Market Outlook
Tuesday, June 29, 2010

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

7:45… ICSC Retail Store Sales

8:55 … Redbook Chain Store Sales

9:00 … S&P Case-Shiller Home Price Index

10:00 … Consumer Confidence

10:00 … State Street Investor Confidence Index

12:00 PM… Tsy Krueger: 'Access to Capital for Small Businesses and Entrepreneurs Summit'

3:00 PM … USDA Ag. Prices

5:00 PM … ABC Consumer Confidence Index

Also the following company is reporting its quarterly earnings:-

• General Mills Inc. (GIS)


Tuesday saw U.S. stock futures drop due to worries over Chinese and global economic growth which is in the spotlight ahead of the release of key indicators later in the week.

Economic Concerns

**The Conference Board's U.S. confidence gauge for June is due for release around 10 a.m. Eastern, with markets expecting a slight decline.

"We expect consumer confidence to remain at a higher level than in the first quarter and increase further in the coming months as momentum in the labor market recovery builds," said economists from Barclays Capital.

Economists polled by Thomson Reuters forecast the Conference Board's consumer confidence index fell to 62.8 from 63.3 last month. The index needs to climb above 90 to indicate the economy is on solid footing. It is set to be released at 10 a.m. EDT.

Consumer confidence could be waning, in part, because there have been few signs that strong job growth is on the horizon. The monthly employment report due out Friday is expected to show the unemployment rate rose 0.1 percent to 9.8 percent in June.

**The S&P/Case-Shiller April home price index is due for release at 9 a.m.

This report is expected to show home prices rose in April has failed to combat the concerns swirling around the market. The S&P/Case-Shiller home price index, which measures home prices in 20 large metropolitan areas, likely rose 3.4 percent compared with the year-ago period. That's better than the 2.3 percent jump in March.


The Energy Sector

BP oil spill: Tropical Storm Alex was set to strengthen into a hurricane on Tuesday, delaying BP Plc's (BP) efforts to increase siphoning capacity at the gushing oil well in the Gulf of Mexico where some companies evacuated workers.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA) could be on a collision course with 10,000 today, as futures on the DJIA are trading about 115 points below fair value.

The S&P 500 Index (SPX) is trading about 14.5 points below fair value, and could find itself pulling back to within reach of support in the 1,060-1,065 region - an area that was home to support in February.

Gold futures are attempting to make some headway amid the rising global uncertainty, but a strong U.S. dollar is creating significant headwinds. As such, the front-month gold contract was last seek higher by about 80 cents at $1,239.40 an ounce in London.

• The U.S. dollar and Japanese yen are both headed higher in early currencies trading, as investors are fleeing the equities market in favor of safer opportunities. Sparking this flight to safety is the realization that the European Central Bank's one-year funding program is set to expire. At last check, the U.S. Dollar Index was up 0.52% at 86.10.

Benchmark crude futures were last seen lower by more than 2% at $76.68 per barrel. The rise in the dollar and news that a Gulf of Mexico storm will likely miss the BP oil spill region has driven crude oil prices lower heading into the open.

Bonds rose, with yields on 10-year Treasury bonds falling 5 basis points to 2.97%.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 807,671 call contracts traded on Monday, compared to 552,519 put contracts.

• The CBOE Market Volatility Index (VIX) retreated from the round-number 30 level in yesterday's trading, but the index could be headed sharply higher if futures trading on the SPX are any indication.

Overseas Markets

Overseas trading is deeply mired in the red this morning, with none of the foreign indexes trading anywhere near positive territory.

European Concerns

European stocks tumbled in morning trade, knocked lower by renewed fears over funding in the euro zone ahead of bank repayments to the European Central Bank this week. Banks must repay 442 billion euros ($545.5 billion) to the ECB on Thursday, leaving a potential liquidity shortfall in the financial system of over 100 billion euros.

Also, European indexes opened sharply lower after Greek workers again walked out of their jobs to protest steep budget cuts. The workers walked off their jobs as part of another nationwide strike to protest the austerity measures the government put in place to try and reduce debt. The austerity measures were a requirement for Greece to receive a bailout from other European Union members and the International Monetary Fund.

The new round of protests sparks fresh concerns about how well European countries will be able to stick to austerity plans in the face of public outcry against them. Investors have been worried for months that Europe's economy would grind to a halt and drag down the global economy with it.

European share markets pulled back in morning trading. The CAC 40 in France and Germany's DAX were both 2% lower in the early going, and the FTSE 100 in Britain fell 1.7%.

In Europe at midday, London -2.0%. Paris -2.5%. Frankfurt -2.2%.

• The FTSEurofirst 300 .FTEU3 index was down 1.7 percent, while the Euro STOXX 50 .STOXX50E, the euro zone's blue chip index, was down 2.4 percent, falling towards a key 23.6 percent retracement of the index's fall from its April high of 3,027.14 to its May low of 2,448.10.


The euro sank below the $1.22 level. The currency has been seen as a proxy for confidence in Europe's economy following Greece's near bankruptcy and steep budget cuts around the continent to combat rising deficits. World markets have regularly dropped along with the euro in recent months.

Asian Concerns

In Asia, regional markets were dragged lower by a 4.3% plunge in China's Shanghai Composite, as traders reacted to a correction in the country's leading economic indicators. Specifically, the Conference Board reported that leading indicators rose 0.3% in April, which was revised lower from a previously reported advance of 1.7%. The weaker-than-expected data prompted a flight to safety, benefiting U.S. and Japanese government debt. The wave of selling pressure cascaded over into Europe, as concerns over global economic growth gained momentum.

The Japanese government reported Tuesday that export demand moderated and household spending dropped last month. Unemployment also rose unexpectedly, climbing for the third straight month.

Also, Chinese shares tumbled as investors worried that an initial public offering for the Agricultural Bank of China would draw money away from other stocks.

Earlier in Asia,

Japan's Nikkei average .N225 slipped 1.3 percent as exporters fell on a stronger yen, with the benchmark index poised for its worst quarter since Lehman Brothers failed in 2008.

The steepest decline was seen in China, where the Shanghai Composite sank 4.3%. The Hang Seng in Hong Kong finished 2.3% lower and Japan's Nikkei lost 1.3%.

In Asia, Japan -1.3% to 9571. Hong Kong -2.3% to 20249. China -4.3% to 2427. India -1.2% to 17557.

Futures Trading

As of 6:55 a.m. in New York, the Dow Jones Industrial Average futures were down 97 points, or 0.96%, to 9990, the S&P 500 futures were lower by 11.4 points to 1059.50 and the Nasdaq 100 futures lost 22.25 points to 1813.50.

Futures: Dow -1.1%. S&P -1.3%. Nasdaq -1.4%. Crude -1.9% to $76.78. Gold -0.2% to $1236.20.


Company News

3M Company (MMM) said it expects second-quarter sales of $6.6 billion to $6.75 billion due to growth of 16% to 18% in organic sales volume. Analysts are currently projecting revenue of $6.52 billion. 3M is slated to release its second-quarter earnings and 2010 outlook on July 22.

Barnes & Noble Inc. (BKS) reported a fourth-quarter loss of $32 million, or 58 cents per share. Excluding one-time benefits, the bookseller would have reported a loss of 89 cents per share for the latest quarter. Analysts estimated a loss of 82 cents per share. Revenue rose to $1.32 billion from $1.11 billion in the previous year's quarter.

Micron Technology (MU) posted a third-quarter profit of $939 million, or 92 cents per share, as revenue more than doubled to $2.29 billion. Wall Street was expecting earnings of 43 cents per share on $2.11 billion in sales.

Some Interesting News

• U.S. drugmaker Abbott Laboratories Inc (ABT) is looking to sell its flu vaccine business in a deal that could fetch 500 million euros ($614 million), the Wall Street Journal said, citing people familiar with the matter.

• Shares of 3M Co (MMM) rose 0.7 percent in extended trading on Monday after the company gave a second-quarter sales outlook, while shares of Micron Technology Inc (MU) fell 3.2 percent in extended trading after the company reported its third-quarter results.

Google blinks in China showdown. Google (GOOG) said it will change how Chinese users access its search engine, three months after Google stopped self-censoring its search results in China. Instead of automatically redirecting users to Google's Hong Kong based site, an approach that Chinese officials called "unacceptable," visitors to the China site will be able to click on an icon that transports them to the newly revamped Hong Kong site, which includes some services that don't require self-censoring. Though the change is a relatively minor one, it represents a loss of face for Google, which is backing away from its commitment to provide censor-free search in China or no search at all. It's also unclear whether the Chinese government will even approve the change and renew Google's license, which expires tomorrow.

Bidding war erupts for Chloride Group. Emerson Electric (EMR) offered to buy U.K.-based Chloride Group for £997M ($1.5B) in an effort to block ABB's (ABB) planned £860M takeover of the British firm. ABB said it will consider its options before making a further statement.

Buyers try to book ITA Software deal. Several companies are reportedly considering a purchase of ITA Software, the privately-held company that provides software for airline and online travel companies. ITA has been in exclusive talks with Google (GOOG) for more than three months, but sources said a deal hasn't yet materialized because of antitrust concerns and because ITA wanted a bid of around $1B and Google's offer was closer to $700M. Expedia (EXPE), and Travelport were also said to be bidders, and some of them have already made unsolicited cash-and-stock offers.

Abbott looks to sell flu-vaccine business. Abbott Laboratories (ABT) is looking to sell the flu-vaccine business it picked up in its 2009 purchase of Solvay's (SVYSY.PK) pharmaceutical unit. A sale could be worth as much as €500M ($619M) and would continue a recent wave of consolidation in the pharmaceutical industry. Potential bidders include such heavyweights as GlaxoSmithKline (GSK) and AstraZeneca (AZN).

Supreme Court rules on Sarbox. The Supreme Court struck down part of the Sarbanes-Oxley Act that created the Public Company Accounting Oversight Board [PCAOB] to police auditors of public companies, saying it violates the constitution; Congress had created the PCAOB to replace the accounting industry's own regulators after the damaging scandals at Enron and WorldCom. Though the ruling that part of Sarbox is unconstitutional sounds serious, the Court took issue with a very limited aspect of the law. Sarbox, as a whole, remains "fully operative" and Chief Justice Roberts dispensed with the status of the rest of the law in a single paragraph.

Supreme Court won't consider tobacco case. The Supreme Court refused to review a landmark ruling that found the tobacco industry had engaged in a conspiracy to deceive the public about the dangers of smoking. Both cigarette makers and the government had appealed the ruling; cigarette makers, for obvious reasons, wanted the racketeering charges overturned, while the government was trying to revive its rejected attempt to get the tobacco industry to forfeit up to $280B in profits. The ruling is "a surprising and favorable industry development," said one analyst, removing the possibility of a large-scale financial decision against tobacco firms. In yesterday's trading, MO +3.25%, RAI +4.05%, LO +2.5%, PM +0.85%.

ECB plays down risks of lending program expiry. The ECB is trying to reassure markets that the expiry of its €442B ($547.5B) bank-lending program this Thursday won't destabilize the financial system. The 12-month lending facility was introduced last year to encourage private-sector lending and ensure the region's banks had sufficient liquidity. The program has since become a lifeline for banks in highly-indebted countries like Greece and Spain, and Spanish banks have called it "absurd" that the ECB isn't renewing the program. Euro borrowing costs in the interbank market rose to an 8-month high yesterday ahead of the program's expiry, and the euro is falling on concerns Europe's financial system will now be more susceptible to threats. Euro -0.7% vs. the dollar.

NY Fed measures systemic risk of BP collapse. The Federal Reserve Bank of New York has reportedly been examining major financial firms' exposure to BP (BP) to ensure that Wall Street and the global financial system won't be at risk in the event the oil giant buckles under the costs of the Gulf spill. Sources said the Fed found no systemic risk, and didn't ask banks to alter their credit relationships with BP. However, some banks, of their own initiatives, are changing the terms of their business with BP. Credit Suisse (CS) has reportedly lowered its collateral requirement threshold to $10M from $30M, while Bank of America (BAC) has shortened the time frame of oil trades with BP to one year. Premarket: BP +0.8% (7:00 ET).

Oil rivals may team up on Alaskan project. A joint venture between BP (BP) and ConocoPhillips (COP) planning to build a massive natural gas pipeline from Alaska to Canada and the 48 states is said to be in early talks to join a competing project by TransCanada (TRP) and Exxon Mobil (XOM). The BP-ConocoPhillips project, known as Denali, would likely be tabled as the companies worked on the $36B TransCanada project. TransCanada denied talks were underway to merge the pipeline projects.

Tesla prices above IPO expectations. Electric car maker Tesla priced shares above the expected range in its IPO yesterday, reported a market source, selling 13.3M shares at $17 each vs. initial plans of 11.1M shares at $14-16 each. Tesla CEO Elon Musk told investors the IPO was more of a technology play than a traditional car maker stock, saying "we are a Silicon Valley company. Closer to an Apple or Google than to a GM or Ford in the way we operate the company." However, analysts remain skeptical, and say shares of money-losing Tesla may not appreciate until the company rolls out its second car, the Model S, in 2012. Shares begin trading on the Nasdaq today under the ticker TSLA.

Siemens to set up its own bank. Siemens (SI) plans to set up its own bank, a move highlighting how major industrial groups are trying to reduce their reliance on banks post-crisis. The company will use a banking license primarily to expand its sales finance business, but also to be able to deposit some of its current €9B ($11B) of cash at the Bundesbank and to broaden its sources of financing. Premarket: SI -2.9% (7:00 ET).

Growing concerns on Glaxo's Avandia. Two studies released yesterday said the GlaxoSmithKline (GSK) diabetes drug Avandia is unsafe, adding to the controversy over a drug linked to an increased risk of heart attack and heart failure. A vote on whether to withdraw the drug from the market will likely come at a two-day meeting next month of outside advisers to the FDA.

Japan's recovery may be slowing. Japan's industrial production slipped in May, as did household spending, and the unemployment rate unexpectedly increased. The data points suggest Japan's economic recovery is slowing down, and may serve as a warning to politicians that it's too soon to tighten fiscal policy in favor of deficit reduction.

• Spurned U.S. suitor Emerson Electric (EMR) upped its cash offer for Chloride (CHLD.L) to $1.5 billion, seeking to tempt the British group away from a recommended $1.25 billion deal from Switzerland's ABB (ABBN.VX).


Investors are worried that a global rebound is weakening. Those fears appear to have spread to consumers as well. A report due out Tuesday on consumer confidence is expected to show confidence fell in June after three straight months of gains.

Also, worries seem to be focused on China, which has barely any outstanding debt, as the Conference Board sharply revised lower its April leading economic indicator for the country. The Shanghai Composite lost 4.3%, with the move by the Agricultural Bank of China to cut the price range for the local portion of its estimated $23 billion initial public offering also weighing on Chinese equities.

Traders may also be positioning ahead of Thursday's expiration of a 442 billion euro one-year tender from the European Central Bank and the U.S. nonfarm payrolls report on Friday.

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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