Market Outlook
Friday, May 21st, 2010

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

10:00 Mass Layoffs

10:30 ECRI Leading Index

Also, there will only be a couple of major companies reporting their quarterly earnings:-

• AnnTaylor Stores Corp. (ANN) and

• Frontline Ltd. (FRO).

Friday might prove to be the opposite to the normal trend of Friday’s this year, where Friday is normally a down-day followed on the Monday as a positive-day.

We have now had our market correction of 10%, as all three major gauges are now officially in a "correction," (technically defined as a loss of more than 10% from the rally highs).

The Dow is now down 10.2% from its April 26 high, the S&P 500 is down 12% from its April 23 high and the Nasdaq is down 12.9% from its April 23 high. The Nasdaq was already in a correction prior to Thursday's selloff.

“Falling below these technical levels could put a floor under the selling”, said Steven Goldman, market strategist at Weeden & Co. He said, “Investors may be better able to tolerate all the uncertainty about Europe when the market has pulled back from the 2010 highs”.

However, there is still plenty of negative comments abounding as in the following statements:-

“Beyond the reaction to the immediate headlines, the stock market may have already been vulnerable to selling”, said Brett Hammond, chief investment strategist at TIAA-CREF.

"The European debt issues and the euro are very important," he said. "But the market was already poised for a pullback after the enormous run up in the stock market since March of 2009."

“Europe's debt crisis poses a "potentially serious" risk to the U.S. economic recovery because it threatens global credit markets and large American banks”, a top Federal Reserve official told Congress Thursday. Fed Governor Daniel Tarullo said “Europe's debt woes, if not contained, could cause financial markets to freeze and spark a global crisis akin to the market meltdown of late 2008”.

Until last week, Fed officials had been playing down the possible impact to the United States from Europe's turmoil. "The European sovereign debt problems are a potentially serious setback," Tarullo told two congressional subcommittees.

Other economic indicators do not help the bull’s cause such as the following:-

Factory activity in the U.S. mid-Atlantic region accelerated less than expected in May, according to a survey on Thursday that also showed employment growth deteriorating. The Philadelphia Federal Reserve Bank said its business activity index rose to 21.4 in May from April's 20.2. Economists had expected a reading of 22.0. The Philadelphia report's jobs component fell to 3.2 from April's 7.3, a troubling development since employment has been the weak spot of the recovery.

There we have it, the bears are on a roll again, particularly checking out the early futures trading with the Dow Jones Industrial Average (DJIA) already down 51 points. At opening, this may place the Dow near or below the psychological 10,000 level. The S&P 500 Index (SPX) is also trading negatively in futures trading, down by 7 points at the moment.

Therefore we could be in for another bumpy ride today which means that we could be continuing to do well in our options trading for the week.

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

• The Dow Jones Industrial Average (DJIA) could breach the 10,000 level today, if futures trading is any indication of market direction.

• The S&P 500 Index (SPX) is getting dangerously close to its February lows near 1,160.

• Gold prices continue to drop sharply this morning by more than $6.20 to $1,182.40 an ounce in London.

• The U.S. Dollar Index is back up, after pulling back yesterday due to the euro rebound, by 0.34% at 85.86.

• Crude futures are at its lowest levels since February. Heading into the open, the July contract is down 59 cents at $70.21 per barrel.

• Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,842,471 call contracts traded on Thursday, compared to 1,760,353 put contracts.

• On the New York Stock Exchange, losers beat winners 19 to one on volume of 2.13 billion shares. On the Nasdaq, decliners beat advancers 11 to 1 on volume of 3.37 billion shares.

VIX may 20,2010

The CBOE Volatility Index (VIX) is up nearly 46% this week, despite its already elevated levels.

The VIX took out the 45 area yesterday, and could continue to make a run at 50 if the market follows the direction of the last couple of days, which seems likely looking at early futures trading.

volatility indexes may 21, 2010

Overseas Markets

Overseas trading is extremely poor this morning. is in positive territory this Friday morning. In Asia, stock markets suffered losses, as persistent worries over the euro zone debt crisis and its negative impact on the global economic recovery sent investors heading for the exits. By the close, Japan's Nikkei average lost 2.45% and Australia's S&P/ASX 200 index dipped 0.2%. The Shanghai Composite added 1%. Meanwhile, markets in Hong Kong, South Korea, and Thailand were closed for Buddha's Birthday.

In Europe, stocks are lower, with heightened concerns over euro zone sovereign debt and government spending and tougher financial industry regulations hurting sentiment. At last check, the London FTSE 100 was down 1.18%, the French CAC 40 was down 1.24%, and the German DAX 30 was down 1.76%.

In Asia, Japan -2.5% to 9785. Hong Kong closed. China +1.1% to 2584. India -0.5% to 16446.

In Europe, at midday, London -1.1%. Paris -1.1%. Frankfurt -1.6%.

Futures Trading

Heading into the open, futures on the DJIA and the SPX are trading roughly 51 points and 7 points below fair value, respectively.

Futures: Dow -0.35%. S&P -0.4%. Nasdaq -0.3%. Crude -1% to $70.09. Gold -0.5% to $1182.80.

Also several companies have announced their quarterly reports which seem to be supporting or surprising analysts’ predictions. These are:-

Aeropostale (ARO) reported first quarter net income of $45.4 million, or 48 cents per share, up from $31.7 million, or 31 cents per share, in the year-ago period. Total net sales rose to $463.6 million from $408 million in the same quarter last year while same-store sales rose 8%. Analysts were expecting 46 cents per share.

Foot Locker, Inc. (FL) announced fiscal first-quarter net income rose to $54 million, or 34 cents per share, from $31 million, or 20 cents, a year ago. Revenue for the three months ended May 1 rose 5.3% to $1.28 billion while same-store sales rose 4.8%. Analysts had expected earnings of 27 cents per share on $1.26 billion in revenue.

Pacific Sunwear of California (PSUN) reported a first-quarter loss of $31 million, or 47 cents per share, wider than its loss of $9 million, or 13 cents per share, a year ago. Excluding one-time items, the loss would have come in at 30 cents per share. Total sales fell to $190.3 million from $223 million a year ago. Analysts were looking for a loss, on average, of 17 cents per share on sales of $218 million.

Marvell Technology Group (MRVL) swung to first-quarter net income of $205.8 million, or 30 cents per share, from a loss of $111.5 million, or 18 cents per share, in the same quarter last year. On an adjusted basis, the chip maker would have earned 38 cents per share. Revenue rose 64% to $855.6 million. Analysts had forecast earnings of 37 cents per share on revenue of $845.8 million.

Brocade Communications Systems Inc. (BRCD) reported a fiscal second-quarter profit of $22.4 million, or 5 cents per share, on revenue of $501 million. During the same period a year ago, the networking-equipment provider lost $66.1 million, or 17 cents per share, on $506.3 million in sales. Excluding one-time items, Brocade would have earned $62.7 million, or 13 cents per share. By that measure, analysts had forecast Brocade to earn 12 cents per share on $503 million in sales. inc. (CRM) said its fiscal first-quarter net income fell to $17.7 million, or 13 cents per share, from $18.4 million, or 15 cents per share in the same period last year. The on-demand business-software provider said revenue for the period ended in April rose 24% to $376.8 million. Excluding special items such as stock-based compensation expenses, said earnings for the period were 30 cents per share, matching the consensus estimate.

Dell Inc. (DELL) reported a fiscal first-quarter profit of $441 million, or 22 cents per share, compared with a profit of $290 million, or 15 cents per share, for the year-earlier period. Revenue rose to $14.9 billion from $12.3 billion for the same quarter the previous year. Adjusted income was 30 cents per share. Analysts had expected the company to report earnings of 26 cents per share, on revenue of $14.3 billion.

Gap Inc. (GPS) said that its fiscal first-quarter profit rose 40% to $302 million, or 45 cents per share, from $215 million, or 31 cents, a year earlier. Sales rose 6.5% to $3.33 billion with sales at stores open at least a year increasing 4%. The most recent quarter's results included a tax benefit of 2 cents per share, Gap said. Analysts, on average, estimated the retailer to earn 42 cents per share on sales of $3.33 billion.

Some Interesting news-

• Abbott Laboratories (ABT) agreed to buy the Healthcare Solutions unit of India's Piramal Healthcare for a total of $3.72B, with $2.1B paid upfront. The purchase will turn Abbott into the largest drug company in India, where the drug market is expected to generate nearly $8B of sales this year and more than double that amount by 2015. The news sent Piramal -11.8% in Indian trading.

• Treasury's Geithner is heading to Europe next week to meet with British and German counterparts over the European debt crisis. Officials will discuss "the economic situation in the region and the measures being taken to restore global confidence and financial stability." The announcement of Geithner's visit followed the biggest point drop in the S&P in a year (-3.9% to 1,071.59), and came amid rumors that the EU may take further measures to stop the euro's fall.

• Germany's lower house of parliament gave its approval to a law which would let Germany, Europe's largest economy, contribute to the €750B emergency aid package to protect the euro. The upper house of parliament is expected to approve the law later today, paving the way for Germany to contribute up to €148B in guarantees.

• In a 59-39 vote yesterday, the Senate approved the most sweeping reforms to financial regulation since the 1930's, prompting proponents of the bill to exult that "the joyride on Wall Street will come to a screeching halt." The legislation must now be reconciled with the version approved by the House of Representatives in December. Key differences include the House's $150B wind-down fund, and whether the consumer protection bureau should be independent or housed inside the Federal Reserve.

• PepsiCo (PEP) plans to invest an additional $2.5B in China over the next three years as it anticipates more growth from that market. Pepsi had previously announced a separate $1B investment in China that will be completed this year. The new funds will cover a variety of projects, including increased R&D, expanded brand-building and new manufacturing facilities.

• Toyota (TM) will take a $50M stake in U.S. electric carmaker Tesla Motors and the two companies will cooperate on the development of electric vehicles. Toyota is likely hoping the deal will help repair its tarnished public image, while the tie-up gives Tesla exposure on the world stage.

• The FDIC's so-called problem bank list grew to 775 institutions in the first quarter from 702, and the assets of problem institutions increased to $431B from $403B. These are the highest levels since 1993, though the increase in the number of problem banks was the smallest in four quarters. On a more positive note, banks and thrifts insured by the FDIC earned $18B, the best results since Q1 2008, and 52% of FDIC members saw net income increase.

• BP (BP) said it is now capturing around 5,000 barrels of oil per day from the Gulf of Mexico leak, but oil continues to surge from the spill area, forcing officials to reassess the rate of the spillage. BP and federal agencies had estimated 5,000 barrels per day were spilling from the leak area, though many scientists said the figure was significantly higher. The White House accused BP of "falling short" in its commitment to keep officials fully informed about the leak data, and said it was "imperative" for BP to promptly share the results of its internal investigations.

• Chrysler (FIATY.PK) CEO Sergio Marchionne said the company will 'probably' have an IPO in 2011, adding that 2010 is shaping up to be a better year than originally forecast. "I think there is enough appetite" for share offerings from both Chrysler and General Motors in the next 12-18 months, said Marchionne, and if GM "wants to go public - let [it] go. We'll come in second."

• As expected, the Bank of Japan held its key interest rate steady at 0.1% and didn't introduce any new monetary easing steps. The bank did outline a new loan scheme meant to support growth industries, but some analysts were skeptical about whether the plan will make much of a difference. The Bank of Japan also upgraded its assessment of the economy, pointing to a moderate recovery "induced by improvement in overseas conditions."

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