US & World Daily Markets Financial Briefing 28-07-2009

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Guarded Optimism May Give Way To Anxiety Over Recovery

The major U.S. index futures are pointing to a lower opening on Tuesday, with sentiment expected to sour following the release of some disappointing earnings reports. The shallow confidence the market has built up based on a few positive catalysts is like to be shaken, as traders question the sustainability of the rally. The markets may also look forward to the consumer confidence survey of the Conference Board.

After trading below the unchanged line for the bulk of Monday’s session, as profit taking kept sentiment in check, the major averages recovered in late trading to close modestly higher. The Dow Industrials ended up 15.27 points or 0.17% at 9,109 and the Nasdaq Composite rose 1.93 points or 0.10% to end at 1,968. Additionally, the Nasdaq Composite advanced 2.92 points or 0.30% to 982.

Seventeen of the thirty Dow components ended the session higher, with Bank of America (BAC) (up 4.64%), Alcoa (AA) (up 2.54%), Caterpillar (CAT) (up 2.05%) and General Electric (GE) (up 2.41%) advancing strongly. However, American Express (AXP) fell 3.83% and Microsoft (MSFT) fell 1.45%.

Among the sector indexes, the Dow Jones Transportation Average gained close to a percentage point and the Philadelphia Housing Sector Index rallied 2.85%. The NYSE Arca Disk Drive Index moved up 1.37% and the NYSE Arca Computer Hardware Index rose about 1%. On the other hand, the S&P Retail Index fell 1.07%.

On the economic front, the Commerce Department’s new home sales report showed that new home sales rose 11% to a seasonally adjusted annual rate of 384,000 units in June. A 23% month-over-month increase in sales in the West can be explained by the $8,000 federal tax credit awarded to first time buyers and the $10,000 California tax credit for new homes. The median sales price of new homes fell 12% year-over-year to $206,200, while inventories, as measured by the months’ supply of new homes at current sales rate, fell to 8.8 from 10.2 in the previous month.

Twist in the Tale

Traditionally, the developed world, led by the U.S., share the honor of providing the lead to the rest of the world, as they were the once ‘happening places’. Now, things are changing. The U.S. hegemony is gradually dwindling after China and India emerged as the new kids on the block, serving as the supply base for the world’s manufactured goods and services. China, with its prowess in mass manufacturing, and India, with its technical competency, are now standing tall. Despite the developed economies limping due to the current economic downcycle, the Chinese and Indian economies have continued to grow, although at a slower rate than in the past.

The latest GDP estimates show that China grew by 7.9% in the second quarter, while Indian GDP rose 5.8% in the three months ended in March. The Reserve Bank of India announced today that it is raising its growth forecast for the fiscal year ending March 2010 to 6% with an upward bias from the 6% estimated earlier, citing favorable funding conditions for companies and a resurgence in industrial production. The data stands in stark contrast to conditions in the U.S., which saw its economy contract at a quarterly pace of 0.5% in the third quarter of 2008, 6.3% in the fourth quarter and 5.5% in the first quarter of 2009. The recovery in the commodity prices seen this year is primarily based on expectations that demand from India and China can keep them ticking.

In reaction to the reality, equity markets in the emerging economies have fared well. The Chinese Shanghai Composite Index has rallied about 88% in the year-to-date period compared to a 38% climb by the Dow Jones Industrial Average and a 14% advance by Japan’s Nikkei 225 average. In the same time frame, India’s Sensex was up about 59%.

That said, can we expect that the U.S. economy and markets will follow suit, latching onto the lead from these emerging economies? The answer is a ‘no’. Sentiment alone cannot lift markets and there should be solid reasoning behind the sentiment. U.S. economic conditions aren’t likely to improve sufficiently enough any time soon to propel the economy onto a path of sustainable growth. Consumers are still reluctant to spend, as is evident from the steep rise in the savings rate.

Consequently, domestic demand isn’t likely to pick up, thereby exerting pressure on companies, which are already reeling under the impact of the recession. Job losses aren’t likely to show a let up for a long time. On top of this, credit conditions remain tight despite all stimulus spending.

Against this backdrop, China and India alone cannot resuscitate the global economy. The primary reason is that these countries, which are home to one-third of the world’s population, are dependent on exports rather than domestic demand. The export-driven economies cannot flourish unless demand perks up in the developed economies, which are destinations for goods produced by the latter. Being production bases, China and India have the potential to drive demand for commodities and in turn their prices. The development may prove inflationary for the rest of the industrialized economies, which rely on imported petroleum products.

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Bay Street Stocks Could Turn Lower

Toronto stocks could see some early weakness on Tuesday as commodities are experiencing moderate weakness. Bay Street stocks have gained in nine of 11 sessions to reach the best level in nearly eight months.

Crude oil prices are down 60 cents to $67.78 per barrel after challenging $69 yesterday. In metals, gold is down $4.20 to $952.10 an ounce, but copper has added 1.65 cents to $2.5615.

Canadian Oil Sands reported net income for the second quarter of $46 million or $0.10 per unit, compared with $497 million or $1.04 per unit a year ago.

Nexen said it priced and agreed to issue US$1.0 billion of senior notes, consisting of US$300 million principal amount of 6.20% senior notes due July 30, 2019 and US$700 million principal amount of 7.50% senior notes due July 30, 2039.

In other corporate news, Rogers Communications Inc reported adjusted second-quarter net income of C$412 million or C$0.65 per share, compared to C$364 million or C$0.57 per share in the year ago quarter.
 
QLT reported second-quarter net income of US$8.63 million, or US$0.16 per share, compared with a net loss of US$7.44 million, or US$0.10 per share, a year ago.

Pharmaceutical companies BioMS Medical Corp. and Eli Lilly and Co. said that dirucotide did not meet the primary endpoint of delaying disease progression during the two-year MAESTRO-01 Phase III trial in patients with secondary progressive multiple sclerosis.

Magna International was upgraded to Buy from Hold at Genuity Capital Markets.

On the economic front, 778,700 Canadians received unemployment benefits In May, Up 9.2% From April. This marks the highest number since records began being kept in 1997.

Monday, the S&P/TSX Composite Index jumped 69.53 points or 0.65% to end at 10,757.43. This is the highest close for Bay Street's main index since October 3.

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The major Asian markets ended Tuesday’s session mostly higher, although the Japanese and the Indian market bucked the uptrend. The fact that the U.S. markets stayed afloat despite overbought conditions seemed to encourage traders, as they held firm to recovery hopes.

Japan’s Nikkei 225 Average opened sharply higher, but it pulled back immediately and was found trading mostly below the unchanged line thereafter. At the close of trading, the index was down 1.40 points or 0.01% at 10,087.

Losses by electronic and electrical machinery stocks contributed to the lower close by the index along with weakness among auto, brokerage and resource stocks.On the other hand, steel, real estate and telecom stocks showed some strength.

Australia’s All Ordinaries opened modestly higher and rose sharply in early trading. Although a selling spree dragged the market lower by the mid-session, the index recovered again and advanced to close up 26.20 points or 0.63% at 4,174.

Most sector stocks traded higher, with the exception of real estate and telecommunication stocks. Miners BHP Billiton and Lihir Gold rose, while Rio Tinto, Fortescue and Newcrest Mining receded. Among the four major banks, ANZ Bank, National Australia Bank and Westpac moved to the upside, while Commonwealth Bank declined.

Hong Kong’s Hang Seng Index, which traded below the unchanged line in the morning, recovered thereafter and advanced sharply to close up by 372.92 points or 1.84% at 20,625. Thirty-seven of the forty-two index components ended the session higher. Wharf Holdings, FIH, China Mobile, Esprit Holdings, Hang Seng Bank and New World Development were among the notable gainers.

Currency, Commodity Futures

Crude oil futures are edging down $0.62 to $67.76 a barrel after gaining $0.33 to $68.38 a barrel on Monday. The commodity is trading near a three-week high, although the recent upsurge seems unjustified, given the fact that demand outside of China remains weak.

Gold futures, which rose $0.40 to $956.30 an ounce in the previous session, are currently moving down $3.90 to $952.40 an ounce.

On the currency front, the U.S. dollar is trading at 94.578 yen compared to the 95.1845 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is trading at $1.4226.

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The major European markets are moving lower on Tuesday. The French CAC 40 Index and the German DAX Index are receding 0.45% and 0.28%, respectively, while the U.K.’s FTSE 100 Index, which was up for the past 11 consecutive sessions, is moving down 0.71%.

In corporate news, oil giant BP said its replacement cost profit for the June quarter was $3.1 billion compared to $6.75 billion reported for the year-ago period. The decline came on the back of lower oil prices despite a 4% increase in daily production.

Germany’s Deutsche Bank reported a net profit of 1.1 billion euros for the second quarter, up 67% year-over-year. The profit growth was supported by strong performance by its corporate and investment banking operations. Dutch department store chain Ahold reported an increase in its second quarter revenues to 6.43 billion euros from 5.77 billion euros last year.

U.S. Economic Reports

The S&P/Case-Shiller home price index, which tracks monthly changes in the value of residential real estate in 20 metropolitan regions across the U.S., is scheduled to be released at 9 AM. Economists expect a 17.90% year-over-year decline in the 20-city composite house price index for May.

The Conference Board is scheduled to release its consumer confidence report for July at about 10 am ET. The report, which is based on a survey of 5,000 U.S. households, is expected to show that the consumer confidence index slipped to 49 in July.

The index unexpectedly fell to 49.3 in June compared to 54.8 in May. While the present situation index fell 5 points to 24.8, marking the lowest level since March, the expectations index declined by 6 points to 65.5. The data suggested that difficult labor market conditions and high debt levels continued to weigh on consumers.

San Francisco Federal Reserve Bank President Janet Yellen is scheduled to speak to the Idaho/Oregon Bankers Association on the economic outlook in Couer d'Alene, Idaho at 10 am ET.

Earnings

Jacobs Engineering said it earned 76 cents per share in the third quarter compared to 87 cents per share last year. Revenues fell to $2.7 billion from the year-ago’s $2.9 billion. Analysts estimated earnings of 75 cents per share on revenues of $2.83 billion. The company narrowed its 2009 earnings per share estimate to $3.10-$3.35 compared to the consensus estimate of $3.29 per share.

Teva said its second quarter net sales rose 20% to $3.4 billion. The company reported non-GAAP net income of 83 cents per share, up 15% year-over-year. Analysts estimated earnings of 80 cents per share on revenues of $3.47 billion.

Smith International reported second quarter adjusted income from continuing operations of 15 cents per share. Revenues were $1.94 billion compared to $2.41 billion in the year-ago period. Analysts estimated earnings of 22 cents per share on revenues of
$2.01 billion.

Corn Products’ second quarter results revealed a loss of $1.13 per share. On an adjusted basis, the company reported earnings of 34 cents per share, lower than 90 cents per share in the year-ago period. Net sales fell 11% to $912 million. Analysts estimated earnings of 30 cents per share on revenues of $886.20 million. The company maintained its 2009 earnings per share guidance of $1.70-$2.10 compared to the $1.82 per share consensus estimate.

Viacom reported that its second quarter revenues fell 14% to $3.3 billion. The company’s adjusted earnings fell to 49 cents per share from 64 cents per share in the year-ago period. Analysts estimated earnings of 49 cents per share on revenues of $3.50 billion.

Coach said its fourth quarter sales of $778 million, lower than $782 million in the year-ago period. The company reported adjusted earnings of 43 cents per share. Analysts estimated earnings of 43 cents per share on revenues of $778.04 million.

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Amgen may move higher after it reported adjusted second quarter earnings of $1.29 per share, ahead of the $1.16 per share consensus estimate. Revenues fell about 1% to $3.71 billion. The company raised its 2009 earnings per share estimate to $4.80-$4.95 from its earlier estimate of $4.55-$4.75, while it said it expects revenues at the upper end of its earlier guidance of $14.4 billion-$14.8 billion. The company also announced a partnership with U.K. drug company GlaxoSmithKline to market its osteoporosis drug denosumab.

IBM may react to its announcement that it has agreed to acquire SPSS (SPSS) in an all cash deal valued at $50 per share, resulting in a total transaction value of $1.2 billion.

Kilroy Realty could be in focus after it said its second quarter funds from operations were 79 cents per share, higher than 74 cents per share last year. Revenues from continuing operations rose to $71.05 million from $69.48 million in the year-ago period. Analysts estimated earnings of 70 cents per share on revenues of $66.40 million.

Rangold Resources receded in Monday’s after hours session after it announced an offering of 5 million new ordinary shares in the form of ADS. The company said it intends to use the proceeds for project-related expenses. The company also reported a 10% quarterly increase in profits to $18.9 million.

RockTenn may be in focus after it reported that its third quarter earnings rose to $2.24 per share from 49 cents per share last year. On an adjusted basis, the company’s earnings climbed to $1.44 per share from the year-ago’s 70 cents per share. Net sales fell to $703.9 million from $771 million last year. The consensus estimates had called for earnings of 89 cents per share on revenues of $693.89 million.

Ambac Financial is likely to recede after it reported that it expects an increase in its impairment losses on credit derivatives of $1.6 billion to $4.9 billion and statutory loss and loss expenses of $800 million as of June 30th, 2009. On a GAAP basis, the company expects to record loss and loss expense of $1.3 billion.

Manitowoc could move to the downside after it reported a second quarter loss of 14 cents per share compared to a profit of $1.01 per share last year. On an adjusted basis, the company reported a profit of 19 cents per share, above the 13 cents per share consensus estimate. Sales fell 13% to $1.03 billion. The Street had estimated sales of $1.12 billion.

Meritage Homes may react to its announcement that it posted a second quarter net loss of $2.37 per share, wider than the loss of 79 cents per share last year. Total closing revenues fell to $221.54 million from $375.30 million in the year-ago period, but still exceeded the consensus estimate of $206.7 million.

Trina Solar could decline after it announced a follow-on public offering of 4 million ADS, each representing 100 ordinary shares. Separately, the company said it expects net revenues of $148 million to $152 million for the second quarter, down 25.6%-27.5% year-over-year. The company reiterated its 2009 total PV module shipments of 350 MW to 400 MW.

Rent-A-Center may see buying interest after it reported that its second quarter earnings rose to 63 cents per share from 56 cents per share last year. The company’s non-GAAP earnings were 61 cents per share, ahead of the 53 cents per share consensus estimate. Revenues fell 5% to $679.6 million. Analysts estimated revenues of $684.4 million.

Fidelity National Financial is likely to trade higher after it reported that its second quarter earnings surged up to 40 cents per share from 3 cents per share last year, as revenues climbed 34% to $1.57 billion. Analysts estimated earnings of 39 cents per share on revenues of $1.64 billion.

Human Genome Sciences rose in Monday’s after hours session despite announcing that it has commenced an underwritten public offering of up to 18 million shares.

Health Management Associates may rally after it said its second quarter earnings rose to 13 cents per share from 7 cents per share last year, as sales rose 4.5% to $1.16 billion. The consensus estimates called for earnings of 10 cents per share on revenues of $1.14 billion. The company raised its 2009 earnings guidance to 45-49 cents per share from its earlier estimate of 37-45 cents per share. Analysts estimate earnings of 42 cents per share on revenues of $4.6 billion.

Insurer ACE could also be in focus after it said its second quarter net income, excluding net realized gains and losses and foreign currency effects, were $2.09 per share compared to $2.16 per share last year. The result was ahead of the $1.94 per share consensus estimate.

Masco could gain ground after it reported that its second quarter revenues of $2.04 billion exceeded the $2.02 billion consensus estimate. The company’s earnings, including a pre-tax chare of 4 cents per share, were 15 cents per share, while analysts expected a loss of 1 cent per share. The company revised its net loss per share estimate for the year to 5-25 cents per share from its previous estimate for a loss of 15-35 cents per share, while it also lifted its revenue estimate for the year to show a 18%-22% decline compared to its earlier estimate for a 20%-25% drop.

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