US & World Daily Markets Financial Briefing 01-07-2010

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Stocks Sharply Lower Following Disappointing Economic Data

Stocks are posting steep losses in mid-morning trading on Thursday, as the markets are digesting a batch of disappointing economic reports on national manufacturing activity, pending home sales and jobless claims. The downside comes as the data has raised somber questions regarding the sustainability of the U.S. economic recovery.

A short time ago, the Institute for Supply Management said its index of manufacturing activity dropped to 56.2 for June from May's reading of 59.7. The drop surprised economists who had expected the figure to show a much more modest decline to a reading of 59.

May's pending home sales from the National Association of Realtors also played a role in deflating sentiment, as the NAR's pending home sales index plummeted by 30.0 percent to a reading of 77.6 in May from a reading of 110.9 in April. The decline came after the expiration of the first-time home buyer tax credit.

Early worries came as the Labor Department released a report showing that initial jobless claims rose to 472,000 from the previous week's revised upwardly figure of 459,000. Economists had expected jobless claims to edge up to 458,000 from the 457,000 originally reported for the previous week.

Meanwhile, the U.S. Department of Commerce revealed that construction spending fell 0.2 percent in May after being forecast to decline by 0.9 percent. April's figure was revised up to show a 2.3 percent increase.

After the markets closed for trading in the previous session, Apollo Group, Inc. (APOL), the parent of the University of Phoenix, said that its third quarter profit fell 11 percent from last year, hurt by goodwill impairment and litigation charges. Nonetheless, the company's earnings, excluding items, came in above analysts' expectations.

The major averages have seen further downside in recent trading, once again falling to new lows for the session. The Dow is down 111.92 points or 1.2 percent at 9,662.10, the Nasdaq is down 38.38 points or 1.8 percent at 2,070.86 and the S&P 500 is down 15.57 points or 1.5 percent at 1,015.14.

Sector News

Biotechnology stocks are some of the morning's worst performers, prompting a 3.9 percent decline by the NYSE Arca Biotechnology Index. With the slide, the index has set a four and a half month intraday.

Healthcare-related stocks are also under pressure, with the Morgan Stanley Healthcare Payor Index down by 3.3 percent. The decline has taken the index down to a seven-month intraday low.

Gold, banking, airline and housing stocks are also markedly lower, among others, reflective of the day's broad market sell-off.

Stocks Driven By Analyst Comments

REIT Douglas Emmett (DEI) is notably lower after being downgraded by Stifel Nicolaus from Buy to Hold. Shares are currently down by 2.4 percent, sinking to a four-month intraday low.

Hawaiian Electric (HE) is also under pressure following a downgrade by analysts at Robert W. Baird from Outperform to Neutral. The stock has lost 2.3 percent, setting a three-week intraday low.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region closed sharply lower on Thursday. Japan's benchmark Nikkei 225 Index fell by 2 percent.

The major European markets also remain under pressure. The U.K.'s FTSE 100 Index and the German DAX Index are down by 1.6 percent and 1.3 percent, respectively, while the French CAC 40 Index is down by 2.5 percent.

In the bond markets, treasuries are notably higher following the day's economic data. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is trading at 2.901 percent, posting a loss of 5 basis points.

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Weekly Jobless Claims Continue To Point To Lackluster Job Market

In another troubling sign for the labor market, the Labor Department released a report on Thursday showing a much bigger than expected increase in first-time claims for unemployment benefits in the week ended June 26th. The data has added to recent concerns about Friday's monthly employment report.

The report showed that initial jobless claims rose to 472,000 from the previous week's revised upwardly figure of 459,000. Economists had expected jobless claims to edge up to 458,000 from the 457,000 originally reported for the previous week.

Peter Boockvar, equity strategist at Miller Tabak, said, "A Labor Dept official said the rise was due in part to the end of the school year, where bus drivers, cafeteria employees and others lose their jobs, but I'm not sure why this wasn't seasonally adjusted away."

While weekly jobless claims are well off the highs set in March of 2009, they continue to stubbornly hover well above the 400,000 level, indicating a lackluster job market.

The Labor Department said that the less volatile four-week moving average edged up to 466,500 from the previous week's revised average of 463,250.

Continuing claims, a reading on the number of people receiving ongoing unemployment help, also rose to 4.616 million in the week ended June 19th from the preceding week's revised level of 4.573 million.


The report also showed that those receiving emergency unemployment compensation fell by about 218 thousand in the week ended June 12th and those receiving extended benefits dropped by about 158 thousand, resulting in a net decrease of about 376 thousand.

However, the drop in emergency and extended benefits likely reflected people losing their benefits due to the lack of an extension of unemployment insurance by Congress rather than people finding new jobs.

Boockvar said, "Bottom line, following the weak private sector job growth seen in yesterday's ADP report, today's initial claims data continues to point to a lackluster labor market and another jobless recovery."

Payroll processor Automatic Data Processing, Inc. (ADP) released a report on Wednesday showing that private sector employment increased by much less than expected in the month of June.

ADP said that non-farm private employment increased by 13,000 jobs in June following an upwardly revised increase of 57,000 jobs in May. Economists had expected an increase of about 61,000 jobs compared to the addition of 55,000 jobs originally reported for the previous month.

As mentioned above, employment data is likely to remain in focus on Friday, with the Labor Department due to release its report on the employment situation in the month of June.

The report is currently expected to show that employment fell by about 100,000 jobs in June after surging up by 431,000 jobs in May due largely to hiring related to the census. The unemployment rate is also expected to tick up to 9.8 percent from 9.7 percent.

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Asian Markets Drift Lower On Global Concerns

The markets across Asia ended the session in negative territory dragged down by weak cues from Wall Street, where the major averages ended sharply lower for the second successive session on concerns about sustaining global recovery. Concerns that Spain's sovereign rating and possibility of a downgrade also impacting market sentiment Weaker than expected manufacturing data from China, signaling a possible slowdown in growth, also impacted market sentiment.

In Japan, the benchmark Nikkei 225 Index dropped 191.04 points, or 2.04% to 9,192 while the broader Topix index of all First Section issues fell 13.03 points, or 1.55%, to 828.

On the economic front, the quarterly Tankan Survey released by the Bank of Japan revealed that large manufacturers' index hit its highest level in two years in the second quarter of 2010, breaking into positive territory with a score of 1. The large non-manufacturers' index came in at -5, slightly below forecasts for -3 but well above the -14 from the first quarter. The indices are calculated by deducting the percentage of respondents who say conditions are bad from those who say they are good. Negative readings mean pessimists outnumber optimists.

A report released by the Ministry of Finance revealed that Japanese residents were net buyers of foreign bonds last week while foreigners were net sellers of Japanese bonds during the same period. As per the report, Japanese residents bought a net JPY 863.5 billion of foreign bonds in the week ended June 26. A net JPY 52.6 billion of foreign securities were sold by the Japanese during the same period. At the same time, foreigners sold a net JPY 376.2 billion of Japanese bonds and a net JPY 183.8 billion of Japanese securities.

Stocks of non-ferrous metals were the major losers even as all the stocks ended in negative territory on global economic concerns. Sumitomo Electric Industries lost 3.44%, Sumitomo Metal Mining Co. declined 2.05%, Toyo Selkan Kaisha fell 2.67%, Sumco Corp. was down 2.01% and Mitsubishi Materials Corp. plunged 5.02%.

Real estate stocks also ended in negative territory. Sumitomo Realty & Development declined 2.88%, Mitsui Fudosan lost 1.52%, Mitsubishi Estate slipped 1.44%, Tokyu Land Corp. plunged 3.82% and Heiwa Real Estate was down 0.99%.

In Australia, the benchmark S&P/ASX200 Index declined 64.00 points, or 1.49% and closed at 4,237, while the All-Ordinaries Index ended at 4,263, representing a loss of 62.10 points, or 1.44%.

On the economic front, a report released by the Australian Bureau of Statistics revealed that retail sales in the country climbed for the third straight month in May but at a slower pace than expected. As per the report, retail sales were up a seasonally adjusted 0.2% month-on-month in May to A$20.16 billion. This was slightly worse than expectations for a 0.3% increase and slower than the 0.6% rise in the previous month. Retail sales had risen 0.8% in March.

A report released by the Australian Industry Group and PriceWaterhouseCoopers revealed the performance of manufacturing index, or PMI, fell 3.4 points in June to 52.9. A reading above 50 indicates expansion while one below 50 suggests contraction. The easing in the overall manufacturing growth rate reflected slower growth in manufacturing production, new orders, employment and supplier deliveries. Inventories rose slightly in June.

A separate report revealed that total dwelling permits granted during May slipped by a seasonally adjusted 6.6% to 13,412 compared to the previous month. Analysts had forecast no monthly change in the number of dwelling approvals granted after the 11.4% decline in April. The number of private houses approved rose 1.7% in May from April to 8,835. The number of private sector other dwelling units approved were down 18.8% to 3,643. On a year-over-year basis, dwelling approvals were up 26.6%. Approvals for private sector houses were up 9.2% and those for private sector other dwellings increased 86.1%.

Banks slid on concerns about the pace and magnitude of global and domestic economic recovery. ANZ Bank declined 2.45%, Commonwealth Bank fell 2.41%, National Australia Bank slipped 1.07% and Westpac Banking lost 1.98%. Investment banking company Macquarie Group was down 1.83%.

Gold related stocks ended in positive territory. Lihir Gold added 0.46% and Newcrest Mining also gained 0.46%.

Oil stocks ended weaker on lower crude oil prices in the international market. Oil Search Ltd declined 1.81%, Origin Energy lost 2.14%, ROC Oil Ltd fell 1.59% and Santos shed 1.90%. However, Woodside Petroleum managed to end in positive territory with a gain of 0.45%.

Mixed trading was witnessed among the metals and mining stocks amid talks about resource super profits tax with the new PM and speculation that a decision will be made tomorrow. BHP Billiton lost 1.43%, Rio Tinto fell 2.34%, Fortescue Metals slumped 2.91%, Gindalbie Metals plunged 5.31% and Murchison Metals was sharply down 6.97%. However, Iluka Resources gained 0.65%, Mincor Resources surged up 5.79% and Oz Minerals climbed 4.17%.

The market in Hong Kong is closed for holiday.

The Indian market fell sharply on Thursday, extending a global rout, dragged down by worrisome jobs figures from the U.S. private sector, disappointing PMI data from China and ongoing concerns about Spain. Closer home, a survey from Markit Economics showed that India's manufacturing activity eased slightly in June after reaching a 27-month high in May, dampening sentiment to some extent. The benchmark 30-share Sensex fell to a low of 17,455 before recouping some of its loss and ending down 192 points or 1.08% at 17,509, while the 50-share Nifty fell by 61 points or 1.15% to 5,251.

Among the other major markets open for trading, China's Shanghai Composite Index fell 24.58 points, or 1.02%, to 2374, Taiwan's Weighted Index declined 75.31 points, or 1.03%, to close at 7,254, Indonesia's Jakarta Composite Index lost 39.44 points, or 1.35%, to 2,874 and Singapore's Strait Times Index was down 15.16 points, or 0.53% to close at 2,820.

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The major European markets are moving to the downside on Thursday, with the French CAC 40 Index are receding 1.86% and 0.91%, while the U.K.’s FTSE Index is declining 1.29%.

In economic news, German Federal Statistics Office reported that Germany’s retail sales rose a seasonally and calendar adjusted 0.4% month-over-month in May. The increase was in line with estimates and marked the first increase in three months.

The results of a survey by Markit Economics showed that manufacturing growth in the euro area slackened in June. The euro area’s manufacturing PMIs fell to 55.6 in June from 55.8 in May, confirming the flash estimate

U.S. Economic Reports

In another troubling sign for the labor market, the Labor Department released a report showing a much bigger than expected increase in first-time claims for unemployment benefits in the week ended June 26th. The data is likely to add to concerns about Friday's monthly employment report.

The report showed that initial jobless claims rose to 472,000 from the previous week's revised upwardly figure of 459,000. Economists had expected jobless claims to edge up to 458,000 from the 457,000 originally reported for the previous week.
The results of the manufacturing survey by the Institute for Supply Management, 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 59 for June.

In May, the manufacturing purchasing managers' index fell by less than economists had expected while also suggesting that the sector expanded for the 10th straight month. The index fell to 59.7 in May from 60.4 in April, while economists had expected a steeper decline to 59.4.

The new orders index remained unchanged at 65.7, while the order backlogs index rose 2 points to 59.5. On an upbeat note, the employment index increased by 1.3 points to 59.8, its highest level since May 2004.

The Commerce Department's construction spending report to be released at 10 AM ET is expected to show a 0.9% decline in spending for May.

Construction spending rose 2.7% month-over-month in April compared to expectations for only 0.1% growth. Public and private construction spending rose 2.9% and 2.4%, respectively. In the private sector, spending on single-family house construction surged up 3.4%, with the increase partly offset by a 1.9% drop in multi-family housing construction spending. Private non-residential construction spending climbed 1.7%.

Data on Pending Home Sales, which is a leading indicator of housing market activity released by the National Association of Realtors, is due out at 10 AM ET. A pending sale is one in which a contract was signed but not yet closed. Normally, it takes four to six weeks to close a contracted sale. The index is expected to show a 10.5% plunge for May.

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Apollo Group (APOL) may move in reaction to its announcement that its third quarter revenues rose 27.7% year-over-year to $1.34 billion. However, the company’s earnings from continuing operations declined to $1.16 per share from $1.30 per share last year. On an adjusted basis, the company reported earnings of $1.74 per share. Analysts estimated earnings of $1.55 per share on revenues of $1.30 billion. For the fourth quarter, the company expects adjusted earnings of $1.30 per share on revenues of $1.25 billion. The consensus estimates call for earnings of $1.20 per share on revenues of $1.27 billion.

Christopher & Banks (CBK) is likely to see some activity after it reported that its first quarter net sales rose to $126.2 million from the year-ago’s $120.4 million. The company reported net income of 18 cents per share compared to 5 cents per share last year. Analysts estimated earnings of 12 cents per share on revenues of $128.02 million.

ABM Industries (ABM) could be in focus after it said its subsidiary AMB Janitorial Services has acquired all outstanding shares of Diversco from DHI Holdings. The company noted that the deal closed on June 30th.

Northrop Grumman (NOC) is expected to see some buying interest after it announced that the U.S. Navy has awarded the company a $175 million cost-plus-fixed fee contract. The contract pertains to the advance procurement of long-lead materials and the performance of engineering/planning efforts for LHA 7, a large-deck amphibious assault ship. The company said the contract value could be up to $193 million once all contract options are exercised.

ConocoPhillips (COP) could see some activity after it said it has complete the sale of its 50% interest in the CFJ Properties-Flying J truck stops to Pilot Travel Centers. The deal is valued at $626 million. ConocoPhillips noted that the sale is consistent with its marketing strategy in the U.S., which calls for minimizing company ownership of motor fuel stations.

Biogen (BIIB) may move in reaction to its announcement that it has appointed George Scangos as its CEO, effective July 15th. Scangos earlier served as president and CEO of Exelixis since 1996.