US & World Daily Markets Financial Briefing 06-10-2009

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Stocks May Look Favorably on Policy Actions Suggesting Improvement

The major index futures are pointing to a higher opening on Tuesday, with sentiment reflecting the optimism behind the Reserve Bank of Australia’s decision in raising interest rates. The first upward adjustment in interest rate among the G-20 nations following the current down cycle is a signal that the world is slowing extricating itself from the clutches of the recession and is slowly positioning itself on the path of sustainable growth.

Commodity prices have taken cues from this development and is trading uniformly higher, with the safe haven dollar taking a beating. With little economic data to digest, traders may closely watch the Fed speech for clues on economic condition and the monetary policy stance of the central bank.

U.S. stocks, which opened modestly higher in Monday’s session, firmed up following the release of the ISM’s service sector reading. The major averages showed a steady climb thereafter to end higher, snapping a 4-day losing streak. The Dow Industrials rose 112.08 points or 1.18% to end at 9,600 and the S&P 500 Index gained 15.25 points or 1.49% at 1,041, while the Nasdaq Composite Index closed up 20.04 points or 0.98% at 2,068.

Twenty-four of the thirty Dow components ended the session higher, with Alcoa (AA) (up 4.68%), JP Morgan Chase (JPM) (up 4.63%), Bank of America (BAC) (up 3.79%), General Electric (GE) (up 3.06%) and American Express (AXP) showing notable gains. On the other hand, Microsoft (MSFT) fell 1.28%.

Among the sector indexes, the KBW Bank Index rose 3.21% compared to a 2.35% gain by the NYSE Arca Securities Broker/Dealer Index. The Dow Jones Transportation Average gained 1.79%, while the NYSE Arca Airline Index and the Dow Jones Utility Average advanced over 1% each. In the resource space, the Dow Jones U.S. Basic Materials Average climbed 2.83%, the NYSE Arca Gold Bugs Index jumped 3.96%, the NYSE Arca Oil Index moved up 1.95% and the Philadelphia Oil Service Index advanced 2.61%. The S&P Retail Index and the Philadelphia Housing Sector Index gained 1.39% and 1.83%, respectively.

Among the technology indexes, the Philadelphia Semiconductor Index, the NYSE Arca Computer Hardware Index and the NYSE Arca Networking Index all moved up over 1.80%, while the NYSE Arca Disk Drive Index rose 3.34%.

On the economic front, the Institute for Supply Management’s service sector survey showed that activity in the sector expanded for the first time since August 2008. The non-manufacturing index rose to 50.9 in September from 48.4 in August and the business activity index rose 4 points to 55.1, marking the highest reading since October 2007. But only 5 out of the 18 industries reported growth. The new orders and backlog orders index rose 4.3 points and 10.5 points, respectively to 54.2 and 51.5, while the employment index edged up merely 0.8 points to 44.3.

Earnings Downward Spiral - Far From Over

Corporate profits are poised to decline yet again, with S&P analysts predicting a 10% year-over-year decline in the operating earnings of companies in the S&P Composite 1500 Index following a 43% drop in the first quarter and a 21% decline in the second quarter. A few sectors such as the consumer discretionary sector, healthcare and telecom sectors are likely to buck the downtrend and show positive earnings growth, with consumer discretionary companies benefiting from a combination of easier comparisons and continued cost cutting efforts. After posting losses from the fourth quarter of 2007 through the fourth quarter of 2008, financials are expected to record their third straight quarter of earnings.

Energy and material companies are likely to show the steepest earnings declines, weighed down by weak global economic conditions. That said, the negative impact is likely to be offset by their international exposure, which may have helped them to take advantage of a weaker dollar.

With earnings expected to show improvement in the fourth quarter, operating profits of companies in the S&P 1500 Index are likely to show a 7% inreease for the full year. S&P estimated 37% growth for 2010.

There have been other concerns as well. In the second quarter, only about two-third of the companies that reported better-than-expected earnings reported better-than-expected revenue results and in the just concluded quarter, things aren’t likely to be any better.

Consumer spending that is a buoy for demand and revenue growth has not recovered significantly enough, although we did have a few months of sales growth primarily achieved on the back stimulus measures. On a year-over-year basis, the scenario is still weak. Additionally, jobs and wages that are prerequisites for bringing back consumers spending are still found languishing. Therefore, it is very likely that the companies that outperform on the bottom line do so by cutting extra flab and trimming down.

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Bay Street Stocks Could Follow Commodities Higher

Canadian stocks could continue to rally on Tuesday morning, with commodity prices notably higher in the early going. U.S. futures are pointing higher and stocks overseas are also in the green.

Crude oil prices have gained 68 cents to move at $71.09 per barrel. Gold has gained $11.70 to $1,029.50 per ounce and copper has jumped 3.8 cents to $2.765 per pound.

In corporate news, BCE, said that it reached an agreement with Apple Inc. to bring iPhone 3G and iPhone 3GS to Canada this November.

Jean Coutu Group reported second quarter net earnings of C$14.9 million or C$0.07 per share, compared to net loss of C$39.1 million or C$0.16 per share last year.
 
Air Canada reported a decline in system traffic for September, while load factor declined 0.2 percentage points from the previous year, System traffic for the month declined 2.1% on a capacity reduction of 2.0% from last year.

Theratechnologies reported net income for the third quarter of C$5.82 million orC$0.10 per share, compared to a loss of C$11.22 million or C$0.19 per share in the year-ago quarter. The stock closed the session up 7.3%.

On the economic front, Canadian building permits rose 7.2% in the month of August. An increase of 5% was expected, compared to a revised drop of 10% in July.

The Ivey Purchasing Managers Index is due at 10 a.m. ET. A reading of 57.0 is forecast for September, compared to 55.7 in August.

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The major Asian markets ended mostly higher, with the exception of the South Korean market, as they relished the positive ISM service sector results that cast aside some of the fears that crept in following the previous week’s lukewarm economic readings. That said, most markets gave back a chunk of their early gains and closed modestly-to-moderately higher.

Japan’s Nikkei 225 average snapped its three-session losing run, ending up merely 17.31 points or 0.18% at 9,692 after trading as high as 9,744 in the morning session. Auto stocks rebounded strongly after their recent declines. Resource stocks also ended higher across the board, as commodity prices continued to climb, helped by the weaker dollar. On the other hand, pharma, breweries, electrical machinery, airline, retail, telecom, utility and financial stocks came under selling pressure.

Australia’s All Ordinaries opened unchanged, but it rose sharply in early trading only to recede immediately thereafter. After a steady retreat, the index ended up 17.90 points or 0.39% at 4,597, off its high of 4,645.

In a significant development, the Australian central bank announced today that it is raising its interest rates by a quarter percentage points to 3.25% after holding rates at 3% since April 2009. Prior to that, the Reserve Bank of Australia had reduced rates from 7.25% in March 2008. Thus, the country became the first among the developed nations to gradually unwind policy actions.

In an economic report released from the region, the Australian Bureau of Statistics reported a narrower trade deficit of 1.52 Australian dollars in August compared to the month-ago period, reflecting a faster rate of decline in imports than in exports.

Hong Kong’s Hang Seng Index, which traded with a modest gain in the morning, advanced sharply in late trading to close up 382.46 points or 1.87% at 20,812. Thirty-five of the forty-two index components closed higher, with the gains led by property, airline and China-related stocks.

Notwithstanding a positive pronouncement from Samsung Electronics, South Korea’s Kospi surrendered all its early gains and moved into negative territory in the afternoon and languished thereafter to close down 8.46 points or 0.53% at 1,598. Samsung announced today that it expects third quarter earnings to come in above market expectations and also exceed the year-ago profit. However, the stock ended lower, apparently due to fears that profit growth will slow down going forward.

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The major European markets are trading higher on Tuesday, adding to the modest gains posted in the previous session. After opening moderately higher, the averages are seeing further gains. Currently, the French CAC 40 Index, the German DAX Index and the U.K.’s FTSE 100 Index are rising 1.44%, 1.64% and 1.53%, respectively.

On the economic front, the Lloyds Banking Group Plc's Halifax division reported that U.K. house prices rose 1.6% month-over-month in September, faster than the 0.8% growth in the preceding month. House prices rose for the third consecutive month in September and for the fifth month in the year.

Meanwhile, the Office for National Statistics reported that U.K. industrial production declined 2.5% in August from July. Economists estimated 0.2% growth. Annually, production was down 11.2%, steeper than the 8.7% decrease expected by economists.

U.S. Economic News

Kansas City Federal Reserve Bank President Thomas Hoenig is due to speak to the economic forum sponsored by the bank's Denver branch at 9:45 PM ET.

Currency, Commodity Futures

Crude oil futures are trading up $0.72 at $71.13 a barrel after rising $0.46 to $70.41 a barrel in Monday’s session. Gold futures are currently advancing $11.80 to $1,029.60. In the previous session, the precious metal climbed $13.50 to $1,017.80 an ounce.

Among currencies, the U.S. dollar is trading at 89.116 yen compared to the 89.535 yen it fetched at the close of New York trading on Monday. Currently, the greenback is valued at $1.4716 versus the euro.

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Nutrisystem traded higher in Monday’s after hours session after it said it has aligned with Wal-Mart to offer customers the convenience of a 14-day starter program for the first time in the retail channel.

Lithia Motors may see weakness after it announced that it has commenced a public offering of 4 million Class A shares. Meanwhile, Cerner is also likely to rally after it said its FetaLink Solution, which helps to monitor fetal waveforms, has received 510(k) pre-market clearance from the FDA and is now available in the U.S. and all U.S. territories.

Robbins & Myers may see some activity after it said its fourth quarter declined to 39 cents per share from 88 cents per share last year. Revenues fell 32% year-over-year to $155.2 million. Analysts estimated earnings of 20 cents per share on revenues of $136.8 million. The company expects 2010 adjusted earnings of 80 cents to $1 per share compared to the $1.19 per share consensus estimate.

GlaxoSmithKline is likely to move the upside after it said the FDA’s Oncology Drug Advisory Committee voted unanimously in support of VOTRIENT, its investigational oral treatment for kidney patients. The committee made its decision based on Phase III trial data presented at the American Society of Clinical Oncology 2009 annual meeting.

United Airlines could react to its announcement that its consolidated load factor rose 2.1 points to 81.2%. At the same time, capacity fell 3.7% and traffic fell 1.1%.

Boise may gain ground after it announced that it received notice from the New York Mercantile Exchange that it has regained compliance with the exchange’s quantitative continued listing standards.

Nara Bancorp. may react to its announcement that it has renewed the employment contract for President and CEO Min Kim. The renewed contract provides for the CEO to receive an annual base salary of $350,000 and on November 27,2009, Kim will be granted 40,000 performance units representing 40,000 shares vested over 3 years.

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