US & World Daily Markets Financial Briefing 29-07-2009

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The major U.S. index futures are pointing to a lower opening on Wednesday, with the sentiment further impacted by the durables goods orders report for June, which showed a bigger-than-expected drop in orders. That said, the inner details of the report weren’t that scary. Shipments as well as new orders for non-defense capital goods, excluding aircraft, showed positive growth for the month.

The alliance struck between Yahoo (YHOO) and Microsoft (MSFT) should augur well for consolidation in the space, although the development is likely to challenge the supremacy of Google (GOOG). Earnings reports released during the day are mixed, while oil is moving lower ahead of the weekly inventory report. The Fed’s Beige Book may also trigger some reaction from traders, who anxiously await on clues on the economy’s course.

U.S. stocks traded below the unchanged line for much of Tuesday’s session amid the release of mixed economic reports and earnings news before closing on a mixed note. While the Dow Industrials ended down 11.79 points or 0.13% at 9,097 and the S&P 500 Index receded 2.56 points or 0.26% to end at 980, the Nasdaq Composite Index recovered in late trading to close up 7.62 points or 0.39% at 1,976.

Eighteen of the thirty Dow components ended lower. American Express (AXP) (down 2.47%), Merck (MRK) (down 2.44%) Pfizer (PFE) (down 3.55%) and Exxon Mobil (XOM) (down 1.18%) were among the notable decliners. On the other hand, Boeing (BA) rose 2.39%, Bank of America (BAC) gained 1.91%, General Electric (GE) moved up 1.62%, Microsoft (MSFT) advanced 1.56% and Verizon (VZ) added 1.29%.

Among the sector indexes, the Dow Jones Transportation Average, the Dow Jones U.S. Basic Materials Average, the NYSE Arca Securities Broker/Dealer Index and the NYSE Arca Oil Index fell over 1% each. At the same time, the Philadelphia Oil Service Index declined 2.59% and the Dow Jones Utility Average moved down 2.10%. The NYSE Arca Gold Bugs Index lost 4.27%. On the other hand, the Amex Airline Index gained 2.32%, the Philadelphia Housing Sector Index rose 1.13% and the NYSE Arca Biotechnology Index advanced 1.30%. In the technology space, the NYSE Arca Disk Drive Index gained 1.49%, while the NYSE Arca Networking Index fell 1.35%.

On the economic front, the S&P Case/Shiller survey revealed that the 20 city composite home price index declined 17.06% year-over-year in May compared to expectations for a 17.9% drop. However, on a monthly basis, the index rose for the first time since Jul 2006.

Meanwhile, the Conference Board said its consumer confidence index for July declined to 46.6 from 49.3 in June. Economists had expected a more modest decline to 49. The present situation as well as the expectations index declined. Much of the negativity was due to the difficult job market situation.

Consumer confidence, Jobs and Spending

Consumer spending, which typically accounts for two-thirds of economic activity, is left in limbo. After showing negative growth in the third and fourth quarters of 2008, the measure rose modestly in the first quarter of 2009, reflecting the favorable impact of the stimulus measures.

That said, stimulus measures alone cannot lift the morale of consumers, whose confidence hit rock bottom in the aftermath of the credit crisis. The Conference Board’s consumer confidence index tumbled to a historical low of 25.3 in February, as the employment scenario worsened. The U.S. economy has been losing jobs in leaps and bounds since January 2008 and the jobless rate has risen close to double digits.

Yesterday’s consumer confidence report showed that the number of respondents saying that jobs were hard to get rose 3.3 percentage points, while those who said jobs were plentiful fell about 1 percentage point. The bleak outlook for jobs is increasing anxiety about the income of consumers, who are hit with the double whammy of seeing their housing wealth erode and jobs disappear. Given expectations that the job market has more legs down, the current recovery is unlikely to be led by consumer spending.

Specifically, consumer spending is likely to have little role to play in the recovery that is expected in the second half of this year. Any such recovery achieved without the support of consumer spending cannot have a lasting impact. Morgan Stanley predicts that personal consumer spending will show a 0.9% quarter-over-quarter decline in the second quarter.

Commodity prices, especially those of crude oil, can also have an impact on consumer confidence. Although the price of oil is well off its July 2008 record highs over $147-a-barrel, expectations of growth recovering in some of the emerging markets is creating a ripple in the oil space. That said, analysts are skeptical about a continued uptrend, given the muted expectations about growth.

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Toronto stocks could extend its losses from the previous session on Wednesday morning as commodity prices continue to see weakness. The market had reached its highest level in almost eight months earlier in the week.

Crude oil prices continued to tumble in electronic trading, losing $1.48 to $65.75 per barrel. Oil had touched as high as $68.99 earlier in the week. Investors await the Energy Information Administration's weekly inventory report at 10:30 a.m. ET.

Talisman Energy reported its second-quarter net income was C$63 million or C$0.06 per share, down from C$426 million or C$0.41 per share, a year earlier.

Enbridge announced that its second quarter earnings were C$393.0 million or C$1.08 per common share, compared to C$657.7 million, or C$1.81 per share in the year ago quarter.
 
Gold also continued to slip on the Comex, losing $4.40 to $937.30 in early trading. Among big names on Bay Street, Agnico-Eagle Mines and Goldcorp are expected to report earnings after the market close today.

In other corporate news, CGI Group said its third-quarter net earnings declined to C$76.5 million or C$0.25 per share from C$78 million or C$0.24 per share in the year earlier period.

Across the border, Yahoo! and Microsoft signed a 10-year partnership to take on Google as the top Internet search engine.

On Tuesday, the S&P/TSX Composite Index has dropped 160.6 points or 1.49% to move at 10,596.31. The market finished Monday's session at its best level since early October.

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The major Asian markets slumped on Wednesday, although the Japanese market bucked the downtrend with a modest gain. Although Australia’s All Ordinaries opened lower, it recovered in early trading, only to show a lack of direction and move sideways close to the unchanged line till the mid-session. Thereafter, selling pressure intensified, dragging the index lower. At the close of trading, the index was down 25.10 points or 0.60% at 4,149.

Material and energy stocks served as the biggest drags on the index, with only the defensive consumer staple, healthcare and utilities showing some degree of buying interest. Mining stocks showed significant weakness, while among the four major banks only Westpac advanced. Macquarie Group rose after it said its operational performance improved in the first quarter of fiscal 2010, but short-term forecasting remains extremely difficult.

Japan’s Nikkei 225 average opened lower, but it recovered in early trading and moved mostly above the unchanged line thereafter to end up 25.98 points or 0.26% at 10,113. Advantest rallied 3.34%, GS Yuasa and Hitachi gained over 5% each, Mitsubishi Mining and Shelter rose 6.05% and Nikon advanced 6.80%. Nissan Chemical Industries, Panasonic Electricals, Taiyo Yuden, Yahoo Japan and Softbank were also among the notable gainers. On the other hand, utilities, pharma, brokerage, financial, shipbuilding, steel, resource and shipping stocks receded.

Currency, Commodity Futures

Crude oil futures are receding $1.29 to $65.94 a barrel after declining $1.15 to $67.23 a barrel in Tuesday’s session. Gold futures are currently declining $3.80 to $937.90 an ounce. In the previous session, the precious metal slid $14.60 to $941.70 an ounce.

On the currency front, the U.S. dollar is trading at 94.75 yen compared to the 94.5478 yen it fetched at the close of New York trading on Tuesday. The dollar is currently valued at $1.4103 against the euro compared to yesterday’s $1.4167.

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The major European markets opened Wednesday’s session sharply lower, but they have recovered since then and are up modestly. The French CAC 40 Index and the German DAX Index are rising 1.52% and 1.67%, respectively, while the U.K.’s FTSE 100 Index is moving up 0.83%.

In corporate news, German chemical company Bayer reported that its second quarter earnings declined to 532 million euros from 574 million euros. Sales fell 5.9% to 8 billion euros. The company also reduced its 2009 sales estimate to 31 billion euros to 32 billion euros.

Steel giant Arcelor Mittal (MT) reported a loss of $792 million or 57 cents per share for its second quarter compared to a profit of $5.84 billion or $4.19 per share last year. The loss for the recent quarter included charges amounting to $1.2 billion.

Confectioner Cadbury (CBY) reported a profit of 313 million pounds for the first half compared to a profit of 113 million pounds a year earlier. Revenues rose 13% to 2.8 billion pounds. The company confirmed its 2009 revenue guidance at the low end of its previous guidance of 4%-6%.

German application software maker SAP (SAP) reported a 10% decline in second quarter sales to 2.58 billion euros. However, net income rose to 423 million euros from 408 million euros last year. While the company raised its non-GAAP operating margin forecast, it lowered its guidance for non-GAAP software and software-license related service revenue.

On the economic front, the French National Institute for Statistics and Economic Studies reported that French producer prices rose 0.5% in June, the first increase after ten consecutive months of declines, with increase in the prices of coke and refined petroleum products responsible for the reversal in the trend. Annually, prices climbed 8.7%.

U.S. Economic Reports

The Commerce Department said durable goods orders fell 2.5% to $158.6 billion in June, reversing the increases of the previous two months. Economists had estimated a 0.6% decline in durable goods orders for June.

The decline was aided by a 12.8% slump in transportation orders. Shipments of manufactured durable goods fell 0.2%, unfilled orders declined 0.9% and inventories at the end of the month were down 0.9%. On a positive note, non-defense capital goods orders, excluding aircraft orders- a measure of capital spending- rose 1.4% month-over-month in June, adding to the 4.3% increase in May.

New York Federal Reserve Bank President William Dudley is due to speak on the factors driving U.S. growth and inflation before the Association for a Better New York in New York at 8:30 am ET.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET.

The oil inventory report for the week ended July 17th showed that crude oil stockpiles fell by 1.8 million barrels, although inventories remained above the upper boundary of the average range for this time of the year.

On the other hand, gasoline stockpiles rose by 0.8 million barrels and were near the upper limit of the average range. Distillate inventories increased by 1.2 million barrels and remained above the upper boundary of the average range. Refinery capacity utilization averaged 86.9% over the four weeks ended July 17th compared to 87.2% in the previous week.

The Federal Reserve is due to release its Beige Book, which is a compilation of anecdotal evidence on economic conditions from each of the 12 Federal Reserve districts, at 2 PM ET. The report is normally released about two weeks before the monetary policy meeting is held.

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Arch Coal (ACI) may react to its announcement that its has priced an offering of $600 million in aggregate principal amount of 8.75% senior unsecured notes due 2016 at an issue price of 97.464%. Human Genome Sciences (HGSI) is likely to see weakness after it said it had priced its underwritten public offering of 23.22 million shares at a price of $14 per share.

Jabil Circuit (JBL) could also recede after it said it intends to offer $20 million of senior unsecured notes due 2016. Norfolk Southern (NSC) is also likely to move to the downside after it said its second quarter profit declined to 66 cents per share from $1.18 per share in the year-ago period. Revenues fell 33% to $1.86 billion. Analysts, on average, estimated earnings of 64 cents per share on revenues of $2.05 billion.

On the other hand, Panera Bread (PNRA) may recede after it said its second quarter earnings rose to 65 cents per share from 52 cents per share last year, as revenues rose 3% to $330.8 million. Analysts estimated earnings of 64 cents per share on revenues of $331.2 million.

THQ (THQI) could trade lower after it said it would offer $90 million of convertible senior notes due in 2014. Separately, the company reported a first quarter profit of 9 cents per share, lower than 41 cents per share last year, as sales rose 77% to $243.5 million. On an adjusted basis, the company’s earnings were 10 cents per share. Analysts estimated a loss of 8 cents per share on revenues of $203.1 million.

DreamWorks (DWA) is expected to trade higher after it reported second quarter earnings of 30 cents per share, flat with last year. Revenues declined 7% to $132 million. The consensus estimates called for earnings of 16 cents per share on revenues of $117 million.

Earnings

American Tower (AMT) said its second quarter revenues rose 7.5% to $423.4 million. The company’s income from continuing operations were 13 cents per share compared to the year-ago’s 12 cents per share. The consensus estimates called for earnings of 17 cents per share on revenues of $414.49 million.

Sprint Nextel (S) reported a second quarter loss of 13 cents per share compared to a loss of 12 cents per share in the year-ago period. Revenues fell 10% to $8.14 billion. Analysts, on average, estimated a loss of 2 cents per share on revenues of $8.12 billion.

Qwest’s (Q) second quarter earnings were 12 cents per share, flat with last year. Operating revenues fell 2.6% to $3.09 billion. Analysts expected earnings of 10 cents per share on revenues of $3.14 billion. The company raised the lower end of its previous 2009 EBITDA guidance to $4.25 billion from its earlier estimate of $4.2 billion, while it maintains the upper end at $4.4 billion.

Medco Health Solutions (MHS) reported second quarter earnings of 64 cents per share compared to the year-ago’s 51 cents per share. On an adjusted basis, the company’s earnings were 69 cents per share, ahead of the 65 cents per share consensus estimate. Revenues rose 17% to $14.93 billion, also exceeding the consensus estimate of $14.55 billion. The company raised its 2009 adjusted earnings estimate to $2.76-$2.81 per share from its earlier estimate of $2.67-$2.77 per share.

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