Market Outlook
Tuesday, May 18th, 2010

Monday presents severaleconomic reports. The schedule for today is:-

7:45 ICSC Retail Store Sales

8:30 Producer Price Index

8:30 Housing Starts

8:55 Redbook Chain Store Sales

12:20 PM Fed's Pianalto: Forecasting in Uncertain Times

5:00 PM ABC Consumer Confidence Index

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

• Abercrombie & Fitch Co. (ANF),

• Ambac Financial Group Inc. (ABK),

• The Home Depot Inc. (HD),

• Wal-Mart Stores Inc. (WMT),

• Analog Devices Inc. (ADI), and

• Hewlett-Packard Co. (HPQ).

It was good to see the bulls come back strong yesterday to recover the loss of some 180 points to finish in the black. Maybe the investor is becoming fed-up with the continuous dramas that have kept filtering in from the EU.

The U.S. economy, from data that we have received in the last month or so, is obviously improving and therefore the markets should keep reflecting this. The companies are presenting an array of fairly good quarterly reports and most economic indicators are positive.

The New York manufacturers saw business conditions improve for a 10th consecutive month in May, according to the Federal Reserve Bank of New York's Empire Manufacturing Survey released Monday, though at a slower pace than in April. The report also showed further gains in the labor markets this month. The Empire State's business conditions index was 19.1 in May, far lower than the reading of 30.7 expected by economists.

Options trading was brisk on Monday, as more than 8.1 million calls traded compared to 7.4 million puts being traded. The total put/call volume ratio came in at 0.91, while the total put/call open interest ratio came in at 0.91. The International Securities Exchange (ISE) had a put/call volume ratio of 0.97, and the Chicago Board Options Exchange (CBOE) had a put/call volume ratio of 0.93. Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,491,346 call contracts traded on Monday, compared to 1,020,752 put contracts.

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

• The Dow Jones Industrial Average (DJIA) seems to have found short-term support at the 10,600 level and its’ 20-week moving average appears to have held.

• The S&P 500 Index (SPX) remains pinned between resistance at its 20-week moving average (near 1,140) and support at its 50-day trend line.

• Gold futures have dropped $14.80 to $1,213.30, as improving investor sentiment in Europe is undermining the precious metal's safe-haven appeal.

• The U.S. Dollar Index still remains strong against the euro but is pulling back slightly this morning, slipping 0.09% to $86.13 as the euro gains strength amid rising confidence in Europe.

• On the sentiment front, it appears that skepticism it beginning to make a healthy comeback, as the 21-day moving average of the Chicago Board Options Exchange (CBOE) single-session, equity only put/call ratio has reached its highest level since March 19.

• Crude for July delivery was up 2.39% at $74.97 per barrel.

Overseas Markets

Overseas trading looks strong this morning, as most of the foreign indexes are in positive territory. In Asia, the major indexes closed mixed in a choppy session. A late turnaround in U.S. markets overnight, when the dollar pulled back from a four-year high against the euro, failed to inspire investors as they remained wary of the problems in Europe. In fact, news that the U.S. Senate would oppose International Monetary Fund (IMF) bailout packages to countries that are unlikely to repay them, raised concerns about the spread of Greek debt problems. Meanwhile, European shares rose in early trading, with banks and commodity stocks gaining, on hopes that euro zone finance ministers are making progress with details of a rescue package.

In Asia, Japan +0.1% to 10243. Hong Kong +1.2% to 19945. China +1.4% to 2595. India +0.2% to 16876.

In Europe, at midday, London +1.0%. Paris +1.6%. Frankfurt +1.3%.

Futures Trading

it appears that we have a positive bias heading into the open, with futures on the Dow Jones Industrial Average (DJIA) and Standard & Poor's 500 (SPX) trading roughly 42 points and 4.5 points above fair value, respectively.

Futures: Dow +0.4%. S&P +0.5%. Nasdaq +0.5%. Crude +2.6% to $71.93. Gold -1.1% to $1214.20.

Also several companies have announced their quarterly reports which seem to be supporting or surprising analysts’ predictions. These are:-

A - may 18, 2010

Agilent Technologies Inc. (A)

Agilent Technologies Inc. (A) reported it swung to a second-quarter net income of $108 million, or 31 cents a share, from a loss of $101 million, or 29 cents a share, in the same quarter last year.

Excluding charges, the company would have earned 43 cents a share. Revenue rose 16% to $1.27 billion in the latest quarter. Analysts had forecast Agilent to hand in a profit of 42 cents on revenue of $1.25 billion.

HD - may 18, 2010

Home Depot Inc (HD)

Home Depot Inc (HD) reported a better-than-expected quarterly profit and boosted its earnings forecast for the year after it saw strong demand for gardening products and energy-efficient appliances.

The news from the top U.S. home-improvement chain came a day after rival Lowe's Cos (LOW.N) gave a disappointing profit forecast for the rest of the year, despite strong quarterly results.

Home Depot raised its forecast for net earnings from continuing operations to $1.88 a share from $1.79. Analysts were expecting $1.87 a share. Its shares rose O.4 percent in premarket trading. Both chains had a strong spring selling season as many U.S. consumers spruced up lawns and gardens and sought to benefit from a federal stimulus for energy-efficient appliances.

Also more consumers are showing a renewed interest in investing in their homes after a long hiatus.

But Lowe's had dampened hopes for a robust U.S. economic recovery in the second half of 2010, calling it "a year of transition" for the home improvement industry and indicating investors will have to wait until 2011 for significant growth.

Sanford C. Bernstein analyst Colin McGranahan, who has a "market perform" on both stocks, said Home Depot's forecast was much better than Lowe's. Lowe's had given a lackluster second-quarter outlook and the mid-point of its full-year forecast was below his expectations.

For the full year, Home Depot expects sales to increase about 3.5 percent, up from a prior view of a 2.5 percent rise. Home Depot's net income rose to $725 million, or 43 cents a share, in the first quarter ended on May 2 from $514 million, or 30 cents a share, a year earlier.

Excluding items, the profit was 45 cents a share, beating the analysts' average forecast of 40 cents.

Sales rose 4.3 percent to $16.86 billion, exceeding Wall Street expectations of $16.37 billion. Same-store sales for the first quarter were up 4.8 percent, with sales at its U.S. stores open for at least a year up 3.3 percent.

ANF - may 18, 2010

Abercrombie & Fitch Co. (ANF)

Abercrombie & Fitch Co. (ANF) narrowed its first-quarter loss to $11.8 million, or 13 cents per share, from a loss of $59.2 million, 68 cents per share, last year. Net sales rose to $687.8 million from $601.7 million. Wall Street was looking for a loss of 12 cents per share on sales of $687.8 million. Shares of ANF were flat in electronic trading.

Some Interesting news-

• Just after Fidelity National Information Services (FIS) finally confirmed that it's considering a leveraged buyout approach, sources said a consortium led by Blackstone (BX) has dropped a plan to bid for the firm. The consortium, which also included THL Partners and TPG Capital, had reportedly offered more than $15B, but Fidelity National wanted a substantially higher price.

• Australia's Macarthur Coal rejected a recently-reduced bid from Peabody Energy (BTU), calling the A$3.8B ($3.3B) cash offer too low. Macarthur also said that its two largest shareholders, Citic Group and ArcelorMittal (MT), were unlikely to support Peabody's bid.

• Chris Oynes, the top-ranking official in charge of regulating offshore drilling at the Minerals Management Service, has resigned in the wake of the oil spill in the Gulf of Mexico. The MMS, and Oynes by extension, is facing heavy scrutiny over safety inspections and criticism for having a "cozy relationship" with the energy industry; the White House is likely to establish a presidential commission to investigate the accident. Last week, officials also announced plans to split the MMS into two separate bodies. Meanwhile, BP (BP) said its stop-gap measures are siphoning off around 40% of the oil leaking into the Gulf, twice as much as it previously estimated.

• Protesters are already gathering ahead of Massey Energy's (MEE) annual meeting today, where CEO Don Blankenship and several board members will face the first challenge to their leadership in four years. Shareholders are trying to block the re-election of three directors in protest over the company's safety record and the April 5 mine accident that killed 29 people. Separately, congressional investigators may compel testimony from witnesses over the mine explosion, and Blankenship will appear before a Senate subcommittee later this week.

• The Treasury said yesterday it will lose $1.6B on a loan made to Chrysler in early 2009. Chrysler repaid $1.9B of a $4B government loan it received before filing for bankruptcy, and the Treasury hopes to get another $500M out of the restructured company. The government does not intend to boost its stake in Chrysler to compensate for the loss, and may lose another $1.9B on a separate loan made to the firm.

• Thomas Weisel Partners (TWPG) and one of its former executives have been charged with securities fraud. A civil complaint filed by the Financial Industry Regulatory Authority accuses Thomas Weisel of "stuffing" three corporate accounts with auction rate securities in order to raise $15.7M to pay executive bonuses. Thomas Weisel, which was acquired last month by Stifel Financial (SF), declined to comment.

• Lions Gate Entertainment (LGF) is considering whether to negotiate with activist investor Carl Icahn over his hostile $7/share bid for the company. In an SEC filing, Lions Gate said its board believes "it would now be appropriate to respond to the Icahn Group's recent communications to determine whether there may be a basis on which to engage in negotiations and will do so today." The filing also revealed that the firm created a $16M trust to pay a cash severance to senior executives terminated without cause in connection to a change in the company's ownership.

• Warren Buffett's Berkshire Hathaway (BRK.A) sold more than 31M shares of Kraft (KFT) in the first quarter, a stake worth almost a billion dollars at yesterday's closing price. The 22.8% reduction came as Buffett heavily criticized Kraft for using its stock to acquire Cadbury's. Post-sale, Buffett remains Kraft's largest shareholder with a 6.3% stake.

• The FTC will likely launch a preliminary inquiry into Google (GOOG) following the firm's disclosure that it accidentally collected data from unsecured wireless networks over the course of several years. The inquiry process is only just beginning and may not lead to any action, but even the possibility of an inquiry is notable as Google has come under increased regulatory scrutiny as of late.

• The FDIC owns more than 250 collateralized debt obligations that it inherited from small banks that failed, and that number is growing as regulators continue to close banks. While the bonds have a book value of $400M, FDIC officials concede that many of these toxic assets "will have little or no market value." The agency plans to auction off at least some of the CDOs this summer, but will have to write down the value of what it's unable to sell, saddling taxpayers with the losses.

• The SEC and major exchanges are reportedly considering tighter market-wide circuit breakers to temporarily stop trading. Sources said the proposal includes trading halts of various amounts of time when the market falls 5%, 10% and 20%. There are broader circuit breakers already in place, but these weren't activated during the May 6 market plunge. Details of the possible changes could be announced as soon as today.

• Boeing (BA) has decided to participate in a multi-billion dollar tender for the U.S. Air Force, despite concerns that rival bidder EADS (EADSF.PK) may have an advantage because it receives government subsidies. The contract for 179 refueling planes is valued at up to $50B.

• Washington Mutual submitted a revised restructuring plan yesterday that would return $7B to creditors, in an attempt to end 18 months of legal wrangling. Though the court documents dropped language that said the FDIC disagreed with the plan, it's unclear whether the FDIC supports the revision, as sources said negotiations are ongoing and the FDIC is not yet on board. WaMu first announced a settlement in March, but the FDIC rejected the original plan.

• The Senate moved yesterday to start wrapping up debate on financial reform, paving the way for a final vote on the legislation potentially as soon as this week. Before a vote, several major issues must still be resolved, including the regulation of over-the-counter derivatives and the power of state bank regulators, while banks are pushing to weaken parts of the bill before the legislation is finalized.

• Toll Brothers (TOL) CEO Robert Toll will step down as chief executive next month after having led the company for more than forty years. Executive Vice President Douglas C. Yearley will become the new CEO. Toll will remain as an executive chairman.

• Nearly a quarter of the 1.2M homeowners offered help through the government's mortgage-modification program have dropped out of the program so far, according to a newly released report. Those who are weeded out of the program often end up worse off than if they had never participated in the first place, having exhausted their savings and delayed taking actions that could have given them fresh starts in more affordable homes.

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