Markets May Take Heart From Bernanke's Comments, Oil's Slide - RTTDaily Market Analysis

Tue. July 08, 2008; Posted: 09:21 AM

(RTTNews) - The major U.S. index futures are pointing to a higher opening on Tuesday. In a soothing remark, Federal Reserve Chairman Ben Bernanke said the Fed may extend securities dealers' access to direct loans into 2009 as long as emergency continues to prevail. Additionally, oil's continued weakness should generate positive sentiment. Nevertheless, some trepidation may be expressed over earnings prospects ahead of the release of Alcoa's (AA | Quote | Chart | News | PowerRating) earnings. The markets may also react to the pending home sales index of the National Association of Realtors to be released after the markets open.

U.S. stocks showed some degree of volatility on Monday amid reports that Freddie Mac and Fannie Mae are seeking to raise fresh capital. The major averages opened slightly higher, but they moved to top gear in early trading, encouraged by a steep drop in oil prices. However, in early afternoon trading, the indexes plummeted on renewed worries over the health of financial firms before staging a recovery in late trading. Nevertheless, selling momentum took hold of the markets in the final few minutes of trading, leading the major averages lower.

The Dow declined 56.58 points or 0.50% to 11,232 and the S&P 500 Index fell 10.59 points or 0.84% to 1,252, while the Nasdaq Composite Index ended down 2.06 points or 0.09% at 2,243.

Traders sold financial stocks, as reflected by the 3.72% decline by the KBW Bank Index and the 2.74% drop by the Amex Securities Broker/Dealer Index. Notwithstanding the drop in oil prices, the Amex Airline Index declined 1.10%. The Amex Oil Index and the Philadelphia Oil Sector Index ended down 1.76% and 1.98%, respectively, while the Amex Gold Bugs Index fell 2.51%. Housing stocks also receded.

However, the Amex Internet Holders Index and the Computer Hardware Index gained 2.67% and 1.34%, respectively. The optimism in the Internet space was due to a 12% rally by Yahoo (YHOO | Quote | Chart | News | PowerRating) on the developments over a possible sale of the company.

Currency, Commodity Markets

The price of the oil is trading down $2.09 at $139.28 a barrel after the commodity declined $3.92 to $141.37 a barrel on Monday. Gold futures, which slipped $6.30 to $929.20 an ounce in the previous session, are currently losing $6.80to $922 an ounce.

Among the currencies, the U.S. dollar is trading at 107.21 yen, stronger than the $107.185 yen it fetched at the close of New York trading on Monday. The dollar is trading at $1.5684 versus the euro.

Can Second Quarter Reporting Season Turn the Tide?

It's more than a year now since the credit crisis erupted and stalled a spectacular rally by the markets. With no end at sight for the crisis, the markets are likely to stay tuned to results of corporations to gauge how they well they weathered the turmoil. Energy stocks should have had a whale of a time due to their prospects being tied to the rising oil prices that galloped to a record high last week and have cooled off modestly since then.

Companies that have exposure to the global markets are likely to have fared relatively better, as the economies outside of the U.S., especially those in Asia, are still vibrant. On the other hand, financial firms are likely to reveal additional damage resulting from the credit crisis. Marshall llsley (MI | Quote | Chart | News | PowerRating) was the latest to join the bandwagon of companies that have warned of a shortfall or loss. The company said last week that it expects to report a loss due to a surge in loan loss provision due to a jump in net charge-offs and further loan loss reserve building tied to its construction and development portfolio.

Given the fact that the second quarter of 2007 was one of the best performing periods, the firms are up against tougher comparisons. Analysts believe that earnings of S&P 500 companies are poised to record negative growth for the fourth consecutive quarter.

Asia

Stock markets across the Asia-Pacific region closed mostly lower Tuesday, tracking Wall Street's decline overnight. The financial sector lost ground after U.S. mortgage providers Fannie Mae and Freddie Mac slumped on funding concerns. Crude oil eased back to $141.36 a barrel in late Asian deals after gaining more than a dollar to trade above $142 a barrel in early trade.

The Japanese market closed sharply lower after advancing on Monday following twelve consecutive sessions of losses. The benchmark Nikkei 225 index closed down 326.94 points or 2.45% at 13,033.10 after falling below the 13,000 mark in intra-day trading for the first time in nearly three months.

Among a slew of economic data released today, the Bank of Japan said that Japan's M2 gauge for money supply increased by 2.3% in June, faster than May's 2.1% growth and 2.0% growth expected by economists. M3, which combines M2 with CDs, time deposits, fixed savings and foreign currency deposits at all financial institutions including Japan Post Bank, rose 0.9% in June after increasing 0.7% in May.

Meanwhile, lending by Japanese banks, excluding Shinkin banks, rose by 2.0% in June from a year earlier to 393.005 trillion yen following a 1.6% gain in May. Bank lending has risen for 29 months in a row.

Additionally, Japan's economy watchers' index, which measures workers' perception of economic trends, declined for the third straight month in June. The major index for current conditions fell to 29.5 last month, lowest reading since October 2001 when the index hit 27.2, from 32.1 in May. According to the survey, higher prices of oil and raw materials prompted companies to hold off new hiring. The forward-looking index, which measures expectations about economic conditions in subsequent months, dipped to 32.1 in June from 35.1 in May.

Banks lost ground on the back of lingering credit concerns. Oil-related stocks were lower after crude prices fell overnight. Exporters closed weaker after the dollar softened against the yen. Sony dropped 4.1%, video games maker Nintendo lost 3.3%, Honda declined 0.8%, machinery maker Komatsu plunged 4.3% and Toyota fell 1.2%.

Shares of Pioneer Corp declined 3.2% after a report said that the audiovisual product maker aims to debut a Blu-ray Disc recorder within the year. The South Korean market plunged, with the key KOSPI index losing nearly 3%, as investors sold banking and other blue chip stocks on interest rate hike fears. The Bank of Korea is scheduled to hold its monthly meeting on Thursday to decide the monetary policy. The benchmark KOSPI index tumbled 46.25 points or 2.93% to close the session at 1,533.47.

In the banking space, Kookmin Bank slumped 8.6% after JPMorgan Chase & Co. cut its recommendations for the lender's stocks to "Neutral" from "Overweight." In the tech sector, market leader Samsung Electronics tumbled 3.4% and LG Electronics shed 2.9%.

The Chinese market closed higher for a second day, as commodity-related shares gained after the Shanghai Securities News reported that the government would delay the introduction of higher taxes on coal and other resources. The Shanghai Composite Index added 22.55 points or 0.81% to finish at 2,814.95 after surging 4.6% on Monday. The Australian stock market closed sharply lower, paring early gains and extending Monday's 1.6% decline. The market opened flat and briefly traded in positive territory, before losing ground to finish at its lowest levels since August 2006. The All Ordinaries index lost 69.3 points or 1.4% to finish at 5,022.4.

On the economic front, a monthly survey released by National Australia Bank showed that Australian business confidence fell to the lowest level in seven years in June, with the index falling to minus 9 points from minus 4 points in the previous month.

Banks closed weak on lingering credit market worries. Commonwealth Bank lost 1.7%, Westpac fell 2.4%, ANZ plunged 3.1% and National Australia Bank dropped 2.7%. St George bank gave away 1.9%, while investment bank Macquarie Group tumbled 4.7%.

Among news driven stocks, struggling fund manager Allco Finance Group jumped 4.4% after the company sold Singaporean real estate assets for A$138 million, Challenger Infrastructure Fund dropped 0.4% after its second biggest shareholder stepped up its campaign to wind up the fund by serving notice for an extraordinary general meeting and toll road operator Transurban Group gained 3.4% after the company reported an increase in annual revenue from tolls and fees on its roads in Australia and the United States. Europe

The major European markets are trading lower on Tuesday. The French CAC 40 Index and the German DAX Index are receding 1.35% and 1.59%, respectively, while the U.K.'s FTSE 100 Index is losing about 1.07%. Engineering company Siemens (SI | Quote | Chart | News | PowerRating) confirmed speculation that it is trimming 16,750 jobs, as a result of which it expects cost savings of 1.2 billion euros by 2010.

U.S. Economic Reports

Data on Pending Home Sales, which is a leading indicator of housing market activity released by the National Association of Realtors, are due out at 10 AM ET on Tuesday. A pending sale is one in which a contract was signed but not yet closed. Normally, it takes four to six weeks to close a contracted sale. The consensus expectations call for a 3% decline in the index for May.

The pending home sales index for April rose 6.3% to 88.2 compared to expectations for a 1% decline. The reading, though representing the highest level since October 2007, represents a 13.1% year-over-year decline. The pending home sales index rose in all the regions, with the exception of the Northeast, where it declined 1.9%.

The Commerce Department is due to release its wholesale inventories report at 10 AM ET on the same day. Economists expect wholesale inventories at the end of May to show 0.7% growth.

Wholesale inventories at the end of April were up 1.3% from the revised March level, while on an annual basis, inventories rose 8.1%. Wholesales sales climbed 1.4% from a month-ago and 12.7% from the previous year. Consequently, the April inventories to sales ratio was at 1.09 compared to 1.14 in April 2007.

Richmond Fed President Jeffrey Lacker is due to speak at a National Economists' Club luncheon at 12:30 AM ET on the same day.

The U.S. Federal Reserve is expected to release its monthly consumer credit report at 3 PM ET on Tuesday. The consumer credit for May is likely to show an increase of $7 billion.

In April, consumer credit rose 4.2% or $8.9 billion to $2.56 trillion, as revolving credit and non-revolving credit increased 0.4% and 6.5%, respectively.

Stocks in Focus

IndyMac (IMB | Quote | Chart | News | PowerRating) could react to its announcement that it has agreed to a new business plan with regulators that will enable stoppage of new mortgages and improve capital ratios. The company also revealed plans to eliminate 3,800 jobs. The regulatory diktat prevents the company from accepting new brokered-deposits unless it gets waiver from the Federal Deposit Insurance Corp.

AirTran Holdings (AAI | Quote | Chart | News | PowerRating) could be in focus after it said it will cut 480 jobs, effective September 6th, as it battles with soaring fuel prices and a slowing economy. The staffs earmarked for retrenchment include 180 pilots and 300 flight attendants.

Ambac Financial (ABK | Quote | Chart | News | PowerRating) may react to its announcement that it has enough liquidity to transact daily business. The company was responding to an investor speculation that its liquidity position is insufficient.

Apollo Group (APOL | Quote | Chart | News | PowerRating) is expected to move in reaction to its announcement that it has appointed Charles Edelstein as its Chief Executive Office, effective August 26th. Another stock that can be in focus over an appointment is Washington Post (WPO | Quote | Chart | News | PowerRating), which announced after the markets closed yesterday that it is naming Marcus Brauchli as the paper's Executive Editor.

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