US & World Daily Markets Financial Briefing 19-05-2009

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Stocks Uncertain in Early Dealing

Following a notable rally in the previous session, stocks are seeing uncertain movement in the first few minutes of trading on Tuesday.

Healthcare provider, steel and gold stocks are seeing considerable upside, while the major averages are being dragged down by real estate, banking and airline stocks.

In the past few minutes, the major averages have moved off of their lows, but largely remain in negative territory. Dow is currently down by 3.11 at 8500.97, the Nasdaq is down 1.20 at 1731.16 and the S&P 500 is up 1.31 at 911.02.

Weak Housing Data May Cast Doubt on Recovery

The major U.S. index futures are pointing to a lower opening on Tuesday, with the futures squandering their gains following the release of a housing market report that showed an unexpected decline in housing starts to record low levels. The report is likely to intensify the uncertainty surrounding the housing market recovery, which many consider is central for a broader economic recovery. Nervous traders may use the data as an excuse to take profits on their recent gains.

However, traders have some positive news to digest as well. The Asian markets took cues from the positive performance by the U.S. markets overnight, while the European markets are trading higher, nonchalant about the dip in the U.S. futures. Home Depot reported forecast-beating results for its first quarter. Additionally, commodity prices are showing strength, while the dollar is weakening against most other currencies. The euro is rallying today on the back of upbeat data from the euro zone region. On an encouraging note, the LIBOR rates are continuing their slide, reflecting the easing of credit market conditions.

The optimism shown by traders in the face of continuing uncertainty, as evidenced by Monday’s sharp rally, is due to hopes of a recovery - not in the near term, but in a distant future. Inventory depletion, which has been a significant drag on growth, will slowly become less of a drag. Recent housing data has been showing a change for the better, although economists unanimously believe that it is too early to call a bottom.

All these positive developments, along with the unstinted support of the federal government through fiscal and monetary policies, should help the economy limp towards a weak recovery in 2010. Only when wary consumers, who are panicky about leveraging, resume their spending ways, we can expect the economy to return to trend-like growth.

U.S. stocks got off to a positive start in Monday’s session, with the initial thrust provided by home improvement retailer Lowe’s better-than-expected results and positive guidance. The buying momentum was sustained throughout the session, with the results of a homebuilders’ survey released in the afternoon offering further support to the markets.

Additionally, reports that some of the banks are planning to apply to the Treasury to repay their TARP loans imparted buoyancy to the financial space. The turnaround came after the past week’s underperformance, when the major averages all ended lower for the week.

On Monday, the Dow Industrials closed up 235.44 points or 2.85% at 8,504 and the S&P 500 Index gained 28.63 points or 3.04% at 910, while the Nasdaq Composite rose 52.22 points or 3.11% at 1,732.

Twenty-nine of the thirty Dow components ended the session higher, with only AT&T showing weakness. Bank of America (up 9.93%), General Motors (up 8.26%), American Express (AXP) (up 7.84%), JP Morgan Chase (up 6.73%), Home Depot (up 6.64%), Caterpillar (up 5.71%) and Alcoa (up 5.09%) were among the notable gainers.

Among the sector indexes, the Amex Securities Broker/Dealer Index and the KBW Bank Index gained 6.07% and 7.53%, respectively. The Philadelphia Housing Sector Index moved up 6.58% compared to a 5.41% jump by the Philadelphia Oil Service Index. Retail, transportation and airline stocks also showed significant strength.

In the technology space, the Philadelphia Semiconductor Index, the Amex Internet Index and the Amex Networking Index rose over 3% each, while the Amex Disk Drive Index, the Amex Computer Hardware Index and the Amex Software Index advanced in excess of 2% each.

The month of May is normally associated with consolidation. According to research from Cantor, institutions will prefer to lower their exposure and risk during an economically slow summer period. The CBOE Volatility Index, which is considered as the fear gauge of the markets, settled Monday’s session at an 8-month low.

The index hasn’t violated the down trending line despite last week’s market declines, which should augur well for the markets. Meanwhile, the S&P 500 Index is continuing to trade along an uptrending channel and is currently above its 50-day and its 21-day moving averages of 836.5 and 882.6, respectively. In early April, the shorter-term 21-day moving average broke above the longer-term 50-day moving average, which signals bullishness.

That said, other momentum indicators such as the relative strength index are showing that the index is in an overbought zone. If the current uptrend is preserved, the index has strong resistance around its 200-day moving average, which is at 943.7.

On the economic front, the National Association of Homebuilders’ released the results of their survey, which showed that the housing market index rose to 16 in May from 14 in April. The increase was in line with expectations, with the index gauging current sales conditions rising 2 points to 14, while the index gauging sales expectations for the next six months rose 3 points to 27. However, the index gauging traffic of prospective buyers remained unchanged at 13.

Peter Boockvar of Miller Tabak noted that much of the gains occurred in the West, where most of the foreclosures occurred, probably benefiting from the tax credits offered by the federal and state governments.

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Resource, Financial Stocks Lead TSX Back Above 10,000

Bay Street stocks have risen sharply in early trading on Tuesday as traders returned to work after a three-day weekend. Global stocks surged yesterday while Canadian markets were closed for Victoria Day.

The S&P/TSX Composite Index has added 258.42 points or 2.65% to move at 10,021.27.

Mining stocks have surged another 5.3% as copper has gained 1.95 cents to $2.0845 per pound. First Quantum, Thompson Creek and Teck Cominco have all gained about 7%, while FNX Mining is up 5.8% and Inmet has added 5.4%.

Coeur d'Alene Mines Corp. has slipped 1.9% after the company announced a one-for-ten reverse split of its common stock, which was approved by Coeur stockholders at the Annual Meeting of Stockholders on May 12. The reverse split will be effective from May 26.

Energy stocks have added 4% with crude oil reaching above $60 per barrel on the NYMEX. Crude has pared most of its gains, moving up 21 cents at $59.26. Earlier it had touched a multi-month intraday high of $60.48, adding to a sharp rally yesterday.

Among the big names, Canadian Oil Sands has added 6.1%, Canadian Natural Resources is up 5.75% and Husky Energy is up 5.3%.
 
Financials are showing a 3.2% gain. The big six banks are all in the green with Scotiabank up 3.3% and National Bank rising 3.2%.

Meanwhile, Toronto-Dominion Bank is reportedly expected to submit a bid along with Goldman Sachs for Florida lender BankUnited Financial Corp., according to the Wall Street Journal. The stock is up 2.5%.

In other corporate news, agriculture giant Viterra has added 1.8% after the company announced it has proposed to acquire ABB Grain Ltd. in a transaction valued at about C$1.4 billion. ABB's board has unanimously recommended shareholders accept the offer.

Rogers Wireless and Research In Motion, Sunday launched the BlackBerry Curve 8900 smartphone in Canada. RIM shares are up 1.3% and Rogers is up 0.7%.

Erdene Resource Development Corp. has added 1.7% after the company reported first-quarter net income of C$681,000 or C$0.01 per share, compared to net loss of C$1.55 million or C$0.02 per share last year.

Across the border, Home Depot reported adjusted first-quarter net income of $587 million or $0.35 per share, down from $697 million or $0.41 per share earned in the same quarter of last year. Wall Street expected earnings of $0.29 per share.

In economic news, the U.S. Commerce Department announced that housing starts dropped 12.8 percent in April to an annual rate of 458,000 units. The result for March was revised to a rate of 525,000 units, a decline of 8.5 percent from the previous month. Analysts had expected starts to rise to a pace of 540,000 units from the rate of 510,000 units that was originally reported for March.

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The stock markets across the Asia-Pacific region ended in positive territory on Tuesday, following a strong closing on Wall Street, where the major indices rallied on hopes about the housing market. The weakening of the domestic currencies and a rally in commodity prices also supported sentiment.

The benchmark Nikkei 225 Index added 251.60 points or 2.80% to 9,290 and the broader Topix Index of all First Section Issues advanced 20.05 points or 2.30% to 877. In economic news from Japan, a revised report from Japan's Ministry of Economy, Trade and Industry revealed today that industrial production rose 1.6% in March from the previous month following a 9.4% decline in February. The ministry confirmed the initial estimate for March. Year-on-year, production plunged 34.2% in March.

The major gainer in the market was Asahi Glass, which rose more than 9% following a revision in its rating by Daiwa Securities. The brokerage raised the stock to "buy" from "neutral".

In the banking sector, Mitsubishi UFJ, Japan's biggest bank, gained 4.22% ahead of the announcement of its financial results after market closed. The bank reported a net loss of 256.65 billion yen for fiscal year 2008 compared to a net profit of 636.62 billion yen reported last year. The net loss was in line with bank's expectation but came in wider than analysts' estimate. Oil-related stocks ended in positive territory on higher crude oil prices.

In Sydney, the benchmark S&P/ASX 200 index gained 81.7 points or 2.17% to close at 3,817 and the broad-based All-Ordinaries Index advanced 79.3 points, or 2.13% to close at 3,801.

Mining stocks advanced on higher copper prices in the international market. Index leader BHP Billiton advanced 2.92% and its rival, Rio Tinto gained 4.28%. Banking, retail and energy stocks also advanced, while gold stocks saw mixed sentiment.

In Hong Kong, the benchmark Hang Seng Index opened sharply higher on Wall Street cues and ended 3.06% or 521.02 points higher at 17,544. Financial, China-related and resource stocks led the gains on positive cues from Wall Street and higher crude oil and copper prices.

HSBC Holdings surged up 6.30% and Bank of East Asia advanced 5.59% in reaction to reports that the two banks were granted approval by the Chinese regulators to sell Yuan bonds in Hong Kong. Other major banks such as Bank of China, Hang Seng Bank, Bank of Communications, ICBC and BOC Hong Kong also ended in positive territory.

Among china-related stocks, China Unicom advanced 2.83%, China Mobile added 2.56%, China Resources soared 7.90%, and China Shinhua rose 4.18%.

Resource stocks also advanced on higher copper and oil prices. CNOOC, China's largest offshore oil producer, gained 5.43%, and PetroChina increased 4.97% on higher crude oil prices in the international market. Aluminum Corp. of China, or CHALCO, surged up 7.59%

The benchmark KOSPI Index in South Korea advanced 2.99% or 41.53 points to close at 1,428, led by financials and auto stocks.

Financials advanced on optimism about stability in financial sector. KB Financial Group surged up 6.22%, Woori Finance gained 3.88%, and Shinhan Financial rose 3.98%. In the auto space, Hyundai Motor gained 4.05%, Kia Motor advanced 3.05%, and Ssangyong Motor surged 5.38%.

Technology stocks also ended in positive territory. Hynix Semiconductor surged up 8.58%, LG Display gained 3.29%, and LG Electronics advanced 4.59%. Market heavyweight Samsung Electronics ended higher by 2.52%.

Among the other major markets, China's Shanghai Composite Index gained 23.90 points, or 0.90% to 2,677, Indonesia's Jakarta Composite Index advanced 4.57% or 82.45 points to 1,886, Singapore's Strait Times Index added 83.38 points, or 3.83% to 2,260, and Taiwan's Weighted Index advanced 77.78 points, or 1.18% to 6,656.

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The major European averages are advancing on Tuesday, as financial and mining stocks are propping up the markets. The French CAC 40 Index is rising 0.50% compared to a 1.86% gain by the German DAX Index, while the U.K.’s FTSE 100 Index is rising 0.46%.

In corporate news, U.K. insurer Homeserve reported a 13% increase in full year earnings to 96.1 million pounds, even as revenues fell 7%to 517.4 million pounds. The company also announced its intention to exit its U.K. Emergency Serviced division to focus on its three core businesses.

U.K. retailer Marks & Spencer reported a net profit of 508 million pounds for the full year compared to a profit of 821.7 million pounds last year. The company’s profit before tax on an adjusted basis was down 40% to 604.4 million. Revenues were up slightly at 9.06 billion pounds. To tide over the difficult macroeconomic condition, the company announced plans to reduce its final dividend by 33% to 9.5 pence per share.

U.K. telecommunication company Vodafone said its full year earnings before interest, taxes, depreciation and amortization rose to 14.5 billion pounds from $13.2 billion pounds on 16% sales growth to 41.02 billion pounds, as it countered the impact of the domestic slowdown with the pound’s weakness and the brisk business in the emerging markets.

On the economic front, the U.K. Office of National Statistics reported that U.K.’s consumer price index rose by 2.3% year-over-year in April compared to a 2.9% increase in March. The decline in the inflation rate was due to lower prices of housing and household services, mainly lower electricity and gas bills. Economists had estimated the annual inflation rate to come in at 2.4%.

A report released by the German Zew Center for Economic Research released the results of its economic sentiment, which showed that the economic sentiment for Germany continued to improve in May. The economic sentiment indicator rose by 18.1 points to 31.1 in May, which is above its historical average of 26.2. The indicator for the current economic situation fell 1.2 points to –92.8.

Meanwhile, construction orders in the euro zone region declined 1% month-over-month in March following a 0.6% decline in the previous month. On an annual basis, construction output declined 8.7%.

U.S. Economic Reports

A Commerce Department report released earlier in the day showed that housing starts fell 12.8% month-over-month to 458,000 in April from an upwardly revised reading of 525,000 for March. Economists expect housing starts to have increased to 527,000 from the initially estimated reading of 510,000 for April.

Single-family starts rose 2.8%, while starts of buildings with five units or more was 78,000. Annually, housing starts slumped 54.2%. Building permits declined 3.3% month-over-month to 494,000.

Minneapolis Federal Reserve Bank President Gary Stern is due to speak to the Willmar Lakes Area Chamber of Commerce in Willmar, Minnesota at 1:15 PM ET.

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Gold Inches Further Above $920 Mark

Gold prices inched higher on Tuesday morning, recouping some of yesterday's slide. A weaker dollar helped increase gold's safety value.

June-gold climbed to $921.90, up $1.40 for the session. Prices climbed as high as $925.80 after earlier hitting as low as $917.60.

The dollar was generally weaker against other majors, boosting gold's hedge appeal. The greenback extended a five-month low against the British pound and also slipped away from a weekly high against the yen. The dollar was little-changed against the euro after recovering an early slide.

In economic news, the U.S. Commerce Department that showed housing starts dropped 12.8 percent in April to an annual rate of 458,000 units. The result for March was revised to a rate of 525,000 units, a decline of 8.5 percent from the previous month.

Analysts had expected starts to rise to a pace of 540,000 units from the rate of 510,000 units that was originally reported for March.
 
Building permits were down 3.3 percent to an annual rate of 494,000 units.

Later in the morning, the State Street Investor Confidence Index is due at 10 a.m. ET. Minneapolis Federal Reserve Bank President Gary Stern will speak to the Willmar Lakes Area Chamber of Commerce in Minnesota at 1:15 p.m. ET.

In other metal trading, silver gained 18 cents to $13.955 an ounce and copper added 2.55 cents to $2.0905 per pound.

Gold dropped $9.60 on Monday, giving back some of its recent strength. The metal finished last week up $16.40 and gained $43.70 over the last two weeks on inflation concerns.

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Home Depot is likely to see some strength after it reported a profit of 30 cents per share for its first quarter compared to a profit of 21 cents per share last year.

On an adjusted basis, the company reported a profit of 35 cents per share, above the 29 cents per share consensus estimate. Sales were down 10% at $16.18 billion, yet they beat the analysts’ estimate of $15.86 billion.

 The company reiterated its full year guidance that calls for a 7% decline in earnings from continuing operations and a 9% sales drop.

Medtronic is expected to be in focus after it reported that its fourth quarter revenues fell 1% to $3.829 billion.

The company’s earnings declined sharply to 22 cents per share from 72 cents per share last year. On a non-GAAP basis, the company’s earnings were 82 cents per share, higher than 78 cents per share last year. Analysts, on average, estimated earnings of 82 cents per share on revenues of $3.84 billion.

Dick’s Sporting Goods is likely to move in reaction to its announcement that its first quarter net sales rose to $959.66 million from adjusted net sales of $912.11 million last year. The company’s earnings fell to 9 cents per share from 17 cents per share last year. On a non-GAAP basis, the company reported earnings of 11 cents per share.

The consensus estimates had called for earnings of 7 cents per share on revenues of $912.63 million. The company expects full year 2009 non-GAAP earnings of 88 cents per share to $1 per share, while comparable store sales is expected to decline 6% to 9%.

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