Tuesday saw the U.S. stocks rally to end sharply higher on the day, with equities gaining momentum as the S&P 500 Index broke through its 200-day moving average and the euro held above $1.23, signaling growing confidence with Europe's ability to deal with its debt crisis. With investors on a buying spree we can foresee that the recent downtrend may be nearing an end.
Picture: In this June 10, 2010 photo, a broker works the trading floor at the New York Stock Exchange, in New York.(AP Photo/David Karp)
Investors were motivated by successful debt auctions in Spain, Belgium and Ireland, which lifted some of the gloom over Europe's debt crisis. The euro rallied against the dollar and pushed commodity prices higher.
"You are seeing renewed confidence, and it's certainly evident in the price action in the euro," said Tom Schrader, managing director of U.S. equity trading at Stifel Nicolaus Capital Markets in Baltimore. "There's definitely a trend towards returning to risky assets."
The bullishness represents a strong rebound from Monday's late-day reversal, which was triggered by sovereign debt worries resurfacing after Moody's slashed Greece's credit rating by four notches into junk territory. However, European markets largely shrugged off the development, easing jitters on Wall Street and reestablishing the risk trade.
“Right now I think we’ve overdone it to the downside and I’m looking for a recovering rally for the rest of the summer period,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald, alluding to the correction the markets suffered in recent weeks.
“For the bulls, short-term, it’s a big buy signal,” said NYSE trader Ted Weisberg of Seaport Securities.
Results for Major Market Indexes
The Dow Jones Industrial Average (DJIA – 10,404.77) finished with a great gain of 213.88 points, or 2.10%.
The S&P 500 Index (SPX – 1,115.23) also had a good gain on the day, of 25.60 points, or 2.35%.
The Nasdaq Composite (COMP – 2,305.88) was also up with the winners, finishing with a gain of 61.92 points, or 2.76%.
The Russell 2000 Index of smaller companies had a good gain of 16.50 points, or 2.53%, to settle at 668.77.
Stocks linked to global growth also rallied sharply, with heavy equipment maker Caterpillar Inc (CAT) up 4 percent at $63.46. Other multinationals with heavy exposure to Europe, such as aircraft maker Boeing Co (BA), also climbed in sync with the euro. Boeing was up 4.1 percent at $67.48 and contributed the most to the Dow's advance.
In a sign of a robust equity market, shares of CBOE Holdings Inc (CBOE) jumped as much as 16.4 percent in their stock market debut as investors saw bright prospects for the parent of the Chicago Board Options Exchange. The $339 million IPO was the biggest this year. CBOE's stock ended at $32.49, up 12 percent from its offering price of $29.
Semiconductor stocks helped lift the Nasdaq after TSMC (2330.TW) and UMC (2303.TW), the world's two largest contract chip makers, forecast growing demand in the coming months amid an improving global economy and rising sales of new personal computers and other consumer gadgets. Very strong rallies for tech companies like Research in Motion (RIMM) and Dell (DELL) certainly helped push the Nasdaq to a comfortable position for the day.
Intel Corp (INTC), the world's dominant chipmaker, added 2.8 percent to $21.48, while Broadcom Corp (BRCM) climbed 5.7 percent to $35.84, and Marvell Technology Group Ltd (MRVL) surged 8.3 percent to $18.94.
Trading volume: About 8.41 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, sharply below last year's estimated daily average of 9.65 billion.
Six stocks rose for every one that fell on the New York Stock Exchange, where consolidated volume came to 4.7 billion shares, versus 4.5 billion shares the day before.
Notes of Interest….
• The Dow Jones Industrial Average’s (DJIA) notched a third consecutive daily close above its 10-day and 20-day moving averages. What's more, the blue-chip barometer settled above 10,400 for the first time since May 19.
• The S&P 500 Index’s (SPX) broke out of the recent trading range between 1,100 and 1,040, as well as move above its 200-day moving average -- a longer-term trend line that many use to distinguish between a bull and bear market. The SPX has now ended three consecutive sessions north of its 10-day and 20-day trend lines.
• The Nasdaq Composite (COMP), the tech-rich index, finished above its own 10-day and 20-day moving averages for the second day in a row, and tackled the 2,300 level for the first time since June 3.
• Crude futures caught a lift right along with stocks today, as trader’s cheered positive manufacturing data from the New York region. Dollar-denominated oil futures were also supported by a fresh two-week high for the euro, as the common currency rebounded from its recent drubbing. By the close, crude oil for July delivery tacked on $1.82, or 2.4%, to settle at $76.94 per barrel -- its highest close since May 6.
• Gold futures also joined in the day's upside bias, with the malleable metal luring a new wave of buyers following a recent slump. Additionally, lingering fears about the economic health of the euro zone continued to provide a crucial underpinning for safe-haven gold futures. Gold for August delivery added a respectable $9.90, or 0.8%, to end the day at $1,234.40 per ounce.
• Bond prices fell and drove up interest rates after stocks climbed. The yield on the benchmark 10-year Treasury note rose to 3.31 percent from 3.26 percent late Monday.
The CBOE Volatility Index (VIX), a gauge of Wall Street's anxiety, fell 9.5 percent to 25.87, its lowest level since the middle of May.
Wall Street put a positive spin on the latest reports suggesting the U.S. economy continued to recover despite the troubles on the other side of the Atlantic.
U.S. import prices recorded their largest decline in nearly a year in May as petroleum costs plummeted, according to a government report on Tuesday that bolstered views of tame inflation and low interest rates.
Import prices fell 0.6%, the biggest decline since July, after rising by a revised 1.1% in April, the Labor Department said.
Although the decline was less than economists' expectations for a 1.2% fall, it was the first drop since February. April import prices were previously reported to have increased 0.9%. In the 12 months to May, import prices rose 8.6%.
The monthly decline in import prices reflected a 5.0% fall in the cost of imported petroleum and petroleum products, the largest drop since December 2008, after a 3.7% gain in April.
Excluding petroleum, import prices rose 0.5% after rising by the same margin in April.
Strength in the U.S. dollar is also helping to keep inflation pressures muted and this should allow the Federal Reserve to renew its low interest rate pledge at next week's policy meeting to nurse the economy's recovery.
The Labor Department report showed export prices unexpectedly increased 0.7% last month after rising 1.2% in April. Analysts had expected export prices to be flat in May. In the 12 months to March, export prices rose 5.8%.
The Empire Manufacturing Survey
A gauge of manufacturing in New York State showed the sector continued to grow in June although employment fell sharply, the New York Federal Reserve said in a report on Tuesday.
The New York Fed's "Empire State" general business conditions index edged up to 19.57 in June from 19.11 in May, but was down from 31.86 in April.
Economists polled by Reuters had expected a June reading of 20.00.
The employment gauge dropped, although it remained positive. The index for the number of employees fell to 12.35 in June from 22.37 in May, while the average employee workweek index rose to 8.64 from zero.
The index of business conditions six months ahead fell to its lowest since July 2009, dropping to 40.74 from 42.11.
The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions.
The Energy Sector
BP PLC (BP) shares gained 2.4%, even as investors wait to see whether there would be a dividend suspension amid the devastating oil spill in the Gulf of Mexico.
On Capitol Hill, BP Chief Executive Tony Hayward is scheduled to meet with President Barack Obama on Wednesday, one day before he's slated to testify before a congressional panel.
Even with BP shares rising, Hogan likened the move higher as akin to "throwing a deck chair off the Titanic."
The oil company "just spent the day getting the snot kicked out of them on Capitol Hill, and their shares are down 50% from the beginning of this disaster. They've had $82 billion in market capitalization taken away for something that will cost $30 billion to fix. The problem is we don't know how much it will cost, since that depends when the oil spill is stopped," he commented.
"Fallout from the Gulf oil spill has seen global investors slash energy weightings to just 7% overweight from 37% overweight in May. This is the largest single-month fall ever seen in energy. It leaves tech by far the most-favored sector and has also driven yield-needy investors into telecom, utilities and pharmaceuticals," noted in a survey.
Buyers snapped up beaten-down energy names as industry executives were grilled by a congressional panel, with some investors betting the stocks may have hit a bottom.
An S&P energy stock index .GSPE gained 2.7 percent, with the U.S.listed shares of BP Plc (BP) up 2.4 percent at $31.39. Halliburton Co (HAL) rose 6 percent to $25.46, while Cameron International Corp (CAM) gained 4.4 percent to $37.38.
BP continues to reel from the massive oil spill in the Gulf of Mexico. BP's credit rating was slashed by six notches by Fitch Ratings amid signs the company's near-term costs could be higher than previously expected due to calls from Washington for a $20 billion escrow account to cover liabilities. However, BP's stock erased its losses and turned solidly higher as oil executives testify on Capitol Hill. Shares of other companies involved in the spill like Transocean (RIG) and Halliburton (HAL) also rallied.
BP execs are gearing up for a grilling from lawmakers on Capitol Hill and a meeting with President Barack Obama, who is scheduled to address the disaster in an Oval Office speech Tuesday night. New documents released by a congressional panel show the company focused on costs during the days leading up to the explosion that caused the worst oil spill in U.S. history.
"The panic from the euro-zone crisis has abated, with the likes of Spain and Ireland able to successfully tap the credit markets, supporting a move into riskier assets, “according to analysts at Action Economics.
"There are rumblings the austerity plan may work," said Doug Roberts, chief investment strategist at Channel Capital Research.com., of Europe's effort to stem its debt crisis. "There is not a lot of liquidity in the market as a lot of major hedge-fund managers are on holiday, so the market is dominated by news."
The worries about what's ahead for the euro and European stocks may have peaked, according to Bank of America's Merrill Lynch monthly fund-manager survey.
The proportion of global investor’s underweight euro-zone equities has fallen to a net 27% from a net 34% in May. A net 12% of managers now want to underweight the region, down from 30% taking this view in May.
At the same time the proportion that believe the euro zone has the weakest outlook for corporate profits fell to 33% in June from 41% in May.
A survey showed that 19% of managers expect the euro to appreciate over the next twelve months, up from 7% holding this view in May. A net total of 14% believe the euro is overvalued, down sharply from 45% taking this view in May.
Greece has already received a 110 billion euro package of loans, and the European Union and International Monetary Fund have set aside money for up to €750 billion more of disbursements.
"Investors are starting to see the basis for Europe's rehabilitation on the back of a more constructive outlook for the euro," said Gary Baker, head of European equity strategy at Bank of America Merrill Lynch global research.
But the realization that government efforts to reduce debt are likely to hurt economic growth for some time to come seems to have hit home.
In currencies, the euro rose 0.9% versus the dollar, continuing to recover after touching a four-year low of $1.188 last week. The dollar fell 0.4% against the yen.
U.S. markets cheered another burst of buying for the euro, which climbed solidly above the $1.23 mark. The currency has seen its value tumble in recent months amid worries about the European sovereign debt crisis, but it has mostly withstood and even gained value following the downgrade of Greece. A stronger euro has consistently boosted U.S. market sentiment and fueled rallies for multinationals and dollar-traded commodities. The euro was up 1.11% to $1.2344 as U.S. markets closed.
The euro is barely intact, and rescuing the banks only worsened the financial crisis, Roger Nightingale, strategist at Pointon York, told CNBC on Tuesday.
Nightingale believes the euro project is basically extinct. “You can keep dead bodies alive, can’t you? You prop them up in a chair, and pretend they’re alive. But everyone knows they’re not.”
Analysts at the French financial group AXA sent an ominous forecast that the euro zone will break in half or disintegrate, dismissing Europe's 750 billion (£623 billion) rescue package for Club Med nations as temporary pain relief that fails to cure the root of the problem. The bailout assumes that citizens in Greece and other Club Med democracies will endure years of pain for the sake of foreign creditors.
Nighingale believes this disintegration has already happened. “The Euro is barely intact, and the European economy is a mess.”
European markets have proved to be resilient in the face of the Greece downgrade, with indexes in London and Paris rallying for the fifth day in a row and reaching new one-month highs.
Chile's bourse,the top performer in Latin America this year, broke through 4,000 points for the first time on Tuesday on its climb to a fifth consecutive record high, tracking gains in global markets.
The blue-chip IPSA .IPSA index rose 1.25 percent to close at 4,035.98 points, following a surge on Wall Street after healthy demand for European bonds suggested easing concerns over the health of the euro zone.
Prudent fiscal policies and strong growth projections have allowed Chile to bounce back quickly from the 8.8-magnitude earthquake that killed hundreds and ravaged the country's south-central region. Strong corporate earnings in the first quarter have also been key to recent stock gains.
By comparison, Brazil's benchmark Bovespa index .BVSP has fallen nearly 6 percent so far this year while Mexico's IPC stock index .MXX has posted 1.4 percent gains from its 2009 close.
European Markets: Britain's FTSE 100 climbed 0.3 percent, Germany's DAX index rose 0.8 percent, and France's CAC-40 rose 1 percent.
Asian Markets: Japan's Nikkei and Hong Kong's Hang Seng ended just above unchanged and China's Shanghai Composite added 0.3%.
Company Earnings Reports
There have been some positive notes today particularly from the earnings arena. Several companies have presented earnings reports that exceeded the analysts’ expectations. These are:-
• FactSet Research Systems (FDS)
• Casey’s General Stores (CASY)
However, Best Buy (BBY) surprised analysts with a negative earnings report.
Best Buy (BBY) reported lower-than-expected sales and profit, hurt by rising costs of expanding its business and weaker consumer demand, sending its shares down 6 percent.
The top U.S. electronics chain said shoppers proved more tentative in a seasonally weaker quarter for sales. That theme has played out for many retailers as unemployment remains high and Europe's economic troubles weigh on a global recovery.
"Consumer spending has been episodic and (it) appears that our customers are operating on cues from the broader environment," CEO Brian Dunn said on a conference call on Tuesday.
Best Buy posted a low single-digit decline in same-store sales of televisions during its fiscal first quarter as well as weak sales in its video gaming, music and movie categories.
Analysts also focused on a 12.3 percent rise in selling, general and administrative costs, adding pressure to margins as Best Buy continues to fight a fierce price war against larger retailers Wal-Mart Stores Inc (WMT) and Amazon.com (AMZN).
"It is definitely a significant worry. When you think about pricing... there is Amazon and Wal-Mart and a number of other major retailers that are focused on this category and they predominantly compete on price," Edward Jones' Matt Arnold said.
Net profit was $155 million, or 36 cents a share, for the three months ended May 29, compared with $153 million, or 36 cents a share, a year earlier.
Analysts on average were expecting a profit of 50 cents a share, according to Thomson Reuters.
Selling, general and administrative expenses rose to 23 percent of revenue in the quarter from 21.9 percent a year ago. The company said that increase was driven by new stores, higher investments to boost sales and foreign currency fluctuations.
"I am not pleased with our overspend in the first quarter," CEO Dunn said in an interview, adding: "That being said ... Q1 is 10 percent of our year. This was a good place for us to make some investments to set us up for the balance of the year."
Despite the huge miss, Best Buy backed its outlook for the full year. Some analysts however remain skeptical.
Oppenheimer's Brian Nagel, who termed the company's outlook as "aggressive," worried that Best Buy's expectations might be a stretch.
"I usually applaud companies for making revenue and margin-enhancing investments... The concern I have though is that the degree to which Best Buy expects what seems to be an immediate payoff from these investments," Nagel said.
CEO Dunn said while there may be no rapid huge paybacks, he expected a steady return from the new initiatives.
In the first quarter, Best Buy's net revenue rose about 6.9 percent to $10.79 billion, missing analysts' expectations of $10.93 billion. Sales at stores operating for at least 14 months increased 2.8 percent, boosted by sales of notebook computers, mobile phones and appliances.
It expects a slower rate of expense growth in dollar terms in subsequent quarters, with costs for full fiscal year 2011 up 6 percent to 6.5 percent from a year ago, excluding restructuring charges from fiscal 2010.
Best Buy, which has benefited from being the only other reseller of certain Apple products, is in for more challenges from its rivals.
Wal-Mart on Tuesday confirmed it would sell the fourth-generation iPhone on launch day. The retailer, which prides itself on featuring "everyday low prices," declined to comment on how it will price the new iPhone.
In a separate statement, Best Buy announced a new program to allow gaming enthusiasts to exchange old games for Best Buy giftcards. The news weighed on shares of GameStop (GME).
Best Buy reiterated its forecast for fiscal 2011 earnings of $3.45 to $3.60 a share on revenue of $52 billion to $53 billion.
Best Buy shares closed down 6 percent at $38.58 Tuesday on the New York Stock Exchange.
Clarcor Inc (CLC)
Filtration products maker Clarcor Inc (CLC) posted better-than-expected quarterly results, helped by higher sales of heavy-duty engine filters, and raised its full-year earnings outlook.
Clarcor, which also makes consumer and industrial packaging products, expects 2010 earnings of $1.70 per share to $1.85 per share, up from its prior view of $1.55 per share to $1.70 per share.
For the second quarter ended May 29, Clarcor reported net income attributable to the company of $23.9 million, or 47 cents a share, compared with $16.8 million, or 33 cents a share, a year ago. Net sales rose 12 percent to $257.9 million. Net sales in its Engine/Mobile Filtration segment rose about 23 percent, while the Packaging segment saw a jump of 56 percent. Analysts on average were expecting earnings of 41 cents a share, before items, on revenue of $237.6 million, according to Thomson Reuters.
Shares of the Franklin, Tennessee-based company rose 6 percent to $38.64 in trading after the bell. They closed at $36.45 Tuesday on the New York Stock Exchange.
Company News and Movements:
• Green Mountain Coffee Roasters Inc. (GMCR) announced on Monday that it has entered into an asset purchase agreement with Pine State Trading Co. Under the terms of the new partnership, GMCR will transition customer support in its northeast region to Pine State Trading.
Shareholders appear to have reacted favorably to the agreement, with GMCR adding roughly three points since yesterday. In fact, the coffee concern is currently making a run at its 10-week and 20-week moving averages, which haven't been toppled since mid-April.
• Illinois Tool Works Inc (ITW).Diversified U.S. manufacturer Illinois Tool Works Inc (ITW) raised the mid-point of its second-quarter earnings forecast on Tuesday, citing "increasing demand across a broad set" of its customers inside and outside of North America.
The Glenview, Illinois-based company said it now expects earnings from continuing operations to be in the range of 80 to 86 cents a share, up from a previous forecast of 74 to 86 cents. That raised the midpoint of the company's EPS forecast to 83 cents from 80 cents.
Analysts, on average, have expected the company to report earnings of 81 cents a share, according to Thomson Reuters.
News of the raised forecast came as Illinois Tool reported that its revenue grew 21 percent during the three months ended May 31, 2010, lifted by a 15 percent growth in base revenue to revenue growth and a 6 percent rise in acquisition and currency related revenues.
VMware, Inc. (VMW), the stock surged to a new annual high of $72.42 earlier on the heels of a substantial price-target boost from Broadpoint AmTech. The brokerage firm backed its "buy" rating on VMW and hiked its price target from $65 to $85, with the new forecast implying expected upside of nearly 22% from Monday's closing price.
Netflix, Inc. (NFLX shares are off about 3% after Stifel Nicolaus slashed its rating on the stock from "buy" to "hold." In a note to clients, the brokerage cited the possibility of competition from Hulu.com, along with the dangers of high investor expectations.
• SunTrust Banks, Inc. (STI) scored a bullish note from Rochdale Securities analyst Richard Bove. The well-known banking analyst raised his opinion on the shares from "sell" to "neutral," and maintained his price target of $25.
"It appears that the residential markets in Florida may have bottomed," wrote Bove in a note accompanying his upgrade of the Georgia-based bank.
• Microsoft Corp. (MSFT) and Dell Inc. (DELL). The Wall Street Journal reported on Monday that the U.S. State Department has dispatched a diplomatic and trade mission to Syria, in order to "woo" President Bashar al-Assad from his alliance with Iran. The main objective of the mission is to help facilitate the flow of information technology into the heavily censored Arab state. The group is comprised of high-level executives from American tech companies, and includes representatives from Microsoft Corp. (MSFT) and Dell Inc. (DELL). Interestingly enough, these two tech titans saw usually high put activity on Monday, in light of both stocks' recent technical turnarounds.
• After the close last night, Callaway Golf Co. (ELY) said that it expects to earn between 10 and 15 cents per share during the second quarter, as the golf sector continues to recover from the recession. The firm also said that it sees second-quarter revenue arriving between $295 million and $305 million. Analysts were expecting a profit of 32 cents per share on revenue of $325.1 million.
Following the announcement, several brokerage firms adjusted their ratings and price targets on the security. For instance, JMP Securities downgraded ELY to "market perform" from "market outperform," while S&P Equity Research cut the stock to "sell" from "hold," and Wedbush lowered its price target to $9 per share from $12 per share.
Overall, there is still room for additional downgrades, as Zacks reports that seven of the 15 analysts following ELY still rate the stock a "buy" or better. Furthermore, Thomson Reuters places the stock's consensus 12-month price target at $11 per share - a premium of 36% to the security's current trading range near $7 per share. Any additional downgrades or price-target cuts from these remaining bulls could send ELY sharply lower.
• Apple (AAPL) said it launched a new version of its lowest-priced computer, Mac mini, with twice the graphics performance and lower power usage, from $699.
Apple said the product's power consumption would be less than 10 watts when idle. The new Mac mini, which is 7.7 inches square by 1.4 inches, has an HDMI port and a new SD card slot to allow transfer of files from a digital camera.
It has a Nvidia GeForce 320M graphics processor, a 2.4 gigahertz Intel Core 2 Duo processor, 320 gigabyte (GB) hard-disk and 2GB RAM. It comes with Mac's Snow Leopard operating system.
• Industrials made some of the biggest moves following upbeat news from Boeing Co. and Illinois Tool Works Inc. Boeing rose 4.1 percent after increasing production of the 737 jet. Boeing said customers are adding to existing orders and placing new ones. ITW rose about 2.5 percent after it raised the lower end of its fiscal second-quarter earnings target.
• GameStop’s (GME) stock slid 5% as Best Buy announced plans to begin to sell used videogames, creating new competition for the videogame retailer. Best Buy also said it will allow customers to trade in old video games for gift cards.
ConclusionTuesday's trading shows that investors have started to put aside some of their uneasiness about Europe and focus on continuing signs of strength in the U.S. Still, the market is susceptible to troubling headlines. On Monday, stocks gave up steep gains, partly because Moody's cut its rating on Greece's debt to "junk" status.
Investors are also ready to punish stocks of companies that have disappointing news. Best Buy Co. fell 6.1 percent Tuesday after the electronics chain posted weaker-than-expected earnings.
Analysts have predicted that the market's choppy trading of the past two months is likely to continue until investors feel more secure about the global economy. The Dow has had 24 triple-digit moves in the 35 trading days since it reached a 2010 high of 11,205.03 on April 26.
The other side of the coin……… Andrew Neale, head of portfolio management at Fogel Neale Partners in New York, is skeptical that the market's climb will hold. He noted that many individual investors are growing weary of the market's sharp swings and are pulling money out of mutual funds and other investments. That means the gains are being driven largely by professional traders.
"We don't see any real retail buying," Neale said, referring to individual investors. "We're advising our clients to be very cautious with the market."
Maybe taking the middle-road view is more acceptable to the investor. "The market has clearly stabilized in the last 12 days or so," said Peter Kenny, managing director at Knight Capital Group. "Investors are willing to look at Europe not as a worst-case scenario, but as an ongoing and evolving policy challenge.”
So make the most of the market, start trading options.
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