Market Outlook
Thursday, September 02, 2010

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

  • Chain Store Sales

  • 6:00 … Monster Employment Index

  • 7:45… ECB Announcement

  • 8:30… Initial Jobless Claims

  • 8:30 … Productivity and Costs

  • 9:00… FCIC Hearing: Too Big To Fail (Bernanke, Bair)

  • 9:00… Fed Conference: REO & Vacant Properties

  • 10:00 … Factory Orders

  • 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 companies are reporting their quarterly earnings:-

  • Del Monte Foods Co. (DLM) and

  • H&R Block Inc. (HRB)

thursday outlook

Thursday sees U.S. stocks set for a flat start, as investors remained cautious ahead of a wave of economic data.

U.S. stock index futures edged higher on Thursday after Wall Street's best day in eight weeks and ahead of jobless claims and pending home sales data.

The Dow Jones Industrial Average (DJIA) soared 255 points on Wednesday, logging its best day since July 7 as hopes for a global economic recovery rose. Wall Street is carrying that positive bias over into the open this morning, even as traders prepare for the next wave of U.S. employment data and a look at July factory orders and new home sales.

"The stability of markets today could be ruffled with yet further data from the States," said Phil Gillett from Spreadex Ltd. in a note to clients.

Economic Concerns

Initial Jobless Claims

Weekly jobless claim figures are due before the opening bell. Economists expect the number of Americans filing new claims for unemployment insurance to have edged up slightly last week to 475,000 from 473,000 in the previous week.

Continuing claims, a measure of Americans who have been receiving benefits for a week or more, are expected to have dropped to 4,435,000 from 4,456,000.

Pending Home Sales

A report on pending home sales is due after the start of trading. Economists forecast the figures to remain unchanged in July, after dropping 2.6% in June.

July Factory Orders

Meanwhile, the Commerce Department reports on July factory orders, which economists expect to show a 0.3% rise, following a 1.2% drop in June.

Business Productivity

A separate government report is expected to show that second-quarter business productivity was downwardly revised to a decline of 1.7%, from the 0.9% drop that was initially projected.

Same Store Sales

The nation's major retailers - with the notable exception of Wal-Mart (WMT) - will report their August same-store sales throughout the morning. Today's same-store sales reports will be closely watched because of the back-to-school shopping season, which is typically the industry's second-biggest shopping period outside of the year-end holidays.

Earlier, Costco Wholesale Corp. (COST) reported August same-store sales rose 7%.

Financial Crisis Inquiry Commission

In Washington, Federal Reserve Chairman Ben Bernanke will testify at a hearing of the Financial Crisis Inquiry Commission, which is charged with examining the causes of the financial meltdown. Sheila Bair, chairman of the U.S. Federal Deposit Insurance Corporation, is also scheduled to testify.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA) comes into today trading back above support in the 10,250 region and its 50-day moving average. More stalwart support lies in the 10,150-10,100 region, while resistance could materialize near 10,350.

The S&P 500 Index (SPX) is currently capped by its 20-day and 50-day moving averages, with additional resistance in the 1,085 region. Support, meanwhile, lies in the 1,070 region.

Gold futures are little changed, rising $1.10 to $1,249.20 an ounce in London.

• The U.S. Dollar Index has inched 0.15% lower to 82.40, as yesterday's appetite for risk has yet to fully abate.

Benchmark crude futures have slipped 23 cents to $73.68 per barrel, with traders concerned about a potential rise in weekly initial jobless claims.

Bonds: The yield on the 10-year Treasury note rose to 2.60% from 2.58% late Wednesday.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,223,245 call contracts traded on Wednesday, compared to 597,648 put contracts.


Overseas Markets

European Concerns

European share markets were mixed in early trading. The CAC 40 in France and Britain's FTSE 100 rose 0.1%, while the DAX in Germany ticked slightly lower.

In Europe, at midday, London -0.1%. Paris -0.1%. Frankfurt -0.3%.

The dollar slipped against the euro and the Japanese yen, but edged higher versus the British pound.

Asian Concerns

Earlier, Asian markets closed higher. Japan's benchmark Nikkei index added 1.5%. The Shanghai Composite rose 1.3%, and the Hang Seng in Hong Kong gained 1.2%.

In Asia, Japan +1.5% to 9063. Hong Kong +1.2% to 20869. China +1.3% to 2656. India +0.2% to 18238.

Futures Trading

As of 6:30 a.m. in New York, the Dow Jones Industrial Average futures fell 12 points, or 0.12%, to 10260, the S&P 500 index futures were down 2.4 points to 1079.30 and the Nasdaq 100 futures were unchanged at 1820.00.

Futures: Dow -0.2%. S&P -0.2%. Nasdaq -0.1%. Crude -0.2% to $73.77. Gold flat at $1247.90.


Company News

Pier 1 Imports (PIR)

Home-goods retailer Pier 1 Imports (PIR) posted second-quarter sales in line with market estimates and expects strong earnings in the quarter, boosted by robust merchandise margins and improved traffic.

For the second quarter ended Aug. 28, the company expects to earn 10-12 cents a share, above analysts' estimate of 8 cents a share, according to Thomson Reuters.

"We continue to see strengths in all parts of the country and in all merchandise categories -- with improvements in traffic, conversion and ticket," Chief Executive Alex Smith said in a statement.

Merchandise margins are expected to be about 58 percent of sales, said the company, which competes with Bed Bath & Beyond Inc (BBBY) and Williams-Sonoma Inc (WSM).

Sales in the quarter rose 8 percent to $310 million, in line with analyst estimates of $310.2 million.

Quarterly same-store sales, a key measure of retail health, were up 11.2 percent, compared with a decline of 7.6 last year.

The company's shares, which have fallen about 33 percent from their 52-week high in April, closed at $6.54 Wednesday on the New York Stock Exchange.


Hovnanian Enterprises (HOV) reported a narrower third-quarter loss of $72.9 million, or 92 cents per share, as revenue fell to $380.6 million. Analysts had forecast a loss of 47 cents per share on revenue of $396.1 million. Home-building gross margin, before interest expenses included in the cost of sales, rose 17.1% compared with 9.1% increase a year ago.

Vimpelcom Ltd. (VIP) posted a net second-quarter profit of $334.7 million, or 28 cents per share, as revenue rose 23% to $2.64 billion. Wall Street was looking for a profit of $376 million and revenue of $2.60 billion.

Some Interesting News

Wary China may review BHP's Potash bid. Nervous about market concentration, China may launch an antimonopoly probe into BHP Billiton's (BHP) $39B bid for Potash (POT), sources said. BHP, which declined to comment, is only seeking regulatory clearance in the U.S. and Canada. China is also said to be planning to review the merger of two Russian potash firms because of the impact these deals could have on the country, though it's unclear what practical steps China can take if it opposes either of the bids. In related news, China's Sinochem has reportedly hired HSBC (HBC) to advise it on its options regarding Potash (POT), though sources said the move is preliminary and doesn't mean a counteroffer is necessarily forthcoming.

Petrobras, Brazil reach controversial oil deal. Brazil's state-controlled Petrobras (PBR) agreed to pay the federal government $42.5B in stock in exchange for five billion barrels of deepwater reserves. The deal is a controversial one, as investors say Petrobras is paying more than the oil is actually worth, and shares of Petrobras have already fallen significantly this year as investors worried just such a scenario would occur. Petrobras also plans to sell new shares to the public to raise an additional $25B as part of the plan.

Lilly scores court victory on generics. Eli Lilly (LLY) scored a victory yesterday after an appeals court upheld a ban preventing Teva (TEVA) from selling a generic version of Evista, Lilly's osteoporosis drug. Evista sales were $259.5M in the second quarter, and the patents are valid through March 2014.

Connecticut AG probes First Niagara-NewAlliance deal. Connecticut is investigating First Niagara Financial's (FNFG) proposed $1.5B takeover of NewAlliance Bancshares and has asked the banks to justify the merger. Connecticut Attorney General Richard Blumenthal said the state may choose to only approve bank mergers that benefit Connecticut's economy and the public, and that the First Niagara deal "raises significant and far-reaching legal and public policy issues." If approved, the tie-up will be the largest U.S. bank deal in nearly two years.

FDIC loses closely-watched bank case. A closely watched court decision found the FDIC is not entitled to the $900M that it had demanded from Colonial BancGroup, the parent company of failed Colonial Bank. The FDIC had argued that Colonial Bank had signed a 2008 memorandum of understanding in which it said it would try to increase its capital, and the $900M represented the capital shortfall at Colonial Bank when it was seized in the biggest bank failure of 2009. However, the judge found that the memorandum of understanding didn't represent a commitment, a ruling that will undoubtedly be seized upon by other holding companies that ended up in bankruptcy after regulators closed their lending operations.

GE preps for possible spending spree. General Electric (GE) could spend up to $30B on takeovers in the next two to three years, said John Rice, one of the company's four vice chairmen, but would do so in a way that's compatible with plans to boost its dividend and buy back shares. The comments signal GE is pulling away from the defensive position it took during the recession, with one analyst calling it a "sea change" in the company's thinking. Shares of GE closed up 3.7% yesterday.

SEC investigates quote stuffing. The SEC is reportedly looking into "quote stuffing," the practice of placing an unusually large number of buy or sell orders for stocks in a fraction of a second, and then canceling the orders almost immediately. Regulators are concerned the practice is putting some investors at a disadvantage because it distorts stock prices, and are also checking if quote stuffing may have played a role in May's flash crash.

Vale loses auction for copper smelter. Brazil's Vale (VALE) said it failed to acquire base metals and fertilizers holding company Paranapanema SA in an auction because the number of shares tendered was below the minimum threshold. Vale had been hoping to pick up Paranapanema, Brazil's only copper smelter, for about $1.13B to provide cost-savings in its growing copper business.

Two Lehman units face failure. In a bankruptcy court filing yesterday, Lehman Brothers (LEHMQ.PK) said two of its units are struggling, and they need hundreds of millions of dollars to prevent a failure that could cost Lehman billions. The two units, Aurora Bank and Woodlands Commercial Bank, are struggling to meet capital requirements because of restrictions from regulators, including a limited ability to issue new CDs. Lehman estimates that failure to resolve the units' capital issues would result in losses of $1.2B-3.6B.

November IPO likely for GM. General Motors reportedly plans to start wooing investors for its initial public offering after the midterm elections on Nov. 2, and will likely price its IPO on Nov. 17. The plan is subject to change based on the performance of the U.S. stock market.

Auto sales show weakness. U.S. auto sales fell 21% in August compared to a year ago, although the comparison is a bit skewed as August 2009 was a strong month for sales thanks to the government's cash-for-clunkers program. One of the few firms to post gains was Chrysler, which saw sales rise 7% because of increased orders from corporate fleets. Ford (F) sales were down 11%, GM's sales were down 25%, and Toyota's (TM) were down a sharp 34%. Despite the precipitous year-on-year drop in sales, car companies remain confident that the industry's steady recovery remains on track.

Mixed reviews on Apple upgrades. As usual, plenty of hype surrounded Apple's (AAPL) annual fall media event yesterday. In the end, the company unveiled a new line of iPods and a smaller, cheaper version of Apple TV for streaming movies and TV shows over the internet and into the living room. Gadgeteers generally liked the iPod updates, including a touch-screen nano, but said the "closed-minded" Apple TV is little more than a "Netflix (NFLX) streaming box." Shares of Netflix jumped 7.5% yesterday thanks to its new key role in Apple TV. Apple closed up 3%.


Private employers unexpectedly cut 10,000 jobs in August, according to a report on Wednesday, but that was largely overshadowed by solid factory data in the United States and China.

"They are going to look at the initial claims and see what direction that points in. Everyone is anticipating more negative numbers, it's just truly a matter of how negative are these numbers going to be," said Chris Hobart, chief executive of Hobart Financial Group in Charlotte, North Carolina.

"It just seems right now where the economy is and where consumer confidence is, unemployment reports almost have a bigger punch to the economy than we're used to seeing."


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