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Market Outlook
Wednesday, May 26th, 2010

7:00 MBA Mortgage Applications

8:30 Durable Goods

10:00 New Home Sales

10:00 Hearing: TARP Aid for AIG

10:30 EIA Petroleum Inventories

1:00 PM 5-Yr Note Auction

2:00 PM Hearing: State of the Housing Government Sponsored Entities

4:15 PM Fed's Lacker: 'The Regulatory Response to the Financial Crisis'

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

• American Eagle Outfitters (AEO),

• Diana Shipping Inc. (DSX),

• Solarfun Power Holdings Co. Ltd. (SOLF),

• Toll Brothers Inc. (TOL),

• Hoku Corp. (HOKU),

• Jo-Ann Stores Inc. (JAS),

• NetApp Inc. (NTAP), and

• Take-Two Interactive Software Inc. (TTWO).

Not only did the market bulls defend the 2010 lows during Tuesday's plunge, but the late-session rally pushed the Dow Jones Industrial Average (DJIA) back above the 10,000 mark. The bounce back was stoked by comments from Congressional leaders saying they would not push for banks to spin-off lucrative trading desks as part of financial regulation reform.

Stock futures are up this morning as investors try to build momentum following a late-day rally during the previous trading session.

Big swings in trading have again become the norm in recent weeks, similar to the volatility that helped define the market during the credit crisis and the early parts of the recovery last year.

The end-of-session focus Tuesday on domestic news was a stark contrast from what had been driving trading for the past few weeks. Investors had been almost wholly focused on whether steep budget cuts to manage rising debt in European countries would slow a global economic recovery in the coming months. The positive economic reports, and also above-analysts’- expectations company quarterly-reports, have been ignored to a fair degree whilst the concentration of negativity seems to be plentiful.

Reports today on durable goods orders and new home sales are expected to provide further evidence that the U.S. economy is improving.

Economists polled by Thomson Reuters forecast orders for big-ticket factory goods rose 1.3 percent last month, rebounding from a 1.2 percent drop in March. The U.S. manufacturing sector has received a boost from exports, so any slowdown in Europe could eventually stall expansion.

For now though, the manufacturing sector has shown some of the most consistent growth in the economy.

A separate report from the Commerce Department is expected to show sales of new homes rose 4.6 percent in April to a seasonally adjusted annual rate of 430,000 units. The results could have been boosted as home buyers rushed to take advantage of a tax credit that expired at the end of last month.

Even though signs still point to recovery in the U.S., concerns about Europe remain. The euro, which is used by 16 European countries, fell again Wednesday. The currency has become a proxy for investor confidence in Europe's ability to contain its debt problems the health of the continent's economy. The euro remains close to the four-year low it hit last week. It was down to $1.2312 Wednesday.

Despite the ongoing concerns, major European indexes have snapped back after big losses Tuesday.

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

• Gold futures are up $14.50 to trade at $1,212.50 an ounce in London.

• The U.S. Dollar Index is trading flat at 86.76 in pre-market activity due to a rebound in commodities and global equities.

• Heading into the open, the July contract for crude is up $1.67 to $70.42 per barrel.

• The 21-day moving average of the Chicago Board Options Exchange's (CBOE) single-session, equity only put/call ratio is currently resting at its highest level since March 5.

Overseas Markets

Overseas trading is in rally mode this morning, as nearly all, if not all, foreign indexes that are in positive territory. In Asia, regional markets finished broadly higher as traders took their cues from a late-session rally on Wall Street.

Furthermore, South Korean stocks overcame volatile trading, even though the Korean won extended its recent losses due to continuing tensions with the North.

European stocks turned higher as bargain hunters rushed into snap up oversold issues, namely banking shares, in the wake of Tuesday's plunge.

• In Asia, Japan +0.7% to 9523. Hong Kong +1.1% to 19196. China +0.1% to 2626. India +2.3% to 16388.

• In Europe, at midday, London +1.7%. Paris +2.5%. Frankfurt +1.6%.

Futures Trading

Heading into the open this morning, DJIA futures are trading roughly 44 points above fair value. If the buying mood catches on, traders should keep an eye out for potential short-term resistance in the 10,200 region. Meanwhile, futures on the S&P 500 Index (SPX) are trading 7.5 points above fair value, placing the broad-market index on course to challenge potential short-term resistance near 1,090.

• Futures: Dow +0.6%. S&P +0.6%. Nasdaq +0.7%. Crude +2.7% to $70.58. Gold +1.2% to $1212.50.

Luxury homebuilder Toll Brothers Inc (TOL) reported a smaller quarterly loss, helped by a federal tax credit designed to spur demand for housing.

The loss narrowed to $40.4 million, or 24 cents per share, in the second quarter ended on April 30 from $83.2 million, or 52 cents per share, a year earlier.

Analysts on average were expecting a loss of 23 cents a share, according to Thomson Reuters I/B/E/S.

Revenue fell 22 percent to $311.3 million, compared with analysts' estimates of $321.9 million. The company attributed the decline to a low fiscal 2009 backlog.

However, backlog in the second quarter rose 5 percent to $993.5 million, with a unit increase of 10 percent to 1,738 units, the company said in a statement.

Despite a tentative housing recovery supported by such government initiatives as the tax credit, Toll has not made a profit in recent quarters, unlike rivals such as D.R. Horton Inc (DHI) and Lennar Corp (LEN).

However, Toll benefits less directly from the tax credit, used primarily by first-time home buyers, because as a luxury builder most of its clients are trading up. The credit helps Toll by enabling trade-up buyers to sell their own homes.

The company also expects to deliver between 2,200 and 2,750 homes in fiscal 2010.

Toll Brothers expects the average delivered price for the next two quarters to be between $540,000 and $560,000 per home.

TiVo Inc (TIVO)

U.S. digital video recording technology company TiVo Inc (TIVO) reported its fifth consecutive quarterly loss as the pace at which it added subscribers slowed, and said it remains confident it will prevail in a patent battle with Dish Network (DISH).

Chief Executive Tom Rogers said TiVo had been "running very dry" on its old set-top boxes and inventory was running low, which affected subscriptions in the first two months of the first quarter.

It recently launched a "Premiere" box to galvanize growth. Rogers told Reuters "the uptake has been good" on that product, without elaborating.

TiVo -- with its groundbreaking technology helped transform the way audiences viewed TV, but is now losing out to me-too products -- posted a net loss of $14.2 million, or 13 cents a share, in the fiscal first quarter ending in April, versus a year-ago loss of $3.9 million, or 4 cents a share.

The average analyst estimate was for a loss of 16 cents a share, according to Thomson Reuters I/B/E/S.

Rogers said this was a "transitional quarter" financially for the company. TiVo forecast a fiscal second-quarter net loss of $17 million to $19 million, surpassing Wall Street's target for a loss of $14.6 million.

TiVo expects to prevail in its legal battle with Dish, Rogers added."We have a very strong case as shown by the fact that we have won overwhelmingly at every level," he said.

TiVo's shares have tumbled almost 50 percent since May 14, when an appeals court set aside a ruling in its patent battle with Dish Network that could open up new licensing opportunities for TiVo.

TiVo's revenue rose 11.4 percent to $61.4 million in the fiscal first quarter. Service and technology revenue was $43.2 million, above Wall Street's view of service and technology revenue of $42.8 million.

TiVo sells its own set-top boxes and also licenses its technology to cable operators and satellite companies. It has sued companies it says are using its technology without permission, including AT&T Inc (T) and Verizon Communications Inc (VZ).

TiVo-owned subscription additions for the fiscal first quarter totaled 33,000, down from 37,000 a year ago.

The company also said on Tuesday it is developing software and services into broadband-connected Insignia televisions from Best Buy Co Inc (BBY).

"Broadband content to the TV is very much the future of television," Rogers said. "It won't replace linear channels anytime soon, but it will be an increasingly important element of what people need."

TiVo-owned subscriptions ended the quarter at 1.4 million, with total subscriptions of 2.5 million. TiVo's software is also used in DVRs offered by television service providers such as Comcast Corp (CMCSA) and DirecTV Group Inc (DTV).

Shares of Alviso, California-based TiVo closed at $9.15 on Nasdaq and slid 1.7 percent to $8.99 in extended trading after the earnings report.

Jewelry retailer Zale says its fiscal third-quarter net loss narrowed on improved margins and lower costs.

Zale Corp. says it has completed the initial stages of its turnaround plan and it's focusing "fixing the business in order to return it to profitability."

The company, based in Irving, Texas, reported a net loss of $12.1 million, or 38 cents per share, for the three months ended April 30. That compares with a year-ago loss of $19.5 million, or 61 cents per share.

Thomson Reuters says analysts were expecting a larger loss of 95 cents per share.

Zale says revenue fell 5 percent to $359.8 million. The company reduced costs by $16 million in the quarter.

Some Interesting News-

• BHP Billiton (BHP), Rio Tinto (RTP), Xstrata (XSRAF.PK) and ten other coal miners with Australian operations have bid A$4.85B ($4B) for the country's largest coal railroad network to prevent an IPO of the assets. The mining companies are concerned that an independent operator would raise fees on the monopoly asset. The Queensland government, which is planning the offering, last year valued the tracks at A$7B, but the offer by the coal miners exceeds what an IPO would likely pull in.

• Qatar's sovereign wealth fund has reportedly expressed interest in buying part of the Treasury's 27% stake in Citigroup (C). Unlike other sovereign wealth funds, the Qatar Investment Authority is still interested in banks and has done well on investments in Credit Suisse (CS) and Barclays (BCS) during the crisis.

• The Justice Department is said to be in the early stages of an antitrust inquiry into Apple (AAPL) and its role in the digital music market. Officials have reportedly spoken to major record labels and online music companies about the dynamics of selling music online. In particular, investigators have discussed allegations that Apple used its market dominance to persuade music labels to block Amazon (AMZN) from exclusive access to soon-to-be released music. Apple is also the subject of at least two other government probes, one on Apple's rules for app developers and one on Apple's hiring practices.

• The OECD raised its growth forecast for its 30 members to 2.7% in 2010, up from the 1.9% growth predicted in November. Including non-members like China, the forecast is for 4.6% growth in 2010 and 4.5% in 2011, highlighting the divergence between developed economies and emerging nations in the post-crisis world. The report also noted some downside risks, including potential sovereign debt problems and the possibility of "a boom-bust scenario" in countries like China and India.

• RiskMetrics, the international proxy advisory service, has warned Prudential (PUK) investors to vote against the insurer's planned purchase of AIG's (AIG) Asian unit. The deal has "a sensible strategic rationale," said RiskMetrics, but "a full price, integration risk and ambitious targets that barely meet the cost of capital do not make a compelling combination." The warning is further bad news for Prudential, which has been struggling to hold the shaky deal together. Shareholders will vote on June 7.

• Australia's Foster's Group (FBRWY.PK) said it plans to demerge its beer and wine operations, sending its shares up strongly in Australian trading on investor expectations of a takeover approach. The split, to be completed in the first half of 2011, will create around A$100M in annual savings and give the company some much-needed flexibility, as the wine business has weighed Foster's down.

• Telefonica (TEF) said it may consider a hostile bid for Portugal Telecom if it doesn't succeed in its €5.7B ($7.3B) bid for PT's stake in Brasilcel, their joint venture. Brasilcel controls 60% of Brazilian mobile company Vivo (VIV), and Telefonica is seeking control of Vivo in order to consolidate its position in the strategically important Brazilian market. PT's board rejected the unsolicited bid earlier in the month, and tensions between the two firms have been growing, with Telefonica threatening to block dividends to PT from Vivo.

• Blockbuster's (BBI) efforts to cut its debt load by more than $900M have reportedly hit a roadblock, after the company and bondholders disagreed over how much money investors would inject into the struggling movie-rental chain. Bondholders had suggested a $30M investment but Blockbuster wants $100M. Meanwhile, one group of bondholders said it's willing to wipe out $300M in debt if it gets the "lion's share" of new equity in a restructured company, while a separate group owed $630M is discussing temporarily canceling amortization payments in exchange for a large equity stake.

• Transocean (RIG) defended its February decision to pay dividends, saying the payment won't impact its ability to meet legal obligations related to the oil leak in the Gulf of Mexico. Eighteen senators had asked the Department of Justice to investigate Transocean over its announced $1B payout to shareholders, and its likely $270M profit on the insurance policy for the sunken Deepwater Horizon rig. Associate Attorney General Thomas J. Perrelli said the rig owner's legal action to limit its liability to $27M is "inappropriate."

• . The White House will announce new safety measures for offshore drilling tomorrow, as it's time to "revisit how these oil companies are operating." Government officials are under pressure to exert more control over BP's (BP) containment and cleanup efforts, and BP, by extension, is under increased pressure to show its efforts are succeeding. Meanwhile, according to a memo released by lawmakers yesterday, BP said it may have been a "fundamental mistake" to continue drilling in the Gulf well after a test warned something may be wrong.

• Speaking at a conference in Tokyo, Bernanke once again argued the importance of keeping the Federal Reserve free from political interference. Political meddling "in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation," he said. Bernanke added that while the Fed doesn't issue an official inflation target, central banks around the world are aiming for inflation at or around 2%.

• Rep. Barney Frank, chairman of the House Financial Services Committee, said the provision in the Senate's financial reform bill which requires banks to spin off their derivatives operations "goes too far." As a central figure in the creation of a joint House-Senate bill, Frank's comments are significant, and suggest the derivatives proposal may be removed from the final legislation altogether.

• Geithner arrived in Europe to discuss the region's debt crisis, and said there must be a coordinated global approach to financial reform. His comments follow Germany's unilateral decision to temporarily ban naked short selling of eurozone sovereign bonds and credit default swaps, and as Berlin stands poised to extend the ban to naked short selling of all German stocks listed on the country’s exchanges.

Conclusion

Concern about Europe's health has continued to overshadow consistent reports that the U.S. economy was continuing its slow, steady growth. Early in the year, those reports pushed stocks higher. Let us hope that positive reports, for and from today, provide positive up-lift to the market figures.