US & World Daily Markets Financial Briefing 01-06-2009

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Stocks Seeing Significant Strength In Mid-Morning Trading

After rallying into the close in the previous session, stocks are showing significant strength in mid-morning trading on Monday. The major averages are all firmly in positive territory, looking to extend their gains for a third straight session as traders digest encouraging economic data.

While the Institute for Supply Management released a report showing that activity in the manufacturing sector contracted for the sixteenth consecutive month in May, the pace of contraction slowed by more than economists had been expecting.

The report showed that the index of activity in the manufacturing sector rose to 42.8 in May from 40.1 in April, with a reading below 50 indicating a contraction. Economists had been expecting the index to edge up to a reading of 42.0.

A turnaround in new orders contributed to the improvement in the sector, with the new orders index climbing to 51.1 in May from 47.2 in April. This marked the first time the index has been above 50 since November of 2007.

Additionally, construction spending unexpectedly increased in the month of April, according to a report released by the Commerce Department, with the unexpected growth reflecting a notable increase in spending on private construction.

The report showed that construction spending increased by 0.8 percent to an annual rate of $968.7 billion in April following a revised 0.4 percent increase in March. Economists had expected spending to decrease by about 0.8 percent.

The Commerce Department also released a separate report showing that personal income unexpectedly rose in the month of April, with the increase partly due to the reduced taxes and increased social benefit payments associated with the government's economic stimulus plan.

On the corporate front, auto giant General Motors (GM) officially filed for insolvency this morning. The Obama administration said Sunday that it has deemed GM's reorganization plan viable and will provide the company $30.1 billion in debtor-in-possession financing.

Subsequently, Dow Jones revealed that GM would be removed from the Dow Jones Industrial Average along with Citigroup (C), with Cisco (CSCO) and Travelers (TRV) to take the place of the troubled firms. Both changes will be effective with the opening of trading on Monday, June 8.

The major averages have moved roughly sideways in recent trading, hovering near their best levels of the day. The Dow is currently up 194.90 at 8,695.23, the Nasdaq is up 46.31 at 1,820.64 and the S&P 500 is up 22.07 at 941.21.

Sector News

Most of the major sectors are showing substantial strength in mid-morning dealing, helping the major averages to surge higher on the day.

Healthcare provider stocks are turning in some of the day’s best performances, with the Morgan Stanley Healthcare Provider Index up by 4.5 percent. The strong gain has lifted the index to its best intraday level in eight months.

The sector is benefiting from an upgrade from Deutsche Bank, which raised its rating on the sector to Positive from Neutral. Deutsche Bank said traditional fundamental investors may become drawn to the sector based on the secular theme of health care reform

Shares of Tenet Healthcare (THC) and Healthcare Management Associates (HMA) have stood out in morning dealing, rising by 10.2 percent and 7.1 percent, respectively.

A variety of other sectors have also shown strong upward moves, reflecting broad based strength in the markets. Significant strength is visible among steel, transportation, semiconductor and energy.

Stocks markets across the Asia-Pacific region soared on Monday. Japan's benchmark Nikkei 225 Index rose by 1.6 percent, while China's Hang Seng climbed 3.4 percent.

The major European markets are also seeing significant strength. The French CAC 40 Index and the German DAX Index are up by 3.0 percent and 4.0 percent, respectively, while the U.K.'s FTSE 100 Index is also on the rise, climbing by 2.2 percent.

In the bond markets, treasuries are plunging, giving back most of the gains posted in the previous session. Subsequently, the yield on the benchmark ten-year note is trading at 3.649 percent, a climb of 18.4 basis points on the day.

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Bay Street Stocks Could See Early Strength After GDP Report

Toronto stocks could move to the upside in early Monday morning trading, following the lead of stocks around the globe. Investors will mull over a better-than-forecast gross domestic product report as well as rising oil prices.

Crude oil prices edged up 33 cents to $66.64 per barrel, continuing a recent rally. Gold is up $3.10 to $983.40 per ounce and copper has rallied 7.6 cents to $2.2735 a pound in early trading.

Canada's real gross domestic product declined 1.4% in the first quarter, the largest quarterly decrease since 1991, according to data released Monday morning by Statistics Canada.

Real GDP fell 0.3% in March. The declines in February and March were less pronounced than those in the preceding three months.

Beleaguered automaker General Motors said that it has filed for insolvency under Chapter 11, as widely expected. In its filing, the company revealed that it had assets equivalent to $82.29 billion, and total debts, on a consolidated basis, of $172.81 billion, as of March 31.

According to the Globe and Mail, the federal and Ontario governments will contribute US$9.5 billion under the filing own $12% of GM.
 
Early Saturday, the German government reported selected Canadian car parts maker Magna International Inc. to takeover Opel, the German division of General Motor Corp.'s European operations.

In other corporate news, Goldcorp said it is planning a private offering of approximately US$750.0 million of convertible senior notes due 2014.

ESI Entertainment Systems reported a net loss of C$5.07 million or C$0.36 per share for fiscal 2009, compared to a net loss of C$7.20 million or C$0.42 per share in the year-ago.

In other economic news in Canada, the Industrial Product Price Index and the Raw Materials Price Index were both down 0.5% in April compared with March.

On Friday, the S&P/TSX Composite Index fell 22.30 points or 0.21% to close at 10,370.07. The index had gained in three of the previous four sessions.

Crude oil futures are rising $1.39 to $67.70 a barrel after the commodity gained $5.93 or 9.62% during the week ended May 29th. Better-than-expected economic readings helped the commodity to start the week on a strong note. On Wednesday, oil rose again, advancing $1 ahead of Thursday’s weekly inventory data and OPEC meeting.

A bigger-than-expected draw down in oil inventories exerted upward pressure on Thursday, as futures rose by over $1.50-a-barrel on Thursday. The commodity rose again on Friday, ending the week at $66.31 a barrel.

Gold futures are currently moving up $7.40 at $987.70 an ounce. In the previous week, the precious metal jumped $21.40 or 2.23% to $980.30 an ounce, with the upside brought about primarily by the dollar’s weakness.

The U.S. dollar closed the week ended May 29th on a mixed note, as it rose 0.60% against the yen to 95.34 yen, while it fell 1.33% against the euro to $1.4158. A weak retail sales report from Japan weighed on the Japanese currency last week, pushing it lower against the dollar. Meanwhile, the U.S. dollar lost its appeal as a safe haven investment amid the release of fairly positive economic readings from the U.S. and from other regions last week.

Currently, the U.S. dollar is trading at 95.36 yen and is valued at $1.4205 versus the euro.

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The markets across the Asia-Pacific region ended in positive territory on Monday, led by resource stocks on higher commodity prices. A positive closing on Wall Street on Friday and economic data from China that revealed that manufacturing in the world's third largest economy increased for the third successive month lifted market sentiment.

Japan’s Nikkei 225 Average opened slightly weaker at 9,517 compared to its previous close at 9,522 on profit taking following recent gains. Thereafter, the market reversed the trend and moved above the unchanged line. Higher commodity prices, Chinese manufacturing data and positive sentiment across the Asian markets lifted the sentiment and drove the index to the day's high of 9,692.

The benchmark index ended a shade lower at 9,678, representing a gain of 155.25 points, or 1.63%. The broader Topix Index of all first section issues gained 14.61 points, or 1.63%, to close at 913.

On the economic front, the Ministry of Health, Labor and Welfare revealed that labor cash earnings for companies with five or more employees eased 2.5% year-on-year in April following a revised 3.9% fall in March. Analysts expected earnings to slip 4.2%.

Inpex, the leading oil exporter in the country, added 0.65%, Showa Shell advanced 1.80% and Nippon Oil gained 2.24%. The shares of Konica Minolta hit the upper limit, ending the day with a gain of 9.79% after Goldman Sachs raised the rating for the company by one notch to "buy" on expectations of more upside growth for the company in the medium term.

Shipping stocks continued to advance following Chinese manufacturing data. Kawasaki Kisen surged up 7.42%, Mitsui OSK Lines advanced 6.36% and Nippon Yusen rose 5.04%.

Among financial stocks, Mitsubishi UFJ gained 2.84%, Mizuho Financial advanced 3.95%, Resona Holdings added 2.31% and Sumitomo Mitsui rose 2.72%. Nomura Holdings gained 3.63% after the brokerage revealed that it is conducting a survey of the market to gauge the demand, terms and pricing for raising funds through the issue of straight bonds under its shelf registration.

Australia’s All Ordinaries Index opened slightly higher at 3,820 compared to its previous close at 3,813. In early trading, the index slipped below the unchanged line briefly on short covering, but it recovered smartly following the release of the Chinese manufacturing report. The index ended the session at the day's high of 3,888, registering a gain of 1.96% or 74.60 points. The benchmark S&P/ASX 200 Index followed a similar trend and ended up at 3,894, a gain of 76.3 points, or 2.00%.

Commodity stocks led the gains in the market, while financial stocks also showed notable buying interest. Macquarie Group soared 11.82% following the finalization of terms to acquire Canada-based global energy advisory firm Tristone Capital Global Inc.

Retail stocks advanced on hopes of a revival in consumer spending. David Jones gained 4.99%, Harvey Norman advanced 2.05%, Coles owner Wesfarmers rose 4.50% and Woolworths added 0.20%.

In Hong Kong, the Hang Seng Index ended sharply higher, led by positive manufacturing data in mainland China, higher commodity prices and Wall Street's gains on Friday. The index ended the session at 18,889, up 718 points, or 3.95%.

Thirty-seven of the forty index components ended in positive territory. PetroChina advanced 5.62% and CNOOC, the largest offshore oil firm in China, surged 8.82%, on higher crude oil prices.

In South Korea, the benchmark KOSPI Index ended in positive territory, led by foreign institutional investors who continued to pick up select stocks. Resource, steel and automotive stocks led the gains. After showing some nervousness in early trading, the Kospi rose decisively above the unchanged line before ending with a gain of 19.21 points or 1.38% at 1,415.

Financial stocks led the gains. KB Financial, which controls Kookmin Bank, gained 6.62%, Shinhan Financial advanced 3.82% and Woori Finance rose 6.33%. Automotive stocks ended mixed, with Hyundai Motor gaining 3.75% and Kia Motor advancing 2.09%. However, Ssangyong Motor shed 2.62% after announcing that it would close down its major factory located in the southern part of Seoul.

The Indian market ended in positive territory, continuing its northward march on expectations of further economic reforms by the Congress party under Dr. Manmohan Singh's stewardship, which returned to power for the second time. Positive sentiment across the Asian markets and increasing hopes for recovery also propped up the market. The BSE Sensex ended at a 9-month high of 14,841, a gain of 215.38 points, or 1.47%, and the Nifty gained 1.82% or 80.95 points, to close at 4530.

Among the other major markets in the region, China's Shanghai Composite Index added 88.35 points, or 3.36% to close at 2,721, Indonesia's Jakarta Composite Index gained 81.75 points or 4.26% to close at 1,999, the Strait Times Index in Singapore added 50.99 points, or 2.19% to close at 2,380, and the Taiwan Weighted Index ended at 6,954, up 63.66 points, or 0.92%.

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The major European averages are trading higher on Monday, with the French CAC 40 Index and the German DAX Index rising 2.04% and 3.15%, respectively, while the U.K.’s FTSE 100 Index is gaining 1.52%. The commodity rally has thus far been the driving force behind the market upside in today’s session.

A report released by Hometrack revealed that U.K. house prices remained stable in May for the first time in 20 months. House prices showed monthly declines in each of the past 20 months. After falling 0.3% in April, average house prices stayed at GBP 155,600 in May. However, house prices were down 9.6% in May compared to the year ago period.

U.S. Economic Reports

The unfolding week is a pretty hectic week on the economic calendar, with a couple of market moving reports due to be released in the week. The monthly non-farm payrolls report for May, the results of the ADP private employment survey, which is seen as a precursor to the Labor Department report due on Friday, the Bureau of Economic Analysis' personal income and outlays report for April and the results of the Institute for Supply Management's manufacturing and non-manufacturing surveys for May are likely to be closely watched by traders.

Additionally, market attention is likely to be vested on the motor vehicle sales for May, given the backdrop of General Motors' impending insolvency filing, the Commerce Department's construction spending report for April and the National Association of Realtors' pending home sales index for April. The Fed's consumer credit report and the Labor Department's final productivity & costs report for the first quarter and the regularly scheduled weekly jobless claims and oil inventory reports may also receive some attention.

The rise of the continuing claims to fresh record highs and the continued increase in the unemployment rate offer little hope for a turnaround in job market conditions. However, State Street Advisors expect the modest improvement evident in April employment to be sustained in May, although without further improvement thereon. The unemployment rate is expected to top 9% in May.

A report released by the Bureau of Economic Analysis showed that personal income rose 0.5% month-over-month in April following a downwardly revised 0.2% decline in March. Economists had expected a 0.2% increase in income for the month. Personal spending fell 0.1% compared to expectations for a 0.2% increase.

Spending on durable goods fell 0.6% in April after declining 0.3% in March, while spending on non-durable goods dropped 0.6%. Spending on services rose 0.3% in May after rising 0.1% in the previous month. The core price consumption expenditure index rose at a 1.9% year-over-year rate, the same rate in February.

Wachovia Securities had expected personal income, especially the disposable income, to rise significantly in April after falling for five straight months, as withholding tables are changed for the new tax provisions. Spending was also expected to climb, although at a slower pace.

The results of the Institute for Supply Management’s manufacturing survey, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 AM ET. Economists expect the index to show a reading of 42 for May.

In April, the manufacturing sector continued to contract, although at a slower rate than in the previous month. The ISM's purchasing managers' index rose 3.8 points to 40.1, with the indexes of new orders, production, employment, supplier deliveries, inventories and backlog of orders showing an improvement in the month from depressed levels. The prices index also rose 1 point to 32.

Although we have seen fledgling signs of recovery, the outlook for the manufacturing sector is still weak. Regional manufacturing surveys show that the sector is still in the contraction zone. However, a rebound in durable goods orders point towards the emergence of strength in the pipeline.

The Commerce Department's construction spending report to be released at 10 AM ET on Monday is expected to show a 0.8% decline in spending for April.

In March, construction spending edged up 0.3% month-over-month, marking the first increase in six months. The gain came amid a 1.1% increase in public construction, while private construction spending eased 0.1%. In the private construction category, spending on single-family home construction slumped 8.6% and multi-family home construction spending dropped 1.1%. Meanwhile, private non-residential construction spending rose 2.7% compared to the previous month.

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Ethan Allen (ETH) may be in focus after it announced that it has entered into a new 3-year senior secured revolving credit facility. The new facility is initially set at $40 million with an accordian feature permitting an increase to up to $60 million.

Prudential Financial (PRU) and Sun Trust Banks (STI) may react to their announcements concerning new offerings. Prudential said it would not participate in the Treasury’s capital purchase program. Instead, the company said it has commenced a public offering of $1.25 billion of its common stock. Meanwhile, Sun Trust said it has commenced offering $1.4 billion of its common shares as well as an offer to buy up to $1 billion liquidation preference or amount of certain of its currently outstanding preferred and hybrid securities. The proposed offerings will help the company accelerate the increase of its Tier 1 capital by $2.2 billion.

Tenet Healthcare (THC) could also move in reaction to its announcement that its aggregate patient admission trends for May were in line with April’s. Additionally, the company noted that outpatient visits through April were stronger than expected and essentially flat over last year. Accordingly, the company reconfirmed its 2009 adjusted EBITDA outlook at $760 million to $825 million. Separately, the company also announced an offering of $450 million worth of senior secured notes due 2019 through a private placement.

GM-Fallen Angel?

General Motors’ insolvency is likely to have a far greater impact than one can ever imagine, as the automaker had stood as testimony to America’s economic might and due to the fact that it will have a ripple impact on the dealers and supplier in the U.S. as well as abroad. The pre-packaged insolvency filing being envisaged will allow GM to emerge leaner and meaner as ‘new GM’, in which the government will own about a 60% stake and the rest owned by UAW retiree healthcare fund, the governments of Ontario and Canada and some bondholders in the old GM. The company is expected to retain only profitable brands, dealerships, plants and contracts.

The government is expected to pump in an incremental $30 billion in addition to the $19.4 billion it has given to GM to finance its operations and cover losses. Ironically, Chrysler, once reckoned as the smallest of the big 3 automakers, is already operating under insolvency. One consolation is that these bankruptcies are not meant to be liquidations, but only transitions. Earlier, GM secured deals to sell its European operations, including Germany’s Opel and U.K.’s Vauxhall.

Many stakeholders stand to lose from the development. Some believe that U.S. taxpayers will be the biggest losers, as there is no guarantee the company will do well. Given the job cuts looming large, as the company strives to cut extra flab during the restructuring process, employees are likely to join the bandwagon along with suppliers and dealers. However, bondholders and the employee union are left with at least a stake in the company.

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