Market Outlook
Wednesday, July 14, 2010

Wednesday has quite a lot of economic reports scheduled. They are:-

7:00… MBA Mortgage Applications

8:30… Retail Sales

8:30 … Import/Export Prices

10:00 … Business Inventories

10:30 … EIA Petroleum Inventories

1:00 PM… $13B, 30-Year bond auction

2:00 PM … FOMC minutes

Also the following companies are reporting their quarterly earnings:-

• The Progressive Corp. (PGR),

• Texas Industries Inc (TXI), and

• Marriott International Inc. (MAR)


Wednesday sees U.S. stock futures seemingly on hold this morning, as DJIA futures are flat with fair value ahead of key economic data from the retail sector and the Federal Open Market Committee.

A strong start to the quarterly reporting period has helped jolt markets. Stocks surged Tuesday on better-than-expected profit from aluminum giant Alcoa (AA).

The positive earnings news continued Tuesday, when Intel (INTC) reported its best quarter ever after the closing bell. The chipmaker reported strong demand from corporate customers and issued a sales outlook that topped Wall Street's estimates.

A setting for a seventh straight day of gains, after tech bellwether Intel Corp (INTC) reported better-than-expected quarterly earnings could be on the cards.

Economic Concerns

Investors will take in a slew of economic reports, including readings on retail sales, export and import prices and business inventories.

Retail Sales

The Commerce Department releases the retail sales report before the market open. Sales are expected to have fallen 0.2% in June after dropping 1.2% in May. Sales excluding autos are expected to have held steady after falling 0.8% in May.

Retail sales remain a vital component to the economy because shoppers account for the bulk of the nation's economic activity. High unemployment has kept customers out of stores and could hold retailers earnings in check.

Fed: The markets will also be looking out for minutes from the Federal Reserve's last policy meeting, which will include an economic forecast. Those minutes are due out at 2 p.m. ET.

**In Washington, the Treasury will sell $13 billion in 30-year bonds at 1 p.m.

Notes of Importance

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

The Dow Jones Industrial Average (DJIA) rocketed 147 points higher yesterday, challenging former support/resistance in the 10,400 area as well as its widely followed 200-day moving average. Should things go south, the Dow could find support near 10,300, or 10,250 on a steep sell-off, while resistance lingers at 10,400 and 10,600 following a sharp rally.

The S&P 500 Index (SPX) could find real difficulty in overcoming the 1,100 level today. Futures trading, on the broad-market index has revealed that sellers are lining up near this area of psychological support/resistance, and it may take a round of positive economic reports to change the SPX's outlook.

Gold futures edged down $1.10 to $1,212.40 an ounce in electronic trading.

The U.S. Dollar Index: The greenback traded mostly lower against its major rivals. The dollar index (DXY) , which tracks the currency's performance against a basket of other currencies, fell 0.1% to 83.587.

Benchmark crude futures dropped 41 cents to $76.74 a barrel in electronic trading on the New York Mercantile Exchange, giving back some of their gains after rallying nearly 3% in the previous session.

The American Petroleum Institute reported late Tuesday an unexpected increase of 1.7 million barrels in crude inventories. The Energy Information Administration will release its more closely watched data at 10:30 a.m. Analysts polled by Platts expect a 2.6-million-barrel reduction in commercial crude supplies.

Bonds: Treasury prices rose slightly, and the yield on the 10-year note was steady at 3.11%.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,691,019 call contracts traded on Tuesday, compared to 887,391 put contracts.Traders will want to keep an eye on the CBOE Market Volatility Index (VIX) today, as the "fear" barometer has pulled back to support near the 23-23.50 area. The VIX rebounded quickly from this region in mid-June, going on to peak near 37.50 on July 1.

Overseas Markets

The Intel news helped Asian shares posted broad-based gains as Japan's Nikkei Stock Average rose 2.7%. However, European equities traded mostly lower apart from the technology sector, with the Stoxx Europe 600 index (ST:SXXP) down 0.2% in late morning trade.

European Concerns

European share markets were lower in morning trading. The DAX in Germany lost 0.1% and France's CAC 40 fell 0.4%. Britain's FTSE 100 slipped 0.5%.

In Europe at midday, London -0.6%. Paris -0.7%. Frankfurt -0.1%.

The euro breached $1.27 even after Moody’s cut Portugal’s credit rating by two notches to “A1.” The currency benefited from a successful sale of Greek debt that drew solid demand. The euro was up 0.98% to $1.2711 as U.S. markets closed.

The dollar was up against the euro but down versus the British pound and the Japanese yen.

Asian Concerns

Earlier in Asia, the Nikkei in Japan surged 2.7%, the Shanghai Composite added 0.8% and the Hang Seng in Hong Kong rose 0.6%.

In Asia, Japan +2.7% to 9795. Hong Kong +0.6% to 20561. China +0.8% to 2470. India -0.3% to 17938.

Futures Trading

Futures: Dow +0.3%. S&P +0.4%. Nasdaq +0.8%. Crude -0.2% to $76.97. Gold flat at $1213.70.


Company News

Intel Corp. (INTC) also posted revenue that was above average analyst forecasts after the market close on Tuesday, allaying concerns about a slowdown in technology business spending. The stock, a Dow component, gained 6.1 percent to $22.30 in premarket trading.

Also in the tech space, chip equipment maker ASML Holding N.V. (ASML) reported stronger-than-expected quarterly earnings.

Yum! Brands Inc. (YUM) said it earned $286 million, or 59 cents a share, in the latest quarter. Excluding special items, the company would have earned 58 cents per share, topping analyst expectations. Revenue came in at $2.57 billion, also better than the consensus view for $2.56 billion in revenue. However, YUM is off nearly 3% heading into the open.

ASML Holding NV (ASML) said that it swung to a first-quarter net profit of 107.3 million euros, or 0.25 euro per share. Net sales totaled 741.8 million euros. Analysts were expecting a profit of 110 million euros on revenue of 728 million euros. Looking ahead, ASML said it expects second-quarter sales around 1 billion euros at a gross-profit margin of about 42%. The company also said that it is on track to exceed its peak sales record, which was set at 3.8 billion euros in 2007. ASML has jumped roughly 4.5% in electronic trading.

Some Interesting News

Some Toyota accidents pinned to driver errors. The Department of Transportation has analyzed dozens of data recorders from Toyota (TM) vehicles supposedly involved in sudden acceleration accidents, and has found that in many cases the throttles were wide open and the brakes were not engaged. In other words, some drivers who blamed their accidents on sudden acceleration problems were actually flooring the gas instead of stepping on the brake. Though the not-yet-released findings don't exonerate Toyota, they do lend credence to the firm's claims that after investigating nearly 2,000 sudden acceleration accidents, there have been no electronic glitches found in the computer-controlled throttle system.

Glaxo agrees to Avandia settlement. GlaxoSmithKline (GSK) has reportedly agreed to pay around $460M to settle the majority of lawsuits alleging its Avandia drug for diabetes can cause heart attacks and strokes. According to sources, Glaxo is settling around 10,000 of the 13,000 lawsuits it faces, for an average of at least $46,000 each. Analysts view this as very positive news, having assumed a worst-case scenario payout of $500,000 per case. Premarket: GSK +1% (7:00 ET).

German officials search Credit Suisse offices. German officials searched 13 Credit Suisse (CS) offices this morning, according to reports, as part of a probe into whether the bank helped clients evade taxes. Prosecutors announced in March that they had launched 1,100 tax evasion probes into Credit Suisse clients. Premarket: CS -2.3% (7:00 ET).

EU approval for airline tie-up. EU competition officials approved a proposed merger between British Airways (BAIRY.PK) and Spanish airline Iberia, saying the transaction, which will create Europe's third-largest airline by revenue, won't significantly hurt competition. Regulators also approved an alliance between the two airlines and American Airlines (AMR), which will allow all three to share revenue, combine their marketing and flight planning and collaborate on pricing on trans-Atlantic flights.

EU okays Comcast-NBC deal. The European Commission gave its approval to a landmark deal in which Comcast (CMCSA) will take a controlling stake in NBC Universal (GE), creating a media superpower that will control both content and its delivery. The deal is still under regulatory review in the U.S. Premarket: GE +0.4% (7:00 ET).

Small banks may struggle to repay TARP. A new report from the Congressional Oversight Panel found that the "one-size-fits-all" repayment terms of the Capital Purchase Program have been far more favorable to large banks than to small ones, and that "small banks may find it difficult or impossible to exit the program, particularly if the current distressed financial markets persist." The report recommends the Treasury take immediate steps to ensure as many banks as possible repay their TARP aid, and warns a lasting effect of TARP may be a more concentrated banking system.

Nokia Siemens interested in Motorola unit. Nokia Siemens Network is said to be in talks to buy Motorola's (MOT) telecom-equipment arm for as much as $1.1B to $1.3B, and a deal could be reached in the next few weeks. Nokia Siemens Network, which is a joint venture of Nokia (NOK) and Siemens (SI), has been trying to break into the U.S. market through acquisitions, and last year unsuccessfully tried to buy two units from bankrupt Nortel Networks.

Spotlight on BP's Libyan links. Lawmakers are calling for an investigation into BP's (BP) business interests in Libya, suggesting the oil company was part of a deal to free a convicted terrorist in exchange for oil licenses. BP said it is a "matter of public record" that it had shared its concern with the U.K. government at the slow progress in releasing Abdel Basset al-Megrahi, the Lockerbie bomber, on concerns a "delay might have negative consequences for U.K. commercial interests, including ratification of BP’s exploration agreement. However, we did not express a view about the specific form of the agreement... or make representations over the al-Megrahi case..." Premarket: BP +0.3% (7:00 ET).

Amedisys plunges on weakening profit, business. Amedisys (AMED) closed down 24.1% yesterday, after warning its business weakened in Q2 and that its profits will fall short of analysts' forecasts. Calling the quarter a "wake-up call," the company will ratchet down its growth and restructure its two segments. Acknowledging that Amedisys (as well as other home-health-care providers) is currently under investigation for possible abuse of Medicare rules, CEO William Borne said "it's a distraction. We are reluctant to call it a correlation, but the timing is not lost on us that we have this outside noise."

MBIA, AIG gain on Berkowitz investment, increased confidence. Bond insurer MBIA (MBI) and AIG (AIG) both saw strong gains in yesterday's trading after a filing late Monday showed Fairholme Capital Management's Bruce Berkowitz invested in the two firms. Berkowitz took an 11% stake in MBIA, and brought his AIG position up to 24.3% from 18.9%, making Fairholme AIG's largest private shareholder. MBIA closed +11.5%, AIG closed +6.8%.

Trade balance unexpectedly widens. May's trade balance came in at -$42.3B, wider than both the -$38.9B expected and the -$40.3B recorded in April. It's the widest trade deficit in a year and a half, and prompted some economists to downgrade their estimates for Q2 economic growth. Others, including Morgan Stanley economists, took a more positive view, pointing to the hefty gain in imports as a sign that business and consumer spending is picking up and that the economy in Q2 was the healthiest in four years: “With much of the upside surprise in imports in a surge in capital goods, the outlook for domestic investment looks even stronger."

Investors chipper over Intel results. Intel (INTC) handily beat analysts' earnings estimates (see details below), prompting the company to call Q2 the "best quarter in the company's 42-year history." Earnings per share, sales and margins all came in better than expected, and Q3 guidance was raised far above expectations. "The key reason everybody missed on it is - as they've been talking about for eight months - cloud infrastructure is just started," said one analyst, adding that the stock is "underpriced." Shares gained 6.7% in afterhours trading.


The Dow is up nearly 7 percent during its current six-day winning streak, its best stretch since last July. The recent run-up has erased nearly all the Dow's losses for the year.

Stocks had been mired in a slump in May and June as economic reports piled up showing the economy was not growing as fast as hoped. Rising debt problems in some European countries also added to the market turbulence.

However, early earnings reports have demonstrated that slow economic growth is not dampening corporate profits. Investors' concerns about a further slowdown later in the year have not been shared by companies so far, which have largely provided upbeat outlooks for future quarters. That reassurance has helped to combat the string of disappointing economic reports that came out in recent months.

There was “definitely a positive tone established early by Alcoa. I think the Street is looking for not only good earnings but good guidance. I think the market is pricing that in,” said Peter Kenny, managing director at Knight Capital Group. “Ten days ago we were reaching a point of extreme oversold after seven weeks of continuous sell pressure. Once that ceased, we’ve had some lift and that lift is more than welcome.”

With more than 20 companies in the S&P 500 releasing second-quarter earnings this week, investors remain wary about the strength of upcoming results and guidance.

"Earnings have been quite outstanding and the market has been in pretty good shape lately, but markets can't like everything about all the earnings reports," said Robert Brusca, chief economist at Fact and Opinion Economics. "At some point you're going to have to look for this to settle down."

“The enthusiasm from last week has trapped some bears. People are buying stocks almost out of a forced nature,” said Michael James, senior equities trader at Wedbush Morgan Securities. “The better market tone is certainly encouraging portfolio managers to dip their toes into the water.”

"The key focus today will be on U.S. retail sales," said strategists at Deutsche Bank in a note to clients. Analysts expect headline sales to fall by 0.3% in June and sales excluding autos to drop by 0.1%, they said.

"It will be a quiet day for reporting as markets get ready for J.P. Morgan's results on Thursday," the Deutsche Bank strategists added.

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