Market Outlook
Tuesday, May 25th, 2010



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

7:45 ICSC Retail Store Sales

8:55 Redbook Chain Store Sales

9:00 S&P Case-Shiller Home Price Index

10:00 Consumer Confidence

10:00 FHFA Housing Price Index

10:00 State Street Investor Confidence Index

10:00 Richmond Fed Mfg.

11:15 Fed's Bullard: 'The Road to Economic Recovery Following the Financial Crisis'

5:00 PM ABC Consumer Confidence Index

8:30 PM Fed's Bernanke: 'Central Bank Independence, Transparency, and Accountability'

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

• AutoZone Inc. (AZO),

• Cracker Barrel Old Country Store Inc. (CBRL),

• Medtronic Inc. (MDT),

• Trina Solar Limited (TSL), and

• TiVo Inc. (TIVO).

More “doom and gloom”!

With so many downbeat reports surrounding the markets it is very difficult to keep a positive attitude that the stock prices will improve soon and the rally, that should be happening, will happen.

Look at all the following items that impact negatively:-

1. World stock markets and the euro tumbled Tuesday on fears Europe's debt crisis will cause a prolonged slump in the region and weaken the outlook for global growth.

2. Asian markets were also hit hard by reports that North Korean leader Kim Jong Il ordered his military to be on combat alert amid rising tensions on the peninsula.

3. In Europe, Britain's FTSE 100 fell 2.5 percent to 4,942.58, Germany's DAX index dropped 2.5 percent to 5,661.09, and France's CAC-40 sank 2.8 percent to 3,333.37. Markets in Spain and Italy, both carrying high debt levels, both fell more than 4 percent.

4. Wall Street was also expected to fall on the open -- Dow Jones industrials futures were down 2.1 percent at 9,837 while Standard & Poor's 500 futures were 2.5 percent lower at 1,043.80.

5. The euro slid to $1.2204 early Tuesday from $1.2398 in New York overnight and not far from the four-year low of $1.2146 it traded at last week.

6. News of a bank failure in Spain and the prospect of more painful austerity measures across the region renewed investors' worries about growth in Europe and its impact on major trading partners like the U.S., Japan and China.

7. The Italian government was due to announce public sector spending cuts to reduce the deficit by euro25 billion ($31 billion) by 2012 in a bid to convince markets that the country can handle its high debt load. On Monday, the International Monetary Fund said Spain, which has already passed tough austerity measures, needed to urgently and radically reform its labor market while consolidating the banking sector.

8. European officials also remained downbeat.

9. EU Economy Commissioner Olli Rehn predicted Tuesday that growth in the 27-nation bloc won't top 1.5 percent and the jobless rate will stay close to current highs without reforms over the next five years. He called for greater flexibility for the services sector and the labor market.

We now need to keep level thinking and very cool heads in the upcoming few days, look at the issues that are causing the conflict, and move on so that the markets can get back on track.

Analysts said the coming days will be important for market sentiment -- whether investors believe the European Union's $1 trillion rescue package for euro zone countries can avoid a sharp fall in the euro and protect countries from bankruptcy.

"The test for markets over the rest of this week is whether the panic can pass, and a more measured appraisal return," said Daragh Maher, currency analyst at Credit Agricole CIB.

He noted that while the euro is likely to continue to weaken, the EU rescue measures have addressed the main market pitfalls -- by giving Greece time to cut its debt and guaranteeing euro zone countries against the risk of default -- which should help stymie any sharp sell-off in the short-term.

Monday's late-session sell-off on the Dow Jones Industrial Average (DJIA) appears to have been merely a prelude to today's plunge. The DJIA traded between 10,200 and 10,100 for much of Monday, only to plummet to within 70 points of the 10,000 level by the close.

I believe the CBOE Volatility Index (VIX) will have a big impact today, and could be near or above the 50 mark if the futures trading is a fair indication of the opening price.

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

• Gold futures are trading lower in London this morning, dropping $5.50 to trade at $1,188.50 an ounce.

• The U.S. Dollar Index is perceived as a safe-haven this morning climbing, rising 1.26% to trade at 87.30.

• Heading into the open, the July contract for crude is down $2.37 at $67.84 per barrel. Strength in the U.S. dollar seems to be responsible for crude's decline.

• Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,232,396 call contracts traded on Monday, compared to 792,605 put contracts.

Overseas Markets

Overseas trading is imploding, as it appears that none of the foreign indexes are in positive territory.

In Europe, Britain's FTSE 100 fell 2.5 percent to 4,942.58, Germany's DAX index dropped 2.5 percent to 5,661.09, and France's CAC-40 sank 2.8 percent to 3,333.37. Markets in Spain and Italy, both carrying high debt levels, both fell more than 4 percent.

In Asia, stock indexes were hit hard by the escalating tensions in the Korean peninsula.

South Korea's benchmark stock index dropped as much as 4.5 percent before recovering some to finish 2.8 percent down at 1,560.83 -- its lowest close in more than three months. The South Korean won slid to its weakest level against the dollar in more than 10 months before paring some losses.

Japan's Nikkei 225 stock average shed 3.1 percent to 9,459.89 as the yen's strength against the common European currency hammered exporters.

Hong Kong's Hang Seng index fell 3.3 percent to 19,019.21 while benchmarks in Australia and Indonesia also lost more than 3 percent. Stock markets in India, Singapore and Thailand were down more than 2 percent and China dropped 1.9 percent.

Still, some investors consider Asian stocks oversold given the region's strong economic growth and low government debt.

"I think it's a great time to buy on dips," said Tey Tze Ming, a trader with Saxo Capital Markets in Singapore. "Fundamentally, things in this region haven't changed. Growth is still good."

In Asia, Japan -3.1% to 9460. Hong Kong -3.5% to 18986. China -1.9% to 2623. India -2.7% to 16022.

In Europe, at midday, London -2.7%. Paris -3.3%. Frankfurt -2.7%.

Futures Trading

Heading into the open this morning, DJIA futures are trading some 225 points below fair value, indicating that the blue-chip barometer could open at or below its February low of 9,835. Meanwhile, futures on the S&P 500 Index (SPX) are trading more than 30 points below fair value, potentially placing the SPX below its February low of 1,044

Futures: Dow -2.1%. S&P -2.5%. Nasdaq -2.2%. Crude -3.7% to $67.64. Gold -0.5% to $1187.50.

US stock futures May 25, 2010



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

TSL may 24, 2010

China-based Trina Solar Ltd (TSL)

China-based Trina Solar Ltd (TSL) reported better-than-expected first-quarter results, as shipments nearly quadrupled, and the company expects demand to improve through the year.

"As a result of increasing demand visibility for its module products in both its European and non-European markets, the company expects to increase its shipment volumes on a quarter to quarter basis through the end of 2010," Trina said.

Trina currently expects to ship between 200 megawatts (MW) and 205 MW of photovoltaic modules in the second quarter, up from 192.6 MW in the latest first quarter.

For the first quarter ended March 31, the company earned 44.5 million, or 66 cents per American Depositary Share (ADS), compared with a loss of $11 million, or 22 cents per ADS, last year.

Revenue rose to $336.8 million, from $132.1 million, a year ago. Analysts on average were looking for earnings of 61 cents per ADS, on revenue of $329.8 million, according to Thomson Reuters I/B/E/S.

Shares of the company, which have so far risen over 75 percent from a July 2009 year-low, closed at $17.66 Monday on the New York Stock Exchange.

SAFM-may 24,2010

Sanderson Farms Inc. (SAFM)

Sanderson Farms Inc. (SAFM) posted a profit of $35.1 million, or $1.62 per share, as revenue rose 14% to $487.1 million. "Demand for chicken at retail grocery stores remains strong and the ongoing issues we and our industry face in export markets have not yet significantly disrupted the markets," said CEO Joe Sanderson.

PVH-may 24, 2010

Phillips-Van Heusen Corp (PVH)

Phillips-Van Heusen Corp (PVH) beat Wall Street estimates in its first quarter, but a second quarter profit forecast lighter than some analysts anticipated sent its shares down nearly 4 percent in after-hours trading.

Analysts had been expecting a bigger boost from Tommy Hilfiger, the preppy apparel brand recently acquired by the clothing maker, but the company cited weaker seasonal business trends in that unit for the second quarter.

A higher projected share count also was expected to dilute earnings further.

"It's Tommy being seasonably not as profitable ... and the higher share count," said Brean Murray Carret analyst Eric Beder, explaining the market reaction.

He noted, however, that the company's projections for the second half of the fiscal year were higher than analysts were expecting. Due to costs associated with the Tommy Hilfiger deal, Phillips-Van Heusen posted a net loss in its fiscal first quarter of $22.6 million, or 53 cents per share, compared with a profit of $49.1 million, or 48 cents per share, a year earlier.

Excluding those costs, the company earned 83 cents per share -- above the 79 cents per share expected, on average, by analysts, according to Thomson Reuters I/B/E/S.

Revenue rose 11 percent to $619 million in the quarter, helped by global growth in the Calvin Klein brand and strong wholesale and retail results.

Phillips-Van Heusen expects second-quarter earnings of 50 cents to 52 cents per share, excluding costs from Tommy Hilfiger. That brand is expected to generate some $40 million of operating income in the quarter.

But the weaker seasonal business trend and lower share count is expected to reduce overall earnings in the second quarter by 12 cents per share, the company said.

"Most of the people on the Street, and I'm one of them, assumed the merger would close a little later than it did, and we really didn't understand the seasonality in terms of profitability," said Beder.

Revenue is expected to range between $1.08 billion and $1.10 billion, including a $520 million contribution from Tommy Hilfiger. The company expects 71.5 million shares outstanding on an adjusted basis. Beder had been planning for about 60 million. Wall Street had been expecting adjusted earnings of 71 cents in the second quarter on revenue of $635 million, but it was not immediately clear if those were comparable.

For 2010, the company expects adjusted earnings of $3.55 to $3.65 on revenue of $4.35 billion to $4.40 billion. That includes an approximately 20 cent to 25 cent boost to earnings and a $1.8 billion contribution to revenue from the Tommy Hilfiger brand, but does not include some $300 million in pre-tax costs due to the acquisition and integration.

Wall Street had been expecting 2010 earnings of $3.63, according to Thomson Reuters I/B/E/S.

For non-Tommy Hilfiger retail businesses, same-store sales are expected to grow about 4 percent to 5 percent in 2010.

The company's shares fell 3.6 percent to $52.35 after closing at $54.28, up 2.45 percent, on the New York Stock Exchange.

DCI-may 24, 2010

Donaldson Co. (DCI)

Donaldson Co. (DCI) reported a third-quarter net income of $49.5 million, or 62 cents per share. Revenue increased 20% to $497.6 million. Analysts estimated a quarterly profit of 59 cents per share on revenue of $477.1 million.



Some Interesting News-

• Microsoft (MSFT) is reportedly ready to announce a major management shake-up in its Entertainment & Devices Division. The unit, which focuses on videogames, mobile phones and other devices, accounted for 11% of Microsoft's revenue in Q1. However, Microsoft is falling behind in the heated competition with Google (GOOG) and Apple (AAPL). In particular, its Windows Phone is struggling, despite the firm's early entrance into the smartphone market, and Microsoft is lagging the new technology found in Apple's iPhone and Google's Android operating system. An announcement could come as soon as this week.

• EMC Corp. (EMC) was downgraded to "neutral" from "overweight" at JPMorgan Chase, while the brokerage firm upgraded NetApp (NTAP) to "overweight" from "neutral." The firm noted that NetApp provided a "more seamless and cost-effective approach to implementing server virtualization." As for EMC, JPMorgan stated that the company doesn't have a lot of "upside potential to top- and bottom-line growth."

• Prudential (PUK) made its debut on stock exchanges in Hong Kong and Singapore today as it gears up for its $35.5B acquisition of AIA, AIG's (AIG) Asian unit. Shares retreated in both markets, part of a broader pullback in Asia but also a reflection of growing investor skepticism over Pru's planned takeover. Pru chairman Harvey McGrath denies that claim, saying "the vast majority of shareholders are comfortable with the AIA transaction." Meanwhile, AIA chief executive Mark Wilson has said he plans to quit if the Pru acquisition goes through, calling a merger of the two businesses "unworkable." AIA’s finance and legal chiefs quit in March, and Wilson's threatened departure raises fears that other senior players will follow suit.

• Blackstone (BX) has reportedly joined TPG Capital and Carlyle Group in their $1.5B bid for Australian hospital operator Healthscope. Blackstone, which said last week that it's planning to establish a presence in Australia, had considered making its own offer but ultimately decided to provide extra financial backing to the existing bid.

• Disney (DIS) has formally ended talks to sell its struggling Miramax Films division back to Hollywood producers Harvey and Bob Weinstein. The Weinsteins, who sold the studio to Disney in 1993 for $80M, reportedly offered $625M for the studio and its library of more than 600 films, but negotiations collapsed because of the complicated acquisition structure proposed by the Weinsteins. Disney can now engage in talks with other bidders, potentially paving the way for another bid by billionaire brothers Tom and Alec Gores.

• Carl Icahn disclosed yesterday that he had acquired an 8.5% stake in Lawson Software (LWSN) as of May 11, and that he's seeking management talks over the company's operations. Lawson's shares have risen 50% over the past year, but Icahn believes the shares are undervalued. News of his purchase helped the stock close +7.7% in yesterday's trading.

• Congressional leaders began selecting the lawmakers that will shepherd the financial reform bill into law. The lawmakers will be tasked with working out the differences between the Senate and House versions of the legislation. The negotiations will begin slowly, and it will still be another week or two before the House names its lineup, but the expected Senate selection suggests banks may have a tougher time than they expected in getting certain business curbs removed from the bill.

• BP (BP) CEO Tony Hayward said yesterday that he had underestimated the possible environmental impact of the Gulf of Mexico spill, adding he's "devastated" by the situation. BP is looking into new ways to stem the oil leak should its current efforts fail.

• Toyota (TM) suspended sales of Lexus LS vehicles in the U.S. while it waits to receive new parts following a worldwide recall of the model. On Friday, Toyota recalled about 3,800 late 2009 and certain 2010 Lexus LS cars in the U.S. due to a steering wheel problem, with 11,500 cars recalled globally.

• As expected, Nokia (NOK) and Yahoo (YHOO) announced a new strategic alliance yesterday, bringing together two struggling companies in an effort to revitalize both, but the announcement brought little fanfare. Nokia will be the exclusive provider of Yahoo's maps and navigation services, and Yahoo will provide Nokia's mail and chat services. Separately, Yahoo said today that it has acquired Koprol, the Indonesia-based mobile-information firm, as part of its efforts to introduce its brand in emerging countries. Terms of the deal weren't disclosed.

• Dell (DELL) unveiled the Streak this morning, a tablet with a 5-inch screen based on Google's (GOOG) Android operating system. The tablet will go on sale in the U.K. in June, and in the U.S. later this summer, as Dell makes its assault on the iPad's (AAPL) newly carved-out territory.

• The delinquency rate for auto loan payments dropped markedly in the first quarter, falling to 0.66% from 0.83% in the first quarter of 2009. Similar improvements in credit card and mortgage delinquency rates in the same period suggest the economic recovery is giving consumers the ability to start catching up on their debt payments. Tighter lending standards also contributed to the decrease.

Conclusion

Caution is obvious for today's trading. If you are an options trader I believe there is a great deal of opportunities available in this type of market.

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



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