers with smartphones and iPads (AAPL), opting instead for usage-based pricing that charges heavy bandwidth users more. Analysts said the move will bring some much-needed common sense to the wireless industry, and likely marks the beginning of the end for unlimited data plans. In regular trading yesterday, AT&T +1.85%.

• Carmakers saw major sales gains in May, with several firms posting double-digit growth. Notably, Toyota significantly lagged its peers, suggesting the firm's discounts are attracting far fewer customers. Among the highlights: Chrysler's (FIATY.PK) May sales +33% to 104,819 vehicles, breaking the 100K mark for the first time in more than a year. Ford's (F) sales +21.9%. GM's sales +16.6%. Toyota's (TM) sales +6.7%.

• Japan's Astellas Pharma said investors tendered around 87% of OSI Pharmaceuticals' (OSIP) shares. Shareholder support for Astellas' offer was widely expected after the company sweetened its offer to $4B ($57.50/share) last month. However, Astellas is still 3% short of the stake it needs to complete its purchase, and is therefore opening a second offer period from June 4-7.

• Shares of Gerdau Ameristeel Corporation (GNA) shot up 54% yesterday after Gerdau SA (GGB) offered to acquire the 33.7% of Gerdau Ameristeel shares it doesn't already own for $11/share. The deal values Gerdau Ameristeel at around $1.7B.

• Amazon (AMZN) will begin selling its Kindle e-reader in Target (TGT) stores as of this Sunday. Previously, the device was only available via Amazon's website, but increased competition from Apple's (AAPL) iPad and Barnes & Noble's (BKS) Nook likely prompted the move.


The CBOE Market Volatility Index (VIX) plunged more than 15% amid Wednesday's rally, with the index holding near support at the round-number 30 level. With the VIX hovering near support, the DJIA and SPX perched just below key short-term resistance, and key economic data slated for release later this morning, we could be in for an interesting trading session.

As I have mentioned on numerous occasions this is the time to be making the most of trading options.

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

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