Market Outlook
Wednesday, July 21, 2010



Wednesday has only a few economic reports scheduled. They are:

7:00… MBA Mortgage Applications

10:00 … Hearing: 'Economy and Monetary Policy'

10:30… Hearing: TARP Update (SIGTARP Barofsky, COP's Warren)

10:30 … EIA Petroleum Inventories

2:00 PM… Bernanke: Semiannual Monetary Policy Report to Congress

Also the following company is reporting its quarterly earnings:-

• Abbott Laboratories (ABT),

• The Coca-Cola Co. (KO),

• EMC Corp. (EMC),

• Wells Fargo & Co. (WFC),

• Baidu Inc. (BIDU),

• CA Inc. (CA),

• eBay Inc. (EBAY),

• Netflix Inc. (NFLX),

• QUALCOMM Inc. (QCOM),

• Starbucks Corp. (SBUX),

• Western Digital Corp. (WDC), and

• Xilinx Inc. (XLNX) .

Wednesday Outlook

Wednesday sees U.S. stock futures rise modestly as investors focus more on an upbeat earnings report from Apple than disappointing results from Yahoo.

Despite plunging to a triple-digit loss early in the session, the Dow Jones Industrial Average (DJIA) came roaring back to finish Tuesday with a gain of roughly 75 points. The bulls are looking to extend the rally this morning, drawing strength from strong earnings from Apple Inc. and expectations that Federal Reserve Chairman Ben Bernanke may announce policy accommodation measures in testimony before the U.S. Senate Banking Committee later today.

Traders are trying to get a read on the economy through companies' profit reports, but earnings have been mixed over the past week, which has led to volatile trading. Profit is mostly improving, but sales are not growing fast enough at some companies to reassure investors the recovery is picking up steam.

More certainty about the health of the economy could come from testimony by Federal Reserve chairman Ben Bernanke. He is scheduled to begin two days of testimony on Capitol Hill Wednesday to discuss the Fed's view on the strength of the economy. Bernanke is likely to say the economy isn't headed back into recession, but he is also expected to be cautious in his optimism for near-term growth. Bernanke will likely repeat a pledge that the Fed will provide any support needed to further boost the recovery.

Economic Concerns

Wall Street reform: President Obama is due to sign the financial reform bill at 11:30 a.m. ET. The sweeping legislation aims to protect consumers and increase oversight of risky bets.

Strategists at Deutsche Bank said the spotlight Wednesday will be on Bernanke's monetary policy report to the U.S. Senate Banking Committee.

"Expectations that Bernanke may announce policy accommodation measures seemed to help risk assets recover from the softer housing-starts data and Goldman Sachs' earnings and revenue miss," they wrote in a note. Markets will "likely listen carefully to decipher any hints about the possibility of a U.S. double-dip [recession]."

Bernanke will start speaking at 2 p.m. Eastern time.

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 find resistance out of the gate this morning, with former support at the 10,250 level looming large as a potential hurdle. Above this area, the 10,400 level could cap any extended rallies by the blue-chip barometer.

The S&P 500 Index (SPX) rebounded from its May "flash crash" low yesterday, and is now challenging former support/resistance near 1,085. Should the SPX push past this hurdle, longer-term resistance remains overhead at the 1,100 level.

Gold futures up $1.70 at $1,193.40 in London.

The U.S. Dollar Index: The U.S. dollar continues to gain ground in overseas trading this week. Heading into the open this morning, the U.S. Dollar Index has advanced 0.26% to trade at 82.96.

Benchmark crude futures have added 34 cents to trade at $77.92 per barrel in electronic trading.

Bonds: Bond prices inched higher Wednesday, meaning some investors are still seeking safety in Treasurys and avoiding the volatile stock market. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.95 percent from 2.96 percent late Tuesday.

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,246,606 call contracts traded on Tuesday, compared to 661,150 put contracts.

Overseas Markets

International bank lending rose for the first time in over a year during the first quarter, expanding by over $600 billion, or 2 percent, ending a long period of contraction during the financial crisis, the Bank for International Settlements (BIS) said.

In Frankfurt, European Central Bank President Jean-Claude Trichet is expected to meet with European bank executives. The meeting comes ahead of the release of the results from the European bank stress tests on Friday.

European Concerns

European share markets rallied in early trading. The FTSE 100 in Britain jumped 1.5%, France's CAC 40 surged 1.5% and Germany's DAX rose 0.9%.

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

The euro fell 0.3% to $1.2851.

The Swiss National Bank said that the sharp rise of the Swiss franc, particularly against the euro, resulted in exchange-rate losses of more than 14 billion Swiss francs ($13.3 billion) in the first half of the year.

Asian Concerns

Earlier in Asia, markets finished mixed. The Hang Seng in Hong Kong gained 1.1% but Japan's Nikkei fell 0.2%. The Shanghai Composite rose 0.3%.

In Asia, Japan -0.2% to 9279. Hong Kong +1.1% to 20487. China +0.3% to 2535. India +0.6% to 17977.

Futures Trading

As of 7:15 a.m. in New York, the Dow Jones Industrial Average futures were up 10 points, or 0.1%, to 10188 while the S&P 500 futures were higher by 13.5 points to 1853.25 and the Nasdaq 100 futures were up 13.5 points to 1853.25.

Futures: Dow +0.1%. S&P +0.2%. Nasdaq +0.5%. Crude +0.5% to $77.94. Gold -0.1% to $1191.

us futures-july21,2010



Company News

Apple (AAPL)

Apple (AAPL) posted its best quarter ever late Tuesday, driven by Macintosh computer and iPad sales. The company's sales surged 61% in the second quarter from the same period a year ago, while net income jumped 78%.

"Apple put up a monster quarter," said Mike Koskuba, a managing director at Victory Capital Management. "Strong earnings results from huge companies like Apple allow investors to see that while there are still major headwinds that the U.S. economy is facing, major companies are also doing really well - meaning that the global economy may not be as unhealthy as it seems to be."

Apple shares jumped $8.59, or 3.4 percent, to $260.48 in pre-opening trading. Yahoo fell $1.00, or 6.6 percent, to $14.20.

Yahoo! Inc. (YHOO) reported second-quarter net income of $213.3 million, or 15 cents per share, on revenue of $1.13 billion. Analysts had expected Yahoo! to post earnings of 14 cents per share on $1.16 billion in net revenue. YHOO was off nearly 7% in electronic trading at last check.

EMC Corp. (EMC) reported a second-quarter profit of $426 million, or 20 cents per share, as sales rose 24% to $4.02 billion. Earnings, excluding one-time items, came in at 28 cents per share. Analysts were expecting earnings of 28 cents per share on sales of $3.99 billion. Looking ahead, EMC said it expects to exceed its prior 2010 sales outlook of $16.5 billion. Still, EMC shares are off roughly 1.3% in pre-market trading.

Some Interesting News

BP: Asset sales, exec departures and more. BP (BP) is moving forward quickly with asset sales, announcing a $7B deal to sell Apache (APA) upstream assets in the U.S., Canada and Egypt. The company also plans to sell its gas fields and pipeline in Vietnam plus assets and exploration licenses in Pakistan; the two countries comprise only about 2% of BP's total natural-gas output, but could raise $1.7B through a sale. The sales, all on land, reflect BP's desire to get more, not less, involved in risky but lucrative deepwater drilling. Reports have been circulating that embattled CEO Tony Hayward could resign as soon as next month, which could also lift the stock, though the company denied Hayward is leaving. Meanwhile, a government probe on the causes of the rig disaster has begun to focus on Transocean (RIG) employees onboard at the time. Premarket: BP +3.9%, RIG +0.9% (7:00 ET).

Icahn launches new hostile bid for Lions Gate. Carl Icahn launched a new hostile bid for Lions Gate (LGF), offering $6.50/share this time rather than his previous offer of $7.00/share. Icahn has already built his stake up to 37.9% and is still hoping to replace the Lions Gate board with his own slate of nominees. Lions Gate responded that it will review the bid before making a recommendation to shareholders, but also announced it had completed a deal to convert $100M worth of debt to equity, effectively reducing Icahn's stake to 33.5%.

Sara Lee may trade bread for dough. Sara Lee (SLE) is thinking about selling its struggling North American bakery business and has selectively reached out to potential buyers, said sources. A sale of the unit could bring in at least $1B. A Sara Lee spokesman declined to comment, other than to say the company sees "tremendous potential" in its bakery business and is focused on running it; however, the bakery business hasn't had a permanent head for a few months, and a sale could be slowed by volatile commodity costs and wariness over competition from local bakeries and in-house supermarket offerings.

MUFG hungry for U.S. buys. Mitsubishi UFJ Financial Group (MTU), Japan's largest bank by assets, confirmed it's looking for new acquisitions in the U.S. as it faces weakening growth prospects domestically. MUFG said a midsize bank on the West Coast or in Texas or Arizona would be an ideal target, though purchasing several small banks is an option as well.

Taxpayers sink another $700B of aid into financial system. Taxpayer support for the financial system increased by $700B over the past year, bringing the total to around $3.7T, said TARP inspector general Neil Barofsky in a quarterly report to Congress. Most of the increase was due to government pledges to supply capital to Fannie Mae (FNM) and Freddie Mac (FRE) and to guarantee more mortgages to support the housing market. Barofsky also criticized the Treasury's housing relief efforts, pointing to "anemic" participation numbers that have failed to "put an appreciable dent in foreclosure filings." Separately, the Treasury said it plans to end a long-delayed and never-used $30B TARP program designed to boost small-business lending.

Judge approves Goldman-SEC settlement. A federal judge approved Goldman Sachs' (GS) $550M settlement with the SEC, in a ruling that was widely expected but still closely watched. For its part, the SEC said the Goldman case was just the tip of the iceberg, and many more crisis-related probes are being pursued.

Apple's phenomenal quarter. Handily beating earnings estimates (see below), Apple (AAPL) said it had experienced "a phenomenal quarter," with "the most successful product launch in Apple's history with iPhone 4." Among its other highlights: Mac unit sales +33%; iPhone unit sales +61% over the year-ago quarter; 3.27M iPads sold in its first quarter on the market. Apple also forecast higher-than-expected Q4 sales. As AllThingsD noted, "you can almost see concerns over antenna-gate sublimating before your very eyes."

Apache shares (APA) fell 2.4 percent in extended trade after the company said it would offer 21 million shares of common stock.

Conclusion

Apple's record quarterly results, released after U.S. markets closed Tuesday, started markets off on a postive note Wednesday, helping to ease worries about the health of the economy and a slowing recovery.

Strong revenue is considered the most important part of quarterly results so far because of how closely it's tied to the economy's health. Quite simply, strong revenue forecasts mean companies are optimistic that business will pick up. Stronger business could get corporations to start ramping up hiring again to meet the higher sales demands.

High unemployment and sluggish sales are considered two of the primary reasons the recovery is slow.

Another batch of earnings is due throughout Wednesday that will provide further insight into the potential pace of recovery. Three big banks -- Morgan Stanley, Wells Fargo & Co. and US Bancorp -- all report results. Coca-Cola Co., Starbucks Corp. and eBay Inc. also release earnings.

Stocks are trying to extend their winning streak into a third day. The Dow rose Tuesday by more than 75 points after falling nearly 150 points early in the morning.



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