Stocks May Look To Capitalize on Oil's Slide - RTTNews Daily Market Analysis

Wed. July 23, 2008; Posted: 09:30 AM

(RTTNews) - The major U.S. index futures are pointing to a higher opening on Wednesday. The positive sentiment seen in the recent sessions is poised to continue, as oil is continuing to slide. That said, the commodity could see some volatility amid the release of weekly inventory of the EIA. Additionally, better-than-expected results from some corporations such as AT&T (T | Quote | Chart | News | PowerRating) and Pepsi (PEP | Quote | Chart | News | PowerRating) could allay fears of a slowdown impacting corporate profit growth. Nevertheless, some degree of profit taking cannot be ruled out, given the recent sessions' advances. The markets may also react to interpretations from the Beige Book to be released after the markets open.

While a rise in oil prices and bleak technology and financial earnings weighed down on the major averages early in Tuesday's session, the Dow moved into positive territory within the first hour of trading and was seen moving sideways with modest gains for much of the session. In late trading, the Dow moved sharply higher, encouraged by a steep pullback in oil prices. Meanwhile, the S&P 500 nervously hugged the unchanged line before breaking out sharply in late trading.

Bleak earnings from technology companies, including Apple (AAPL | Quote | Chart | News | PowerRating), weighed down on the space, thereby keeping the Nasdaq Composite Index below the unchanged line before the late-session strength salvaged the day for the tech stocks.

The Dow ended the day up 135.16 points or 1.18% at 11,603 and the S&P 500 Index gained 17 points or 1.35% to 1,277, while the Nasdaq Composite gained 24.43 points or 1.07% to 2,304.

The Amex Securities Broker/Dealer Index rallied 8.42% compared to an 8.93% gain by the KBW Bank Index. The Amex Biotechnology Index and the S&P Retail Index gained over 2% each, while the Philadelphia Housing Sector Index jumped 4.60%. Meanwhile, the Amex Airline Index soared 22.18% on the back of the retreat in the price of oil and the austerity measures outlined by the airline companies to weather adverse macroeconomic developments.

The Dow Jones Transportation Averages advanced 4.06%. In the tech space, the Amex Internet Holders Index and the Amex Networking Index rallied 1.38% and 3.27%, respectively. On the other hand, the Philadelphia Semiconductor Index receded 4.54%. Reflecting oil's retreat, the Amex Oil Index and the Philadelphia Oil Service Sector Index fell 1.58% and 2.44%, respectively. The Amex Gold Bugs Index was off 3.02%.

The Dow Jones Industrial Average has been on a strong bounce back over the last few days following the recent down leg that was witnessed since late May 2008. On Tuesday, the index settled near its January lows, and the volume was higher than the previous down-day. If the index manages to break above 11,613, its next stop on the upside could be around 12,064.

Philadelphia Fed President Charles Plosser said in a speech on Tuesday that the current very accommodative stance of monetary policy will need to be reversed taking cognizance of how economic conditions will pan out. Plosser outlined his view that the reversal needs to begin sooner than later.

Currency, Commodity Markets

Crude oil for August delivery declined $3.09 to $127.95 a barrel on Tuesday in its last day as a front-month contract. The pullback came as Hurricane Dolly cruising past the Gulf of Mexico without causing much damage to oil installations and due to the volatility associated with the expiration of the futures contract. Additionally, the stronger dollar served to exert downward pressure on oil prices. Currently, the September futures, in their first day as a front-month contract, are declining $2.12 to $126.30 a barrel.

Gold futures are also seeing weakness and are currently trading down $10.50 at $938 an ounce. Yesterday, the precious metal declined $15.20 to $948.50 an ounce.

Among the currencies, the U.S. dollar is strengthening to 107.76 yen after the currency firmed up to 107.3250 yen at the close of New York trading on Tuesday. The greenback is currently valued at $1.5747 a euro compared to yesterday's $1.5786.

Asia

Stock markets across the Asia-Pacific region rallied on Wednesday, led by India, after Wall Street rebounded overnight following a drop in crude oil prices. Additionally, a stronger dollar boosted exporters. Financial firms gained as U.S. credit fears eased, but the resources sector witnessed selling pressure. The Japanese market closed higher, extending Tuesday's 3% gain. A weaker yen boosted some exporters. The benchmark Nikkei 225 index rose 127.97 points or 0.97% to close at 13,313.

Banks, real estate and brokerages posted sharp gains, but miners fell following a dip in commodity prices. Oil and gas miner Inpex Holdings plummeted 4.2% after oil prices continued to slide. Nippon Mining Holdings advanced 1.0%, but Nippon Oil dropped 0.7%. Hitachi rose by 1.7% after the Nikkei newspaper reported that the electronics giant and General Electric would jointly develop mid-sized nuclear reactors.

The South Korean market closed sharply higher, led by financials and other large caps. The KOSPI closed up 30.53 points or 1.96% at 1,592 after Tuesday's flat finish.

Kookmin Bank gained 2.8% and top brokerage Samsung Securities advanced 2.4%. Samsung Fire & Marine Insurance surged up 3.8%. Builder Daewoo Engineering & Construction climbed 4.4% and Hyundai Engineering & Construction soared 9.4%. Korean Air Lines jumped 5.2% and Doosan Heavy Industries & Construction gained 5.0%. The power-equipment maker said that its second-quarter earnings dropped 38% from a year earlier due to losses from currency fluctuations and equity ties with affiliates.

Bucking the trend, Samsung Electronics fell 0.5% and rival Hynix Semiconductor declined 0.6%. Meanwhile, Daewoo Shipbuilding & Marine Engineering gained 2.7% after the world's third-largest shipyard said that its second-quarter earnings increased 12.6% from a year earlier on rising demand for high-priced ships.

The Chinese market closed lower, led by coal and non-ferrous metals producers. Airline stocks surged, partly because of speculation about merger activity in the industry and a drop in oil prices. The Shanghai Composite Index closed down 8.27 points or 0.29% at 2,837.85, extending Tuesday's losses.

The Hong Kong market showed a strong upward move, with the key Hang Seng index closing above the 23,000 mark. The benchmark index closed up 607.07 points or 2.69% at 23,134.55.

China Eastern Airlines soared nearly 12% after a report showed that the Chinese government is discussing the possibility of merging the carrier with Shanghai Airlines. Exporters rose on the back of a stronger U.S. dollar. Among large-caps, HSBC gained 3.0%, China Mobile rose 2.9%, China Life jumped 3.1% and Hong Kong Exchange surged 3.8%. Oil refiner Sinopec soared 5.3%.

The Australian market closed sharply higher after turning in a mixed performance on Tuesday following Monday's rally. The benchmark S&P/ASX 200 index closed up 99.7 points, or 2.0%, at 5,105 and the broader All Ordinaries index climbed 85.7 points, or 1.7%, to finish at 5,162.

The Australian Bureau of Statistics reported that its Consumer Price Index or CPI, at the end of June was 4.5%, higher than its level one year earlier. The CPI rose 1.5% above its level of the preceding quarter. The top line inflation figure is above the Reserve Bank of Australia's 2% to 3% target range and is likely to weigh against any reduction in interest rates by the RBA.

Financial stocks soared in the session. On the other hand, BHP Billiton fell 0.8% after it said full year production for seven commodities was at record highs, while Rio Tinto lost 0.5%. Europe

The major European markets are trading higher on Wednesday. The French CAC 40 Index and the German DAX Index are rising 1.67% and 1.22%, respectively, while the U.K.'s FTSE 100 Index is advancing 1.11%. Stocks are benefiting from a dip in oil prices and positive corporate tidings. The U.K. market is benefiting from an announcement by Vodafone (VOD | Quote | Chart | News | PowerRating) of a 1 billion pound-buyback program.

On the economic front, the French National Institute of Statistics and Economic Studies reported that household consumption in manufactured goods fell 0.4% in June compared with expectations of a 0.6% decline. In May, spending was up 1.7%. The weakness in June spending was due to a soft performance of autos. Year-over-year, consumer spending rose 1% in June compared with expectations for 1.4% growth.

Eurostat, the European Union's statistical agency reported today that the euro area's industrial new orders fell 3.5% in May compared to the previous month, when orders grew 2%. Excluding the volatile transportation orders, orders were down a steeper 2.5%. Year-over-year, orders fell 2.5% in the euro area.

Additionally, the Bank of England released the minutes of its July meeting, showing that the Monetary Policy Committee was split three-way while they decided to hold interest rates unchanged at 5%. While seven members voted for the decision, David Blanchflower argued for a rate cut.

U.S. Economic Reports

Federal Reserve Governor Frederic Mishkin is scheduled to speak at a Bank of Canada Economic Conference at 10 AM ET on Wednesday. Additionally, Federal Reserve Vice Chairman Donald Kohn will speak on transparency at 11:15 AM ET.

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

The oil inventory report for the week ended July 11th showed that crude oil stockpiles rose by 3 million barrels to 206.9 million barrels. Gasoline and distillate inventories rose by 2.4 million and 3.2 million barrels, respectively. Refinery capacity utilization averaged 89.1% over the four-weeks ended July 11th, the same as in the previous week.

The Federal Reserve is also 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.

Earnings

Pfizer (PFE | Quote | Chart | News | PowerRating) reported that its second quarter revenues rose to $12.1 billion compared with $1.11 billion in the year-ago period. The company's adjusted earnings were 55 cents per share, lower than 42 cents in the year-ago period. Analysts, on average, estimated earnings of 54 cents per share on revenues of $11.46 billion. The company expects adjusted earnings of $2.35 to $2.45 per share on revenues of $47-$49 billion for full year 2008. The guidance is in-line with the consensus estimates that call for earnings of $2.35 per share on revenues of $48 billion.

Boeing (BA | Quote | Chart | News | PowerRating) reported second quarter earnings of $1.16 per share compared with $1.35 per share last year. On an adjusted basis, the company reported earnings of $1.38 per share. Revenues remained almost unchanged at $17 billion. Analysts estimated earnings of $1.23 per share on revenues of $17.24 billion.

AT&T (T | Quote | Chart | News | PowerRating) said its second quarter earnings were 63 cents per share compared to 47 cents per share in the year-ago period. The company's adjusted earnings were 76 cents per share, as revenues rose 4.7% to $30.9 billion. Analysts, on average, estimated earnings of 76 cents per share on revenues of $31.15 billion.

Stocks in Focus

E*Trade (ETFC | Quote | Chart | News | PowerRating) may come under selling pressure after the company reported a loss of 19 cents per share for its second quarter compared to a profit of 37 cents per share in the year-ago period. The loss reflected a $319.1 million provision the company set aside to cover rising defaults in investment portfolios. Analysts, on average, estimated a loss of 14 cents per share.

Yahoo (YHOO | Quote | Chart | News | PowerRating) is also likely to see weakness after it reported a decline in its second quarter net profit to 9 cents per share from 11 cents per share last year. The consensus estimates had called for earnings of 12 cents per share for the recent quarter. Revenues, excluding traffic acquisition costs, came in at $1.35 billion, marginally shy of the mean analysts' estimate of $1.37 billion.

Washington Mutual (WM | Quote | Chart | News | PowerRating) also receded in Tuesday's after hours session after the company reported a loss of $6.58 per share for its second quarter compared to a profit of 92 cents per share last year. The second quarter results included a charge of $3.24 per share pertaining to the company's capital raising program. Analysts had estimated a loss of $1.05 per share for the quarter.

Sealy (ZZ | Quote | Chart | News | PowerRating) may react to its announcement that it has appointed Lawrence Rogers as its new President and CEO. Rogers was serving in the role of the CEO on an interim basis following the resignation of its former CEO David Mcllquham. Amerigroup (AGP | Quote | Chart | News | PowerRating) could be in focus after it agreed to settle litigation that accused the company of discriminating against pregnant women and high-risk patients. The company is liable to pay $234 million as per the settlement agreement.

Broadcom (BRCM | Quote | Chart | News | PowerRating) is also expected to react to its announcement that its second quarter earnings climbed to 25 cents per share from 6 cents per share last year. The company's revenues rose 34% to $1.2 billion, exceeding the $1.11 billion consensus estimate. The company also forecast third quarter sales of $1.25-$1.30 billion, exceeding the mean analysts' estimate of $1.16 billion. Charles Schwab (SCHW | Quote | Chart | News | PowerRating) could also remain in the spotlight after it announced the resignation of its founder Chairman and CEO, Charles Schwab from the post of Chief Executive Officer.

Logistics company C.H. Robinson (CHRW | Quote | Chart | News | PowerRating) may recede after the company reported second quarter earnings of 52 cents per share, trailing the 55 cents per share consensus estimate. Gross revenues increased 24% to $2.32 billion compared to the consensus estimate of $2.19 billion.

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