Market Outlook
Tuesday, August 17, 2010

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

7:45 … ICSC Retail Store Sales

8:30… Housing Starts

8:30 …Producer Price Index

8:55… Redbook Chain Store Sales

9:00… Conference: The Future of Housing Finance (Geithner)

9:15… Industrial Production

10:00 …E-Commerce Retail Sales

12:00 PM… Joint Hearing: Community Reinvestment Act (Fed, FDIC, OCC, OTS)

12:30 PM… Fed's Kocherlakota: Inside the FOMC

5:00 PM …ABC Consumer Confidence Index

Also the following companies are reporting their quarterly earnings:-

• Abercrombie & Fitch Co. (ANF),

• The Home Depot Inc. (HD),

• Saks Inc. (SKS),

• Wal-Mart Stores Inc. (WMT), and

• Analog Devices Inc. (ADI).


Tuesday sees U.S. stocks set for a rebound as investors prepare for a handful of economic and earnings reports that are expected to show some modest improvement.

Investors are waiting for reports on housing starts, industrial production and inflation at the retail level that are all expected to show the economy continues to grow at a measured pace.

U.S. stock index futures rose on Tuesday after bellwether retailers Wal-Mart and Home Depot Inc posted-better-than expected quarterly profits, but Wal-Mart cautioned about the strength of the U.S. consumer. Also Potash Corp. announced it had rejected a $38.6 billion takeover bid from BHP Billiton.

"Earnings news from Wal-Mart in the U.S. will be a highlight for many -- the retail giant acting as an economic barometer in its own right," said Ben Potter, market strategist at IG Markets, in a note.

Economic Concerns

A slew of economic reports are on tap, including data on housing and inflation.

New Home Construction in July

A report from the Commerce Department is expected to show a rebound in new home construction in July, following two months of decline after the end of the homebuyer tax credit.

Economists are looking for housing starts to rise to a seasonally adjusted annual rate of 555,000. However, building permits -- a measure of future activity -- are expected to slip to an annual rate of 573,000.

The Producer Price Index

Investors will be watching a report on retail inflation. With fears of another recession, investors and the Federal Reserve have also worried about deflation. Falling prices would hurt wages and earnings, making it less likely that companies would ramp up hiring. But investors will be looking for price increases, which are seen as normal during periods of economic growth.

The Producer Price Index likely rose 0.2 percent in July after falling 0.5 percent in June. Excluding volatile energy and food prices, economists predict core inflation rose 0.1 percent last month, similar to the growth reported in June.

Industrial Production

Reports on industrial production and capacity utilization will also be released.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA) slipped fractionally on Monday, as Wall Street bulls came out in force to defend support in the 10,300 region. This morning, the bulls' hard work appears to have paid off, as the blue-chip barometer could be headed toward an end of its five-session losing streak.

The S&P 500 Index (SPX) is trading about 7.4 points above fair value, as the broad-market index looks to reclaim the 1,080 level and its 50-day moving average.

Gold futuresprices continue to rebound by trading inversely to the U.S. dollar. At last check, the front-month crude contract was up 83 cents at $76.43 per barrel.

• The U.S. Dollar Index is continuing to pull back this week, with the yen gaining strength on news that the Bank of Japan is considering a stimulus package. Currently, the index has slipped 0.30% to trade at 82.59, below former support in the 82.50 region.

Benchmark crude futures are threatening the $80 region, with the front-month contract off $1.10 to $80.30 per barrel in electronic trading.

Bonds: Prices for Treasurys were lower. The yield on the 10-year note rose to 2.62% from 2.58% late Monday.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 815,446 call contracts traded on Monday, compared to 586,308 put contracts.

The CBOE Market Volatility Index (VIX) experienced an outside day on Monday. An "outside day" is a technical formation where a stock or index hits a higher high and a lower low than the previous day. With the VIX closing lower yesterday, this technical formation could indicate that the index is set to reverse course and decline once again, potentially breaching short-term support near the 25 level in the process.

Overseas Markets

In Germany, the ZEW business-climate index fell unexpectedly in August from the previous month. Economists had forecast the index to hold steady.

In the debt markets, Ireland auctioned 1.5 billion euros ($1.9 billion) in government bonds, the maximum amount on offer.

European share markets: got off to a positive start. The CAC 40 in France jumped 0.8% in morning trading, while Germany's DAX and the FTSE 100 in Britain gained 0.7%.

In Europe at midday, London +1.1%. Paris +1.0%. Frankfurt +1.3%.The dollar fell against the euro, the U.K. pound, and the Japanese yen.

Asian Concerns

Earlier in Asia, the Shanghai Composite and Hang Seng ended the session with modest gains. Japan's benchmark Nikkei index, however, fell a;most 0.4%.

In Asia, Japan -0.4% to 9162. Hong Kong +0.1% to 21137. China +0.4% to 2672. India flat at 18049.

Futures Trading

As of 6:55 a.m. in New York, the Dow Jones Industrial Average futures climbed 66 points, or 0.64%, to 10339, the S&P 500 index futures were up 8.4 points to 1085.50 and the Nasdaq 100 futures were up 12 points to 1832.00.

Futures: Dow +0.6%. S&P +0.8%. Nasdaq +0.7%. Crude +1.3% to $76.23. Gold +0.2% to $1228.40.

us futures-aug17,2010

Company News

Abercrombie & Fitch Co. (ANF)

Abercrombie & Fitch return to a profit in the second quarter as its strategy of lowering some prices boosted sales.

The chain also says it will close 60 stores in the U.S. in 2010.

The preppy teen clothing seller says net income totaled $19.5 million, or 22 cents per share. A year ago the company lost $26.7 million, or 9 cents per share. Earnings were 24 cents excluding a charge for closing stores.

Analysts expected a smaller 16 cents-per-share gain.

Revenue rose 17 percent to $745.8 million. Analysts expected $727.7 million.

Abercrombie & Fitch Co., based in New Albany, Ohio, has lowered some prices to compete with Aeropostale Inc. and American Eagle Outfitters Inc. for teen dollars.


Wal-Mart (WMT)

Wal-Mart Stores Inc. is reporting a 3.6 percent increase in second-quarter net income and is raising its earnings guidance for the full year as it benefits from cost-cutting.

But a closely watched measure of revenue at its namesake U.S. stores fell more than expected as it struggles to keep customers. The discounter says it had net income of $3.59 billion, or 97 cents per share, for the period ended July 31. That compares with $3.47 billion, or 89 cents per share, a year ago.

Revenue rose almost 3 percent to $103.7 billion. Revenue at stores opened at least a year fell 1.4 percent, worse than the 0.26 percent expected by Thomson Reuters.

Analysts had expected earnings per share of 96 cents on revenue of $105.3 billion.


Home Depot (HD)

The home improvement giant saw its shares rise 3% in pre-market trading following the company reporting a second-quarter profit of 72 cents per share, up from 66 cents a year earlier. Revenue was $19.41 billion in the quarter.

Home Depot (HD) beat analysts' estimates on the bottom line, who on average were looking for 71 cents per share, but missed on top-line estimates.

The company also boosted its full-year guidance, which gave a lift to the stock as well.

General Motors is expected to file for an initial public offering of stock with U.S. securities regulators as early as Tuesday.

Some Interesting News

Potash Corp. rebuffs BHP. Potash Corp. (POT) said this morning that it had received and unanimously rejected an unsolicited takeover proposal from BHP Billiton (BHP) of $130/share. The bid values Potash at $38.4B. The company, which also announced this morning that it's adopting a shareholder rights plan, said BHP's offer "substantially undervalues PotashCorp and fails to reflect both the value of our premier position in a strategically vital industry and our unparalleled future growth prospects." Premarket: POT +26.1% to $141.40, BHP +0.1%. The news is boosting other fertilizer stocks as well: IPI +4.3%, MOS +9.4%, CF +1.7% (7:00 ET).

Talks advance on Pactiv sale. Pactiv (PTV) is said to be in advanced talks to be bought by New Zealand's Rank Group. Private equity firm Apollo Global Management and Koch Industries are also interested in Pactiv, and could move forward with a deal if talks with Rank break down. Finals bids were due a week ago and a deal may be reached as soon as this week, though the price range for the transaction couldn't be determined. News of the talks helped lift Pactiv shares 6.7% in after-hours trading.

Santander renews M&T talks. Santander (STD) has reportedly restarted talks to merge its U.S. operations with M&T Bank (MTB). Negotiations had stalled in May after the two banks couldn't decide who would control the combined business, but Santander and M&T are trying to resolve the issue now and have sounded out the deal with regulators including the Fed. Premarket: STD +0.3% (7:00 ET).

Judge refuses to approve Citi-SEC settlement. A federal judge refused to approve a proposed $75M payment by Citigroup (C) to settle SEC charges over its disclosure of subprime-mortgage problems. U.S. District Judge Ellen Segal Huvelle said the settlement was neither fair nor reasonable, and asked the SEC why it pursued only two individuals in the case and why Citigroup shareholders should have to pay for the alleged missteps of Citi's executives. Citi and the SEC will provide additional legal briefs for a hearing set for mid-September. Premarket: C +1% (7:00 ET).

Insurers face revived class-action suit. In a 200-page ruling, a federal appeals court reinstated part of a nationwide class action lawsuit that accuses dozens of insurers and brokers of conspiring to rig the insurance market. The court restored antitrust and racketeering claims over alleged bid rigging centered on Marsh & McLennan (MMC) as well as racketeering claims against some brokerages. The original case involved more than 20 defendants, including AIG (AIG), Chubb (CB), Hartford Financial (HIG) and Travelers Co. (TRV).

CME Group faces antitrust probe. CME Group (CME) said it would continue to prevent investors from easily moving contract positions to or from smaller rival ELX Futures. It's a defiant position, as CME had received a letter from the Commodity Futures Trading Commission saying that the practice was sound and that regulators had opened an antitrust probe into CME's actions. CME maintains that the CFTC's assessment doesn't change the rules of its Chicago Board of Trade unit, which prohibits so-called exchange of futures for futures [EFF] in U.S. Treasury futures.

Berkshire bets on J&J. Berkshire Hathaway (BRK.A) raised its stake in Johnson & Johnson (JNJ) by 73% in Q2, adding 17.4M shares worth just over $1B at J&J's closing price yesterday. Berkshire also picked up 4.4M shares in Fiserv (FISV), while selling around 5M shares in ConocoPhillips (COP) and around 1.5M shares in Kraft (KFT).

Barclays settles sanctions case. Barclays (BCS) will pay $298M to settle criminal charges that it violated U.S. sanctions by dealing with banks in Cuba, Iran, Libya, Sudan and Myanmar. The settlement covers $500M of illegal transactions from 1995 through 2006.

Fed tightens mortgage rules. The Federal Reserve set new rules (I, II, III) on mortgage practices yesterday, including a ban on "yield spread premium" payments to brokers for steering borrowers to higher-cost loans and better disclosures of loan costs and "worst case" outcomes. The Fed also made two proposals (I, II) of a similar nature and will take public comment on them for 60 days, though the Fed intends for lenders to comply with the proposals beginning Jan. 30, 2011.

Looser lending standards but few takers. Big banks modestly eased their standards on small-business lending in Q2, but customers have shown little interest as they grapple with a slowing economy. Smaller banks are still cautious about easing lending conditions, and the modifications made by large banks are a far cry from conditions before the financial crisis hit.

BP raises $5B by pledging revenue. BP (BP) raised $5B by pledging revenues from oil sales for the first time. The company plans to use the money for general corporate financing rather than for its $20B escrow fund related to the Gulf oil spill. The cost of protecting against a default on BP debt over five years has fallen to 234 basis points from a record high of more than 600bps, but this is still more than four times higher than the level before the spill. Premarket: BP -0.4% (7:00 ET).

Nielsen boosts IPO size. Nielsen, the world's largest TV and consumer measurement company, is raising the size of its planned IPO to $2.01B from $1.75B. The company is owned by six private equity firms, including Blackstone (BX) and KKR (KKR), and its IPO reflects the surge in private equity-owned companies going public as P-E firms try to exit investments and provide returns for investors.


Trading on Wall Street was choppy Monday. The tech-heavy Nasdaq managed to advance, rising about 0.4%, while the Dow and S&P 500 ended little changed.

Economic reports in recent months have almost wholly pointed to slowing growth. That data has led some investors to worry that the country could fall back into recession, so reports indicating even modest improvement could provide reassurances that the economy is still expanding and give investors a reason to buy.

"Any clues that suggest that consumer spending is not about to turn negative is a plus," said Peter Cardillo, chief market economist at Avalon Partners.

The Dow is trying to snap a five-day losing streak, which has largely been driven by worries about second-half economic growth and the Federal Reserve's more cautious tone about the pace of the recovery. The index has dropped 3.7 percent during that stretch.


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