Market Outlook
Wednesday, June 2, 2010

Wednesday presents several economic reports. The schedule for today is:-

May Auto sales

7:00 MBA Mortgage Applications

7:30 Challenger Job-Cut Report

7:45 ICSC Retail Store Sales

8:30 Hearing: Credit Ratings Credibility

8:55 Redbook Chain Store Sales

10:00 Pending Home Sales

Also, once again, there are a couple of companies reporting their quarterly earnings:-

• Canadian Solar Inc. (CSIQ),

• Daktronics Inc. (DAKT),

• Shoe Carnival Inc. (SCVL),

• Coldwater Creek Inc. (CWTR), and

• Hovnanian Enterprises Inc. (HOV).

U.S. stock futures are pointed toward a moderately positive open today ahead a host of economic reports, including data on the housing and auto markets along with jobs data.

BP oil spill

On Tuesday, Wall Street reversed early gains as investors fretted about the implications of oil spill in the Gulf of Mexico, which President Barack Obama described as the "greatest environmental disaster of its kind in our history."

Worries about the spill were increased Tuesday when the U.S. government said it was starting criminal and civil investigations against BP PLC, Europe's second biggest oil company. That has raised concerns that the sector will now be more tightly regulated.

Shares in BP, which slid 13 percent on Tuesday -- its biggest one-day fall in 18 years -- were down another 3 percent.

"Today's wide-ranging losses testify to a general bearishness, with the crisis in the Gulf of Mexico simply amplifying widespread pessimism in markets," said Will Hedden, a sales trader at IG Index.

Economic Reports

With traders mostly focused on the health of Europe's economy and political events over the past month, domestic economic reports have taken somewhat of a backseat. Stocks couldn't hold onto early gains Tuesday following a better-than-expected report on the manufacturing sector from the Institute for Supply Management.

A report today is expected to show pending home sales surged in April. However, like many other housing reports from the month, investors are likely to dismiss the results. That's because April was the final month for home buyers to qualify for a tax credit. Analysts widely expect housing data to weaken in the coming months because the credit has expired.

The National Association of Realtors pending home sales index, which tracks signed contracts to buy previously occupied homes, likely rose to 108 in April, according to economists surveyed by Thomson Reuters. That would represent a 5 percent increase from March's reading of 102.9.

The report is due out at 10 a.m. EDT.

And later today, the major auto manufacturers will release their May sales totals starting at about 12 p.m. ET. Economists expect sales remained at a healthy sales pace of 8.9 million annualized units in May as the major car makers continued to push sales incentives onto consumers.

Challenger & Gray will release its May lay off report, which traditionally doesn't move the market much but is the first of several jobs-related economic reports out this week. ADP Macroeconomic Advisors' private-sector jobs report is out tomorrow instead of its usual Wednesday release.

One economic report that should draw the attention of investors will be the Labor Department's monthly employment report due out on Friday. High unemployment still remains a major obstacle to a sustained recovery in the country. A strong report could provide relief for investors worried about a potential slowdown in the nation's recovery.

Economists predict the unemployment rate dipped to 9.8 percent in April as employers added 513,000 jobs.

Once again the CBOE Volatility Index (VIX) will probably have a big impact today. Given the early positive bias in stock futures, we could see the VIX pull back to around the 30 level by the close. Once again, options opportunities are available.

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

• The S&P 500 Index (SPX) comes into this morning perched above support in the 1,060 area. Resistance for the SPX could materialize in the 1,090 area today, which is home to the index's declining 10-day trend line.

• Gold is pulling back from yesterday's peak above $1,230 an ounce. In London, gold futures are down $3.20 at $1,223.70 an ounce. • The U.S. dollar continues to benefit from a weak euro, but news that the Japanese prime minister will step down has bolstered the greenback versus the yen as well. So far this morning, the U.S. Dollar Index is up 0.24% at 86.86.

• Benchmark crude for July delivery was down 30 cents at $72.28 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.39 to settle at $72.58 on Tuesday.

• Bond prices are narrowly mixed today. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.28 percent from 3.27 percent late Tuesday.

Overseas Markets

World stock markets mostly fell today after a late decline on Wall Street connected to the massive oil spill in the Gulf of Mexico reined in already-fragile confidence related to Europe's debt crisis.

European Concerns

Most of the pessimism in recent week has been related to Europe's government debt problems and the many attempts by the continent's policymakers to get a handle on the crisis.

David Buik, markets analyst at BGC Partners, said significant concern over the health of the European banking sector -- big holders of government debt -- continues to make investors "vigilant and reflective."

In its latest financial stability report, the European Central Bank warned that Europe's banking system may have to report writedowns of euro195 billion over the next 18 months.

These worries contributed to a further fall in the value of the euro currency -- on Tuesday it dropped to a fresh four-year low of $1.2112 before recovering Wednesday to $1.2240.

Further weighing on the euro this week were the mounting tensions in the Middle East following Israel's raid on a Gaza-bound aid ship and worries over an economic slowdown in China. Investors are again looking for assets considered safe -- the dollar is widely thought of as one of the world's leading safe havens, along with gold and the Swiss franc.

Overseas, Britain's FTSE 100 dropped 1.1 percent, Germany's DAX index fell 0.6 percent, and France's CAC-40 fell 1 percent. Japan's Nikkei stock average fell 1.1 percent.

European shares fell at midday on Wednesday, with BP (BP.L) leading the energy sector down after the launch of a criminal probe into the Gulf of Mexico disaster, and with banks weaker on worries about the euro zone crisis.

At 1045 GMT, the pan-European FTSEurofirst 300 .FTEU3 index was down 0.8 percent at 994.59 points.

The European index has lost more than 10 percent since mid-April when fears intensified that a sovereign debt crisis in the euro zone could derail the global economic recovery .

"Markets are worried about the political solution for BP, and that some of the assets might be seized," said Colin McLean, managing director at fund manager SVM in Edinburgh.

The prospects of tougher restrictions on the industry as a whole hurt other energy shares, as did crude prices CLc1 falling towards $72, with the euro only slightly up from a four-year low against the dollar.

Total (TOTF.PA), ENI (ENI.MI), BG (BG.L), Royal Dutch Shell (RDSa.AS) and Repsol (REP.MC) fell between 1.2 and 2.4 percent. The heavyweight banking sector was also lower.

Banco Santander (SAN.MC), BBVA (BBVA.MC), Credit Agricole (CAGR.PA) and Societe Generale (SOGN.PA) fell between 2.3 and 2.7 percent.

"There is real concern about European financials. It's not clear what the actions of the ECB are," McLean said. "There's an extent to which the markets may be being propped up by the buying of debt, and short-selling bans create something of an artificial market. Investors question whether they're seeing the truth in balance sheets."

Investors were also digesting the German government's decision to widen a ban on speculative trades on Wednesday, expanding restrictions on naked short-selling to include all shares.

The planned legislation, which must pass both houses of parliament, adds to regulations set up last month in a campaign by Chancellor Angela Merkel's government to curtail financial speculation, which it blames for intensifying the euro zone debt crisis.

Earlier in Asia, Hong Kong's Hang Seng dipped 0.1 percent to close at 19,471.80 and Australia's S&P/ASX 200 dropped 0.7 percent to 4,381.0.

Japan's Nikkei 225 stock average lost 108.59 points, or 1.1 percent, to 9,603.24 amid news that embattled Japanese Prime Minister Yukio Hatoyama was resigning.

Hatoyama had faced growing pressure from within his Democratic Party of Japan to resign ahead of July's upper house elections after his approval ratings plummeted over his broken campaign promise to move a U.S. Marine base off the southern island of Okinawa.

Hatoyama is the fourth Japanese prime minister to resign in four years.

Jackson Wong, vice president of Tanrich Securities, said he believed negative factors pulling Asia down included the continuing euro zone crisis and negative cues from Wall Street -- not the political news out of Japan.

"The resignation of the prime minister of Japan was actually pretty positive news initially," Wong said. "When they change the prime minister, the new one will probably have a fresh look toward the economy, so that's pretty good news."

In Asia, Japan -1.1% to 9603. Hong Kong -0.1% to 19472. China +0.1% to 2571. India +1.0% to 16742.

In Europe, at midday, London -1.1%. Paris -1.1%. Frankfurt -1.0%.

Futures Trading

Stock futures are pointing to a modest rebound in the market today, a day after major indexes plunged shortly before the close of trading.

Futures are getting a boost as the euro rebounds slightly after hitting a four-year low Tuesday. The euro, which is used by 16 European countries, has heavily influenced trading over the past month. It has particularly influenced futures trading when there are few other economic reports out for investors to review and help drive trading.

The currency has become an indicator of confidence in Europe's ability to contain a sovereign debt crisis that began in Greece, but has spread to other countries, including Spain and Portugal. The euro rose to $1.2229.

Heading into the open this morning, the Dow Jones Industrial Average (DJIA) futures are trading some 49 points above fair value, retesting the 10,000 level. Meanwhile, futures on the S&P 500 Index (SPX) are trading more than 4 points above fair value.

Futures: Dow +0.4%. S&P +0.4%. Nasdaq +0.6%. Crude -0.55% to $72.18. Gold -0.3% to $1223.10.

US futures-june02,2010

Company News

PSS-june 02,2010

Collective Brands Inc's (PSS)

Collective Brands Inc's (PSS) quarterly profit beat market expectations, boosted by Performance and Lifestyle Group brands, but the still weak U.S. economy and high unemployment rates hurt the footwear retailer's domestic sales. Shares of the Topeka, Kansas-based company, fell as much as 10 percent to $19.35 in trading after the bell. They closed at $21.55 Tuesday on the New York Stock Exchange.

Comparable store-sales -- a key metric of retail health -- were down 1.2 percent for the quarter.

"Traffic was down at the mass level across the U.S., due to the economy and we saw select urban markets underperform, particularly in the Southwest, Mexican border and California markets which still face significant unemployment challenges," Chief Executive Matthew Rubel said on a conference call.

The U.S. unemployment rate is expected to dip to 9.8 percent when figures are released on Friday.

Capstone Investments analyst Claire Gallacher said the company's comparable store sales were disappointing as analysts were expecting an increase of 1 percent to 2 percent for the quarter.

Sales at the company's Payless Domestic unit, which makes up for more than two-thirds of its business, fell 4 percent during the quarter.

"We entered the first quarter with a very lean inventory position of clearance merchandise at Payless which negatively affected the Payless Domestic sales performance in February," CEO Rubel said.

Collective Brands, which is the holding company of Payless ShoeSource and Stride Rite, posted net income of $54.2 million, or 83 cents share, up from $38.0 million, or 59 cents a share, a year earlier. Revenue at Collective Brands, which bought shoe maker Stride Rite last year, rose marginally to $878.8 million.

"It looks like the sales were really driven by the international side and the wholesale business. That is not reflected in comps," analyst Gallacher said.

Analysts on average were looking for earnings of 75 cents a share, on revenue of $888.2 million, according to Thomson Reuters.


Jos. A. Bank Clothiers Inc. (JOSB)

Jos. A. Bank Clothiers Inc. (JOSB) reported a first-quarter net profit of $15.8 million, or 85 cents per share, as sales rose 10% to $178.1 million. Analysts were expecting earnings of 72 cents per share. "With this quarter's results, we have achieved earnings growth in 34 of the past 35 quarters when compared to the respective prior year periods, including 16 quarters in a row," said CEO R. Neal Black.

Sonic Solutions (SNIC)

In merger and acquisition news, Sonic Solutions (SNIC) announced that it is buying DivX Inc. (DIVX) in a cash and stock deal.

Sonic said it will pay $3.75 in cash and 0.514 of its own shares for every DivX share, or approximately $9.83 per share at SNIC's closing price on Tuesday. Sonic said the deal is expected to close in September and could potentially double its adjusted earnings per share in fiscal 2012.


CDC Software Corp. (CDCS)

CDC Software Corp. (CDCS) cut its fiscal full-year view, but said it expects double-digit growth in application sales in the second quarter of 2010, compared with a year ago. The company said application sales include license revenue and new total contract value for software-as-a-service sales.

"We are very pleased about our projections for double-digit application sales growth for the second quarter as a result of strong increases in on-premise and SaaS sales we have been seeing," said Bruce Cameron, president of CDC Software, in a statement. "We are focused on expanding our higher margin recurring revenue stream, such as SaaS revenue, and expect this will gradually increase our gross margin.”

The Hong Kong-based software vendor said it expects full-year adjusted earnings to fall in the range of $1.15 to $1.25 per share on revenue between $220 million and $230 million. Analysts polled by Thomson Reuters had projected adjusted 2010 earnings of $1.27 a share on revenue of $219.08 million.

In 2011, the company said it expects adjusted earnings between $1.35 and $1.45 per share on revenue between $245 and $255 million. The Street had estimated earnings o0f $1.48 a share on sales of $238.10 million.

"Our guidance reflects our move to a hybrid model and our focus on generating more SaaS business,” Cameron continued. “As a result, we believe that we will recognize less revenue up front compared to our traditional license model, and will also be realizing more expenses in R&D, sales and marketing and other integration-related costs as we ramp up our SaaS business."

Shares of CDC Software fell 23 cents, or 2.7%, to close at $8.31 Tuesday.

Some Interesting News-

• The National Mediation Board has rejected a union request to release UPS(UPS) and its aircraft mechanics from mediation.

The Teamsters union, which represents the 1,400 mechanics, asked the NMB to declare that contract talks, which have gone on for more than three years, have reached an impasse. That declaration would trigger a 30-day countdown that could result in a strike or a move to binding arbitration, if both sides agree to it. Instead, the NMB wants the two sides to remain in recess until it calls them back to negotiations.

• Despite the sharp fall in BP's share price following the company's inability to cap a leaking well in the Gulf of Mexico, most analysts say the selloff is overdone.

BP shares sank nearly 15% Tuesday after the company's latest attempt to seal the leaking Gulf oil well failed over the weekend. The selloff accelerated just before the closing bell, when U.S. Attorney General Eric Holder announced a criminal probe into the spill.

BP-chart of events

Since April 20 when the Gulf oil spill began, BP shares have tumbled about 40%.

• Earlier this year, Google (Stock Quote: GOOG) decided to open its first ever online store so users could purchase the company’s Nexus One phone without having to go through a cell phone carrier. Google had high hopes that this site would provide more options for consumers and at the time, some speculated that Google was inching into Amazon’s (Stock Quote: AMZN) territory. But just five months after the idea was first announced, Google has shut down the store, all but admitting that it was a complete and utter failure.

• Prudential (PUK) called off its agreement to buy AIG's (AIG) Asian unit, and plans to cancel its $21B rights offer that was meant to fund the deal. The decision, which follows AIG's refusal to negotiate a lower purchase price for the unit, will cost Pru around £450M ($660M) in break fees, underwriting charges and currency hedges. Investors had criticized Pru CEO Tidjane Thiam for pursuing the costly deal, but some are now calling for his resignation for failing to save it. Credit Suisse (CS), JPMorgan (JPM) and HSBC (HBC) will also face deal fallout; as advisers and underwriters for Prudential, the three banks would have pocketed hundreds of millions of dollars in fees had the deal gone forward. AIG will now consider alternate options for the unit, including a possible IPO.

• The Justice Department opened civil and criminal investigations into the Gulf of Mexico oil spill, calling the leak "nothing less than a tragedy." U.S. Attorney General Eric Holder declined to specify which companies are under investigation because authorities aren't "clear on who should ultimately be held liable," but BP (BP) and Transocean (RIG) have both already pledged to cooperate with authorities. Even before news of the investigations, spooked investors were selling shares of companies connected to the accident: Yesterday, BP closed -15%, RIG -11.85%, HAL -14.8%, SLB -7.8%, APC -19.55%. The precipitous fall in BP's shares since the Gulf accident have prompted speculation that BP may become a takeover target. Companies connected to the spill are broadly up premarket: BP +1.45%, RIG +2.1%, HAL +1.65% (7:00 ET).

• Japanese Prime Minister Yukio Hatoyama resigned after just eight months in office, following political clashes over the relocation of a U.S. military base on the southern island of Okinawa. The news pushed the Nikkei to a -1.1% close. Yen -1.1% against the dollar (7:00 ET).

• Amgen (AMGN) received FDA clearance for Prolia, its injectable bone strengthening drug for postmenopausal women at risk for fractures. It's a potential blockbuster market, and analysts believe Amgen could make billions of dollars in revenue from Prolia's launch.

• Telefonica (TEF) raised its bid to buy Portugal Telecom (PT) out of Vivo (VIV), their Brazilian mobile phone joint venture. At €6.5B ($7.9B), the new bid is 14% higher than Telefonica's original offer. Portugal Telecom is calling a shareholders' meeting to vote on the revised offer and has appointed three executives to negotiate a potential deal.

• BASF (BASFY) has reportedly agreed in principle to buy the specialty chemicals maker Cognis for €3B-3.5B ($3.7B-4.3B). Cognis' owners, Permira Advisors and Goldman Sachs (GS), have been in talks with BASF for a month, said people familiar with the situation. A deal announcement is likely still a few weeks away as the two sides negotiate final terms.

• Citigroup (C) said it plans to close 330 branches of CitiFinancial as part of a restructuring aimed at finding a buyer for the U.S. consumer finance unit. CitiFinancial's U.S. business will be split into two parts, and will be renamed after the reorganization is complete.

• While seeking a consulting mandate from Calpers, the nation's largest public pension fund, Goldman Sachs (GS) said it was not "the target of a formal investigation." This statement was made six months after the SEC sent Goldman a Wells Notice, notifying the firm it was likely to be charged with fraud in connection to subprime mortgages. Goldman's failure to disclose the Wells Notice to Calpers could reignite the debate about whether the firm had an obligation to share that information with shareholders and clients.

• According to media reports, the Iranian central bank has announced it will sell 45 billion euros from its foreign exchange reserves and will buy U.S. dollars and gold. The sale will be conducted in three stages, the first of which has already begun. The reports said that other Gulf states have followed suit and are starting to cut their euro holdings as well. Euro +0.2% against the dollar (7:00 ET).

• For the sixth time, Carl Icahn extended his tender offer to buy the outstanding common shares of Lions Gate Entertainment (LGF) and removed its minimum support level ahead of a possible proxy fight this summer. Lions Gate said shareholder rejection of Icahn's previous offers showed "the Icahn Group's offer is financially inadequate," but added the board will review the revised offer and make a recommendation to shareholders shortly.

• The National Highway Traffic Safety Administration will investigate Ford (F) over complaints that the pedals in some of its models became stuck in the depressed position because of the floormats. There have been no reports of crashes or injuries, but the issue is similar to one that prompted Toyota (TM) to recall 5M vehicles earlier this year.

• Canada became the first G-7 nation to raise its interest rates post-financial crisis. The Bank of Canada increased its key rate yesterday by 25bps to 0.50%. Further rate hikes will depend on the condition of the global economy.

• GlaxoSmithKline (GSK.L) rose 1.4 percent after Jefferies raised its rating for the company to "buy" from "hold".


"These are not normal markets and with continuing fears about problems in the banking sector in Europe, tensions in the Middle East and a possible slowdown in China not helping, sentiment remains fragile and risk aversion remains the favored play," said Michael Hewson, an analyst at CMC Markets.

As I have mentioned on numerous occasions this is the time to be making the most of trading options.

Success is simple. Do what's right, the right way, at the right time.

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