US & World Daily Markets Financial Briefing 21-05-2009

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Stocks Seeing Considerable Downside in Early Trading

Following a lackluster performance in the previous session, stocks are seeing a considerable pullback in early trading on Thursday.

Steel, oil and railroad stocks are leading the day's declines, while losses are being limited by healthcare stocks and some technology stocks.

In the past few minutes, the major averages have moved off of their worst levels, but remain in firmly negative territory. The Dow is currently down by 124.01 to 8298.03, the Nasdaq is down 21.18 to 1706.66, and the S&P 500 is down by 12.71 to 890.76.

Cautious Assessment Reduces Visibility into Economic Recovery

The major U.S. index futures are pointing to a lower opening on Thursday. Just when the markets were becoming complacent about a recovery in the making, the Fed’s skepticism relayed through the minutes of the April FOMC meeting came as a rude shock. Adding fuel to the fire, the news about the downgrade of U.K.’s rating by S&P spread panic among traders, resulting in a large scale sell-off in the European markets. Earlier in the day, the Asian averages also closed on a weak note, as traders in the region sifted through and digested the FOMC minutes.

Jobs data continues to be downbeat, with a Labor Department report released earlier showing a smaller than expected decline in the first time claims for unemployment benefits. Continuing claims surged to another record high, accentuating the weakness in the job market. Sentiment over the course of the session may also hinge on the manufacturing survey results of the Philadelphia Fed and the Conference Board’s leading indicators index, scheduled to be released shortly after the markets open, as traders look for clarity on the economic outlook.

U.S. stocks, which opened Wednesday’s session higher and saw incremental gains in early trading on the back of the commodity rally, surrendered much of their gains by early afternoon trading and dipped momentarily below the unchanged lined, coinciding with the release of the minutes of the April FOMC meeting. Although some buying interest emerged thereafter, the gains could not be sustained, with the major averages dipped back sharply below the unchanged line in late trading.

The Dow Industrials ended down 52.81 points or 0.62% at 8,422, the S&P 500 Index receded 4.66 points or 0.51% at 904 and the Nasdaq Composite Index fell 6.70 points or 0.51% to 1,728.

Hewlett-Packard (HPQ) retreated 5.22% in reaction to the bleak outlook issued by the company, while Home Depot (HD), JP Morgan Chase (JPM) and American Express (AXP) lost more than 3% each. Alcoa (AA), Citigroup (C) and AT&T (T) moved down about 2% each. On the other hand, General Motors (GM) rallied 14.17%, while Bank of America (BAC0 rose in excess of 2% following its announcement that it has raised $13.47 billion in a public offering. McDonald’s (MCD) was up 4.42%.

Among the sector indexes, the KBW Bank Index fell 2.81% and the Philadelphia Housing Index moved down 2.71%, while the S&P Retail Index and the Dow Jones Utility Average fell over 1.5% each. However, the Amex Gold Bugs Index rallied 5.18%, while Hewlett-Packard’s dismal results weighed on the Amex Computer Hardware Index, which fell 3.28%.

In response to the recent moves on Wall Street, Marc Pado from Cantor Fitzgerald said that the consolidation trend we have been witnessing will likely continue, as pessimism continues to fade. The CBOE Volatility Index closed below the 30 level for the second straight day, which reinforces the idea of a slow and steady recovery. Typically, a trading range of 10-30 for the index signals bullish market conditions. On the upside, the index has resistance around 33.

On the economic front, the minutes of the April FOMC meeting revealed that the members of the Federal Reserve’s policy-setting body seem to concur that the pace of decline in some components of final demand has slowed, with consumer spending firming up in the first quarter and housing activity leveling off in February and March.

On the flip side, businesses continued to trim production and employment market continued to deteriorate. Headline and core consumer prices were up moderately in the first three months of the year.

The Fed updated its forecast of growth, inflation and unemployment rate, with the central tendency growth forecast for 2009 pitched at a 1.3% to a 2% GDP decline compared to its earlier estimate for a mere 0.5% to 1.3% contraction. The central bank also nudged up its unemployment rate forecast for 2009 to 9.2%-9.6% from 8.5%-8.8%. The Fed also toned down its growth estimate for 2010 to 2%-3% rate compared to 2.5%-3.3% growth it estimated in January, while it expects an unemployment rate of 9%-9.5% for 2010 versus its January projection of 8%-8.3%. The longer-run forecasts were left unchanged.

The downgrade came despite the Fed noting that conditions have improved in the inter-meeting period. Some economists believe that the tempered outlook is due to a contraction in credit creation, as commercial bank credit contracted both in March and April.

Analyzing the minutes, Barclays commented that the Fed seemed to have decided to wait till the June meeting to assess the impact of the asset purchase and decide if additional action needs to be taken.

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Bay Street Stocks Could Surrender Some Of Recent Rally

Toronto stocks could pull back on Thursday morning after a sharp rise to a multi-month high in the previous session. Lower oil prices and a disappointing jobs report from the U.S. could cause weakness.

Energy stocks could give back some of yesterday's rally as crude oil has slipped $1.27 to $60.77 in overnight transactions.

Copper is also moving lower, losing 6.45 cents to $2.042. This could lead to some weakness in the mining sector. Meanwhile, gold has leveled off following a recent rally.

Mavrix Fund Management said that it has entered into deal to be acquired by 1796862 Ontario at a cash price of C$0.25 per share.

RuggedCom reported a fourth quarter net income of US$3.4 million or US$0.28 per share, compared to US$2.3 million or US$0.19 per share in the prior year quarter.

Africo Resources on Wednesday announced the resignation of Tony Harwood as president and chief executive officer of the company, effective immediately.
 
Savvis Communications announced a three-year extension of its master services agreement with Thomson Reuters.

In economic news, Statistics Canada revealed wholesale sales in current dollars fell 0.6% to $40.5 billion in March. Declining sales in the building materials and machinery and electronic equipment sectors were important factors contributing to this decrease. In terms of the volume of sales, wholesale sales were down 1.3%.

Meanwhile, the Globe and Mail reported Canadian Finance Minister Jim Flaherty will reveal credit-card rules today, on the heels of a similar announcement by the U.S. Congress yesterday.

Across the border, the Labor Department revealed that initial jobless claims came in at 631,000 for the week ended May 16th. This was down 12,000 from the previous week's revised total of 643,000.

Continuing claims climbed to 6.662 million - yet another record high.

On Wednesday, the S&P/TSX Composite Index gained 131.49 points or 1.3% to end at 10,232.44. The market reached a seven-month intraday high of 10,365.39 in the mid-morning.

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The major markets across the Asia-Pacific region ended in negative territory on Thursday, mirroring Wall Street's losses after the minutes of the FOMC meeting revealed doubts over signs of recovery in the world's largest economy. However, strong commodity and oil prices helped limit the downside to a certain extent.

In Japan, the Nikkei Index opened lower at 9,280 compared to its previous close at 9,345 and drifted down further to a low of 9,190 in early trading. After remaining in a narrow range for much of the session, the index recouped some of the losses, led by resource stocks, before closing at 9,264, down 0.9% or 80.49 points.

On the economic front, the Ministry of Economy, Trade and Industry reported that an index measuring the tertiary industrial activity fell to a seasonally adjusted 4.0% to 100.8 month-on-month during March. Analysts expected the index to fall 1.5% compared to a revised drop of 1.3% in February. Meanwhile, Japan’s Health Ministry confirmed yesterday that as many as 234 cases of swine flu have been registered in the country in the past few days.

Supermarket operator Aeon declined 3.17% following reports of swine flu in the Tokyo Area. Seven & I Holdings slipped 2.28% and McDonalds Holdings shed 2.68% following confirmation that two part time employees of the company were confirmed to be infected by swine flu. Exporters declined after the local currency strengthened against the dollar.

After opening unchanged, Australia’s All Ordinaries Index drifted down to 3,783, led lower by financials on weak cues from Wall Street. On the other hand, resource stocks advanced on higher metal prices, helping to trim the losses. The index closed with a loss of 4.20 points, or 0.11%, at 3,805.

Mining stocks rose, as a measure of six metals traded on the London Metals Exchange advanced 1.2%. Gold stocks moved to the upside, tracking the higher bullion prices. However, oil stocks ended in negative territory following a retreat in crude oil prices in the Asian session. Banking and retail stocks came under significant selling pressure.

In Hong Kong, the Hang Seng Index opened sharply lower at 17,290 and continued to drift lower. Attempts to stage a recovery during mid-day trading proved futile and the index finally ended lower by 1.58% or 276.35 points, at 17,199. Profit taking across all stocks after a strong rally in the past few trading sessions as well as gloomy outlook for the future sent the stocks lower.

In South Korea, the benchmark KOSPI Index ended at 1,422, down 14.05 points, or 0.98%. The market witnessed across the board weakness, as investors dumped stocks on weak prospects for a global economic recovery. Shipping and technology stocks were worst hit.

The Indian market ended sharply lower, as traders took profits in frontline stocks and bought under-valued small cap stocks. Weak cues from the overseas market also kept the large-cap indexes under check. The Sensex closed at 13,737, down 324 points or 2.31%.

Among the other major markets in the region, China's Shanghai Composite Index slipped 40.79 points or 1.54% to close at 2,611, and Singapore's Strait Times Index fell 2.57% or 58.27 points to close at 2,211. The market in Indonesia was closed, while the Taiwanese Weighted Index bucked the overall trend and ended higher by 15.19 points or 0.23% at 6,719.

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The major European markets are moving lower after five straight sessions of gains as traders are taking profits in reaction to an announcement from S&P that it has lowered its outlook for the U.K. economy to “negative”, attributing the downgrade to the perceived difficulty in reigning in government debt and the uncertainty about the policy response.

The French CAC 40 Index and the German DAX Index are trading down 1.93% and 1.88%, respectively, while the U.K.’s FTSE 100 Index is declining 2.15%.

On the economic front, the U.K. Office for National Statistics said retail sales in the U.K. rose 0.9% in April from the previous month compared to expectations for a 0.5% increase. On a yearly basis, sales grew 2.6%, faster than estimates for a 2.4% increase. Another report released by the Statistical agency showed that business investment in the U.K. fell a seasonally adjusted 5.5% in the first quarter compared to the fourth quarter of 2008. Economists had estimated a 4% decline for the month. Annually, investment was down 6.8%, worse than the 5.9% decline expected by economists.

Economic Reports

On the economic front, the Labor Department reported that initial claims for unemployment benefits fell to 631,000 in the week ended May 16th from the previous week’s upwardly revised average of 643,000. Economists had expected claims to decline to 625,000 from the initially reported reading of 637,000 for the past week.

The 4-week moving average for initial claims, a statistic that flattens out week-to-week fluctuations, declined 3,500 to a level of 628,500. The number of people receiving ongoing unemployment help, a statistic known as continuing claims, increased 75,000 to a level of 6.662 million in the week ended May 9th.

The results of the Philadelphia Federal Reserve's manufacturing survey are due out at 10 AM ET. Economists expect the diffusion index of current activity to show a reading of -18.

A slowdown in the contraction of manufacturing activity in April was confirmed by the Philadelphia Fed's manufacturing survey. The manufacturing index of the survey rose 10.6 points to -24.4 in April. While the new orders index jumped 16 points to -24.3, the index of backlog of orders rose to its highest level since September 2008. Notwithstanding a 15-point increase in the employment index, it remained in negative territory at -40.2. The prices paid and the prices received indexes drifted down to record low levels. The 6-month outlook index rose sharply to 36.2 in April from 14.5 in March.

The Conference Board is scheduled to release a report on the U.S. leading index for April at 10 AM ET. The consensus estimate calls for a 0.8% increase in the leading indicators index for the month.

In March, the leading indicators index fell 0.3% month-over-month following a 0.2% monthly drop in February. The largest negative contributors were building permits, stock prices and the index of supplier deliveries. On the other hand, real money supply and yield spread had a positive impact on the headline index.

Earnings

Patterson (PDCO) said its fourth quarter consolidated sales remained almost flat at $779.88 million. The company’s net income declined to 46 cents per share from 51 cents per share last year. Analysts estimated earnings of 50 cents per share on revenues of $809.47 million.

Buckle (BKE) reported first quarter sales growth of 24.6% to $199.7 million. The company’s net income rose to 58 cents per share from 40 cents per share in the year-ago period. The consensus estimates had called for earnings of 50 cents per share on revenues of $195.36 million.

Hormel’s (HRL) second quarter earnings per share rose 5% to 59 cents per share, as sales remained flat at $1.6 billion. The Street had estimated earnings of 50 cents per share on revenues of $1.68 billion. The company raised its full year earnings estimate to the upper end of its earlier guidance range of $2.15-$2.25 per share compared to the consensus estimate of $2.24 per share.

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Gold Extends Eight-Week High

Gold prices inched higher again on Thursday morning and added to a multi-week high. A disappointing jobs report improved gold's safety value.

June-stamped gold climbed to $939.00, up $1.60 for the day. Earlier, the metal hit as high as $944, its highest intraday mark since March 26.

The dollar stabilized versus the other major currencies after dropping sharply in recent days. The greenback had hit a six-month low against the pound and a four-month low against the euro. Gold usually moves opposite the dollar because of the precious metal's hedge appeal.

On the economic front, the Labor Department revealed that initial jobless claims came in at 631,000 for the week ended May 16th. This was down 12,000 from the previous week's revised total of 643,000.
 
Continuing claims climbed to 6.662 million - yet another record high.

Leading indicators data for April is due at 10 a.m. ET. The report is expected to show a rise of 0.6%, compared to a drop of 0.3% in March.

Also at 10 a.m., the Philadelphia Fed's survey index is also set for release. A reading of minus-20.0 for May is forecast, compared to a minus-24.4 a month ago.

On Wednesday, June gold rose to $937.40, up $10.70 on the session.

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Limited Brands (LTD) could see some strength after it reported that its first quarter earnings were 1 cent per share, better than the consensus estimate of a loss of 3 cents per share. Revenues declined 10% to $1.73 billion, slightly below the mean analysts’ estimate. The company now expects full year earnings of 67-87 cents per share, surrounding the 74 cents per share consensus estimate.

Computer Sciences Corp. (CSC) is also likely to gain ground after it reported that its fourth quarter earnings rose to $2.51 per share from $1.15 per share last year. The recent quarter’s results included charges totaling $1.23 per share. Revenues were down 8% to $4.11 billion compared to the consensus estimate of $4.2 billion. The company guided 2010 earnings to $4.20-$4.30 per share, while analysts estimate earnings of $4.08 per share for the year.

Advance Auto Parts (AAP) is likely to move to the upside after it reported that its first quarter earnings rose to 98 cents per share from 86 cents per share last year on 10% revenue growth to $1.68 billion. The consensus estimates had called for earnings of 92 cents per share on revenues of $1.59 billion.

Gymboree (GYMB) receded in Wednesday’s after hours session after the company reported first quarter earnings fell to 74 cents per share from 86 cents per share last year. However, the earnings were ahead of the consensus estimate of 71 cents per share. Sales were down 5% at $230.9 million, trailing the $232.7 million consensus estimate.

Hot Topic (HOTT) could recede in reaction to its announcement that it expects a loss of 4 cents to 6 cents per share, worse than analysts’ estimate that called for 1 cent per share. For the first quarter, the company reported earnings of 3 cents per share, including a charge of 2 cents per share. Sales rose 10% to $175.1 million. Analysts estimated earnings of 2 cents per share on revenues of $174.7 million.

Intuit (INTU) could rise after it reported third quarter sales of $1.43 billion, up 9% from last year. On an operating basis, the company reported earnings of $1.68 per share. Analysts estimated earnings of $1.61 per share on revenues of $1.42 billion.

Saks (SKS) is likely to react to its announcement that it has priced its offering of its $105 million aggregate amount convertible notes due 2013 in a private offering. The company has granted option to buy up to $15 million principal amount of additional notes to cover overallotment.

Regions Financial (RF) could see weakness after it reported that it would raise $1.85 billion through a public offering of 400 million shares to the public at $4 per share and an offering of 250,000 shares of its 10% mandatory convertible preferred stock. The company noted that the offering will help it to satisfy the $2.5 billion Tier 1 common equity requirement prescribed by the Treasury following the stress tests.

Meanwhile, Huntington Bancshares (HBAN) announced additional capital actions to add about $675 million in regulatory common equity, including a $350 million discretionary equity issuance program and about $250 million of combined impact from other potential actions. The company expects the actions to help fortify its capital base to weather any adverse economic environment and repay $1.4 billion of its TARP capital. Fifth Third Bancorp. (FITB) said it will issue an at the market offering of up to $750 million of its common stock and offer to exchange common stock and cash for $1.8 billion in 8.5% non-cumulative perpetual preferred stock.

Cephalon (CEPH) could also be in focus after it announced that it will offer $300 million worth of common stock and $350 million in aggregate principal amount of convertible senior subordinated notes due 2014 through two concurrent public offerings.

WellCare (WCG) is likely to react to its announcement that it is realigning its organization to respond to changing business conditions. The company announced that certain changes announced recently would eliminate 360 associates or 9% of its workforce.

Qualcomm (QCOM) may be in focus after it expressed disappointment over a ruling by the International Trade Commission, which found the company violating two patents asserted by Tessera Technologies (TSRA). The ITC has banned Qualcomm and other respondents from importing into the U.S. the contentious chip packages to the extent they are not licensed.

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