Market Outlook
Thursday, July 08, 2010



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

Monthly retail same-store sales

7:00… BoE Announcement

7:45… ECB Announcement

8:30 … Initial Jobless Claims

10:30… EIA Natural Gas Inventory

11:00… EIA Petroleum Inventories

3:00 PM … Consumer Credit

4:30 PM… Fed Balance Sheet

4:30 PM … Money Supply

Also the following company is reporting its quarterly earnings:-

International Speedway Corp. (ISCA)

STOCK-MARKET

Thursday saw U.S. stock futures edge lower as investors pause after a big two-day rally to prepare for key reports on the jobs market and retail sales, along with comments from the European Central Bank.

High unemployment and slow growth in consumer spending have been the biggest impediments to a strong, sustained recovery. So Thursday's weekly government report on initial jobless claims and retailers' reports on monthly sales will be closely watched to see if recent trends reverse.

Economic Concerns

Weekly Jobless Claims

Economists predict initial claims for unemployment benefits dropped last week, but not enough to signal employers are significantly ramping up hiring. Initial claims likely fell to 465,000 last week from 472,000 a week earlier, according to economists polled by Thomson Reuters. The Labor Department report is due out at 8:30 a.m. EDT.

Same-store Sales

Also out today is the major retailers' June same-store sales, with Reuters expecting overall sales to rise 3.5% compared to the previous month. Retail giant Wal-Mart (WMT) is not included in this equation as the company decided last year to stop reporting month same-store sales.

Top U.S. warehouse club operator Costco Wholesale Corp (COST) said June same-store sales rose 4 percent, but just missed expectations due to a holiday shift in the period.

"All bets are off until we start seeing how June (comparable) store sales came in," said Craig Peckham, equity trading strategist at Jefferies & Co in New York. "There is a lot of concern about just how well the U.S. consumer held up."

Consumer Credit

The government's report on May consumer credit is due in the afternoon. Credit is expected to have fallen by $3 billion after rising by $1 billion in April.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA) reclaimed the 10,000 level on Wednesday. The DJIA soared roughly 275 points on the session, overcoming its 10-day trend line in the process. Technically, the Dow could find support at the 10K level, with short-term support emerging near 9,900 should selling pressure re-emerge. Resistance lingers overhead at 10,200, where the venerable average's 10-week moving average resides.

The S&P 500 Index (SPX) closed a hair above 1,060 yesterday, and could find support in the area, with 1,040 providing a backstop should the bears regain control today. Overhead, the SPX is facing resistance near 1,080, which is home to its declining 10-week trend line.

Gold futures are hovering just above break-even, gaining 70 cents to trade at $1,199.60 an ounce in London.

• The U.S. dollar pulled back amid yesterday's equity love fest, but the greenback has once again found support in Asian trading overnight, rising against the euro, but slipping a bit against the yen. At last check, the U.S. Dollar Index was up 0.14% at 83.94.

Benchmark crude futures are poised to continue yesterday's advance, with the lead futures contract up 69 cents at $74.76 per barrel.

Bonds: Treasury prices rose, pushing the yield on the 10-year note to 2.97% from 2.98% late Wednesday.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,095,899 call contracts traded on Wednesday, compared to 570,560 put contracts.

The CBOE Market Volatility Index (VIX) retreated from the round-number 30 level yesterday, breaching former support in the 27-28 region. A continued advance from the SPX could send the VIX down for a test of its June lows near the 23-24 area.

Overseas Markets

Overseas markets rallied after the International Monetary Fund raised its world growth estimate for the year to 4.6 percent from 4.2 percent. The climb also comes before the European Central Bank wraps up a meeting where it is expected to discuss the strength of the banking sector in Europe.

European Concerns

The European Central Bank will meet on Thursday, with investors listening up for any comments from President Jean-Claude Trichet over European bank stress tests, the methodology of which was released the prior session. Interest rates in Europe, and in the U.K. -- with the Bank of England also meeting -- are not expected to change.

European banks rallied a second day lifting Europe, even as analysts criticized the stress test plans as too soft. There was no detail given on the losses banks would have to be able to withstand on their sovereign debt holdings, but the tests are widely reported to assume a 17% loss on Greek sovereign debt, 3% on Spanish government bonds and no losses on German debt.

European share markets rose in morning trading. Britain's FTSE 100 and France's CAC 40 both jumped more than 1%, while Germany's DAX edged up 0.4% in the early going.

In Europe at midday, London +1.4%. Paris +1.2%. Frankfurt +0.5%.

The euro rose to $1.2650, its highest level since May. The dollar was down against the euro but up versus the British pound and the Japanese yen.

Asian Concerns

In Asia, stocks rose with the Australian market hitting a fresh seven-day high after a stronger-than-expected June employment report, which lifted the Aussie dollar and the euro.

Earlier in Asia, markets ended mixed. Japan's benchmark Nikkei rose 2.8% and the Hang Seng in Hong Kong added 1%, while the Shanghai Composite fell 0.3%.

In Asia, Japan +2.8% to 9536. Hong Kong +1.0% to 20051. China -0.3% to 2415. India +1.0% to 17652.

Futures Trading

As of 6:45 a.m. in New York, the Dow Jones Industrial Average futures lost 14 points, or 0.14%, to 9966, the S&P 500 futures were down 1.8 points to 1057.50 and the Nasdaq 100 futures fell 3.5 points to 1786.80.

Futures: Dow flat. S&P -0.1%. Nasdaq -0.1%. Crude +0.9% to $74.76. Gold flat at $1199.

us-futures-july08,2010


Company News

Limited Brands Inc. (LTD) reported that its June same-store sales rose 6%. Analysts were expecting a rise of 3.2%, according to Thomson Reuters. Net sales for the month increased to $965.4 million from $891.8 million last year.

JPMorgan lowered its second-quarter earnings outlook for aluminum giant Alcoa Inc. (AA). The brokerage firm cited lower-than-expected aluminum prices. In a research note, analyst Michael Gambardella said he expects Alcoa to earn 10 cents per share for the latest quarter, down from his prior forecast for a profit of 15 cents per share. According to Thomson Reuters, the consensus is looking for second-quarter earnings of 12 cents per share from Alcoa.

Oppenheimer upgraded EMC Corp. (EMC) to "outperform" from "perform." According to the brokerage firm, "EMC's broad product portfolio favorable upgrade cycle and scale will enable it to deliver solid growth and better withstand another potential macro slowdown." Furthermore, Oppenheimer believes that storage "remains a top IT spending priority and we believe EMC is well positioned in this area."

Citi to sell P-E unit. Citigroup (C) has reportedly agreed to sell its private equity unit to Lexington Partners for more than $900M, marking one of the largest secondary transactions ever and a further move by Citi away from private equity. The $900M-plus price tag is a slight discount to the portfolio's net asset value and a small premium to its holding value. Premarket: C +0.8% (7:00 ET).

HSBC eyes South Africa's Nedbank. HSBC (HBC) is said to be in the early stages of evaluating a bid for South Africa's Nedbank (NDBKY.PK), and has appointed Lazard (LAZ) to advise on a takeover that would cost several billion pounds. Insurer Old Mutual, which owns roughly 54% of Nedbank, is not yet in talks with potential buyers. If it goes through, the deal will help HSBC bulk up its presence in Africa's largest economy and give it a strong foothold to expand in the fast-growing continent. Premarket: HBC -1% (7:00 ET).

Disney nears Miramax deal. Disney (DIS) is close to a deal to sell its Miramax film studio to construction tycoon Ron Tutor and investment firm Colony Capital for up to $700M in cash. An agreement is expected within a week, bringing an end to Disney's months-long attempt to sell the studio to various bidders.

IMF raises outlook. The IMF raised its global growth forecast, and expects the world economy to expand 4.6% this year vs. an April projection of 4.2%. The revision reflects stronger-than-expected growth in the first half of the year, with Canada and the U.S. leading advanced economies, but the IMF also warned that financial markets pose a continued risk to global recovery. The growth forecast for 2011 is unchanged at 4.3%, making the IMF the most recent agency, but certainly not the first, to foresee slowing growth next year as the recovery loses some steam.

Court sides with Telefonica on Vivo. Telefonica (TEF) got a boost in its bid for Vivo (VIV) after Europe's highest court ruled against Portugal's "golden share" in Portugal Telecom (PT). The Portugese government had used its golden share to block Telefonica's €7.15B ($9.04B) bid for PT's stake in Vivo, the firms' Brazilian mobile joint venture. PT shareholders had voted in favor of the deal. Following the ruling, Portugal is expected to divest its shares, but it could take months to implement the ruling. Premarket: TEF -0.5%, PT -1.8% (7:00 ET).

Liquidators sue Carlyle Group. Carlyle Group is being sued by liquidators of the buyout firm's hedge fund Carlyle Capital Corp. [CCC], which collapsed in March 2008 following poorly-timed investments in the mortgage-bond market. The liquidators hope to recover more than $1B representing capital losses at CCC. Carlyle called the suit "without merit" and plans to contest the charges.

WaMu faces fraud suit. Holders of $1B of securities issued by Washington Mutual (WAMUQ.PK) are suing the firm to invalidate an eve-of-bankruptcy forced exchange of their investment. As part of WaMu's September 2008 seizure, regulators ordered that $4B of outstanding trust preferred securities that had been issued by a special purpose entity of WaMu be exchanged for preferred stock of WaMu. Holders of $1B of those securities are claiming fraud, trying to undo the exchange and alleging that JPMorgan Chase (JPM) knew about WaMu's misrepresentations about the soundness of its bank.

GM sells steering unit. General Motors (MTLQQ.PK) will sell Nexteer Automotive, its steering-parts operation, to Beijing-based Pacific Century Motors. It's the largest move by a Chinese company into the U.S. auto-parts industry, and the sale will help GM refocus on its core auto business. Terms of the deal were not disclosed, but the deal is expected to total more than $450M.

BP accelerates relief well timeline. BP (BP) has set July 27 as its new target for plugging the leaking Gulf well, said company officials, weeks ahead of the deadline the company has discussed in public. The accelerated timeline is meant to show investors that the company has capped its growing financial liabilities. However, BP is also preparing several backup plans, partly at the urging of the U.S. government, in case its current operations fail.

Drilling ban goes to court. The oil industry will go head-to-head with the White House in court today over the government's six month deepwater drilling moratorium. The government is asking an appeals court to reinstate the ban, which had previously been blocked by a federal judge, and says drillers won't suffer permanent damage. However, the government's own energy forecasting unit said a drilling ban would reduce crude output by an average of 82,000 barrels per day next year, more than previously estimated.

EU sets stress test criteria. European regulators released details of the closely-watched stress tests now underway on European banks. The tests will cover 91 banks accounting for 65% of the region's banking assets and will assess potential bank losses in the event that Europe returns to recession or in the face of a sovereign shock that would generate losses on government bond portfolios. Additional details, including what would be considered a satisfactory minimum capital base for banks, were not provided. Results of the tests will be released on July 23.

Another delay for financial reform. Lawmakers itching to get the financial reform bill approved in the Senate may have to wait for more than just the end of the July 4 recess. West Virginia Governor Joe Manchin decided yesterday to delay naming a successor for the late Senator Robert Byrd until the state's attorney general gives an opinion on the state's election law. Manchin hopes the opinion will be delivered sometime next week, but a delay in replacing Byrd could complicate Democratic efforts to muster up the 60 votes needed, and would likely necessitate winning the support of at least three moderate Republicans.

Bank bailouts turns a profit. The government has thus far turned a profit on the bank bailout part of TARP, according to a report by investment bank Keefe, Bruyette & Woods. Returns have averaged 10% on the initial investment in 61 banks that have fully repaid their TARP aid. Around $137B of aid has already been paid back, with $65B still outstanding, so it's "pretty clear that unless the economy just craters, the bank portion of TARP will be profitable."

U.S. lender Wells Fargo (WFC) , which said it will cut 3,800 jobs and close a business unit that specialized in subprime and other loans issued through its consumer finance stores.

Conclusion

High unemployment and slow growth in consumer spending have been the biggest impediments to a strong, sustained recovery. So Thursday's weekly government report on initial jobless claims and retailers' reports on monthly sales will be closely watched to see if recent trends reverse.

Disappointing jobs reports have been piling up and helped drive stocks lower in recent weeks. Continued high unemployment has dragged down consumer confidence, which in turn has slowed spending. Consumer spending accounts for the bulk of economic activity. Without a rebound in jobs and sales, the economy is likely to continue to post only modest growth.

The Dow jumped back above 10,000 Wednesday after soaring 275 points. It was the second straight day of gains and the first back-to-back advance since the middle of June. Traders say the recent gains, which came after seven straight days of declines, were not tied to any one particular catalyst. Instead some investors jumped into the market thinking prices had been beaten down too much in the past couple of weeks.

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