Markets May Surrender Recent Advantage on Evidence of Economy going into Recession - RTTNews Daily Market Analysis

Thu. July 31, 2008; Posted: 09:27 AM

(RTTNews) - The major U.S. index futures are pointing to a lower opening on Thursday, with the futures dipping following the release of a government report that showed slower-than-expected growth in the second quarter and a contraction in the fourth quarter of 2007. The 'R' word and associated fears are back in full force, as negative growth reported for the fourth quarter is compounding growth concerns of the Street. Additionally, an unexpected sharp climb in the weekly claims for unemployment benefits may stir anxiety about the labor market, especially ahead of Friday's jobs report.

U.S. stocks opened Wednesday's session notably higher and saw further gains until early afternoon trading, as they relished unexpected job gains in the private sector reported by ADP. While the major averages pared back most of their gains by late afternoon, pressured by a significant increase in oil prices, they climbed sharply in late trading on a commodity-led rally. The markets also expressed optimism over a Federal Reserve announcement concerning changes to its liquidity provision facilities.

The Dow Industrials gained 186.13 points or 1.63% to 11,584 and the Nasdaq Composite rose 10.10 points or 0.44% to 2,330, while the S&P 500 Index advanced 21.07 points or 1.67% to 1,284.

Among the sectors, Dow Jones Utility Average rose 1.52%, while the Amex Securities Broker/Dealer Index and the KBW Index gained 2.54% and 2.44%, respectively. The Amex Oil Index surged up 5.83% compared to a 6.13% advance by the Philadelphia Oil Service Sector Index. However, the Amex Airline Index fell 4.85%. Disk drive and semiconductor stocks also found some buying interest.

According to Standard & Poor's, it will be difficult for the equity markets to rally and justify sustained P/E expansions until there is stabilization in the financial sector, which initiated the overall downturn. The firm believes that the pace of the slump in the housing market has to slow down before one can expect a bottom in the financial space.

The major averages are now being stifled by major resistances, which are preventing a sustained rally. In the case of the Dow, the index has overhead resistances around its January lows of 11,637, 12,137, its August 2007 lows of 12,511 and 12,862. Sentiment needs to turn around significantly before there can be a sustained rally that could take the index past these resistance levels.

Analysts mostly see rallies that are quick in duration and short on price gains, and therefore they expect the mid-July lows to be tested over the next couple of months. On the downside, the index is likely to find support around 11,388, 11,130 and 12,862.

While the ADP private non-farm payroll employment survey showed an unexpected increase in private non-farm payrolls, the Fed announced a series to its liquidity provision facilities. The Fed extended the period for the Primary Dealer Credit Facility and the Terms Securities Lending Facility Through January 30th, 2009. The central bank also said it will introduce auctions of options on TSLF funding and a 3-month Term Auction Facility operations. Additionally, the Fed increased its swap line with the ECB to $55 billion from $50 billion.

Currency, Commodity Markets

Crude oil futures are easing $0.96 to $125.81 a barrel after the commodity jumped sharply in the previous session in reaction to a lackluster petroleum inventory report. On Wednesday, oil climbed $4.58 to $126.77 a barrel.

The commodity received support on Wednesday from the EIA's weekly petroleum inventory report, which showed that gasoline stockpiles declined by 3.5 million barrels in the week ended July 25th. Nevertheless, inventory levels of this category of product are near the upper bound of the average range. While crude oil stocks edged down by 0.1 million barrels, distillate fuel inventories climbed by 2.4 million barrels. Refinery capacity utilization averaged 88.2% over the four-weeks ended July 25th compared to 88.8% in the previous week.

Gold futures are currently climbing $4.90 to $917.20 an ounce after declining $3.60 to $912.30 an ounce in the previous session.

On the currency front, the U.S. dollar is trading at 107.73 yen, weaker than the 108.13 yen it fetched at the close of New York trading on Wednesday. The greenback is currently at $1.5674 a euro after strengthening to $1.5576.

Asia

Stock markets across the Asia-Pacific region closed mostly higher Thursday after Wall Street extended its gains overnight on the positive private sector employment data.

The Japanese stock market closed marginally higher on Thursday, extending gains for the second straight session. Though the market opened higher, it turned choppy in the afternoon session and finished slightly above the flat line. Investors turned cautious ahead of U.S. GDP numbers. The benchmark Nikkei 225 index closed up 9.02 points or 0.1% at 13,377.

Among the economic reports released today, a report released by the Ministry of Land, Infrastructure and Transport showed that Japanese housing starts declined 16.7% in June from the previous year after falling 6.5% in May and 8.7% in April. Economists had forecast a sharp fall of 17.8% for June. Construction orders received by big 50 contractors dropped 11.7% versus May's 25.2% decline. Meanwhile, labor cash earnings unexpectedly fell by 0.6% on year in June, according to the Ministry of Health, Labor and Welfare. Analysts expected a 0.6% year-over-year increase following a revised 0.8% annual gain in May.

The financial sector was weak on poor earnings reported by some companies. Among oil-related stocks, oil and gas miner Inpex Holdings rose 2.5%, Nippon Oil jumped 3.0% and Nippon Mining Holdings surged 4.0% on higher crude oil prices. Trading house Mitsubishi Corp. shed 2.8%, despite reporting a 12% year-over-year increase in net profit for the first quarter ended in June. The company also left its full year to March 2009 earnings guidance unchanged.

Nintendo plunged 8.9%, despite reporting a 31.5% increase in first-quarter operating profit. But it left its full year earnings guidance unchanged, citing an uncertain sales outlook for the Christmas and year-end sales period.

The South Korean market closed higher, extending gains for a second day. The benchmark Korea Composite Stock Price Index closed up 16.97 points 1.08% at 1,895. Among technology stocks, market heavyweight Samsung Electronics surged 2.9%, LG Electronics climbed 1.0% and LG Display advanced 1.4%. Hynix Semiconductors jumped 2.6%, despite reporting a wider net loss for the second quarter. Net loss for the quarter was 707.8 billion won compared to 674 billion won in the previous quarter.

Automaker Hyundai Motor gained 1.4% and steel major POSCO gained 2.9%. Leading lender KookMin Bank edged up 0.2%, Shinhan Financial Group added 0.4% and Woori Finance rose 1.4%. Brokerage Mirae Asset Securities moved up 2.5%.

The Chinese market closed sharply lower, falling the most since July 16, on selling across the board. Airlines and oil refiners led the decline on the back of a surge in crude oil prices overnight. The Shanghai Composite Index lost 60.95 points or 2.15%. The Shanghai index has dropped 2,482.16 points or 46.1% in the first six months, making it one of the worst performing markets in the world.

The Hong Kong market closed higher, extending Wednesday's 1.9% gain. The benchmark Hang Seng Index closed up 40.50 points or 0.2% at 22,731.

Oil stocks and exporters led the gainers. CNOOC jumped 3.7% and PetroChina rose 1.2%. PetroChina shareholders approved the sale of up to 60 billion yuan worth of bonds, due in 15 years or less, at a special shareholders meeting on Thursday. Li & Fung advanced nearly 2.1% and Yue Yuen Industrial Holdings climbed 2.3%.

The Australian stock market closed higher, extending gains for a second straight session. The resources stocks gained on higher prices overnight for copper, nickel and oil. The All Ordinaries index advanced 43.9 points or 0.9% to finish at 5,053.

On the economic front, a report released by the Australian Bureau of Statistics showed that Australia's balance of trade in goods and services turned to a surplus in June. Meanwhile, retail sales in Australia dropped 1.0% in June compared to the previous month. Analysts had been expecting a flat reading following a revised 0.9 increase in May to A$20.23 billion. Resource stocks rallied, while banking stocks were mixed, with Commonwealth Bank losing 1.6%, National Australia Bank plunging 3.0%, Westpac jumping 2.9% and ANZ Bank advancing 0.9%. In the retail sector, David Jones rose 2.1%, while Coles owner Wesfarmer climbed 0.9% and Woolworths gained 0.6%, despite news that its bid for New Zealand retailer The Warehouse Group has been blocked by New Zealand's Court of Appeals.

Europe

The major European markets are trading on a mixed on Thursday. The French CAC 40 Index is receding 0.25% compared to a 0.18% gain by the German DAX Index, while the U.K.'s FTSE 100 Index is losing about 0.27%.

In earnings news, Deutsche Bank (DB | Quote | Chart | News | PowerRating) reported a 64% drop in second quarter profits to 2.3 billion euros, dragged down by the writedowns in its securities unit. The company also said it remains cautious about the second-half of the year. German chemicals company BASF reported a 27% increase in its second quarter net profits to 1.3 billion euros, while operating profits rose 19% to 2.4 billion euros. Sales rose 11% to 16.3 billion euros.

U.K.' s British Sky Broadcasting reported a loss of 127 million pounds for the first half, while BT Group said its first quarter net profits fell 35% to 397 million pounds even as revenues rose 3% to 5.18 billion pounds. U.K.-based insurer Prudential's (PUK | Quote | Chart | News | PowerRating) first-half profits climbed 13% to 674 million pounds on 12% sales growth.

On the economic front, Eurostat, the statistical body of the European Commission, said that the euro area's annual inflation is expected to be 4.1% in July compared to 4% in June. A separate report showed that the seasonally adjusted unemployment rate of the euro area stood at 7.3% in June, unchanged from the previous month.

U.S. Economic Reports

Among the trio of economic reports released before the markets opened, the Labor Department reported that total compensation costs rose by 0.7% in the second quarter. The growth was in-line with the estimate of economists. Wages and salaries rose 0.7% compared to a 0.6% increase in benefits.

The Bureau of Economic Analysis is due to release its advance second quarter GDP report at 8:30 AM ET on Thursday. The economy is likely to have expanded at a pace of 2.3% in the quarter.

Advance estimates by the Bureau of Economic Analysis showed that second quarter GDP rose at an annual rate of 1.9%, which is faster than the revised 0.9% growth in the first quarter. Economists expected a 2.3% expansion in the second quarter. Revisions to the previous quarters resulted in negative growth in the fourth quarter. On a year-over-year basis, second quarter GDP growth was 1.8% compared to 2.5% in the first quarter

The increase in second quarter GDP compared to the previous quarter reflected positive contributions from exports, personal consumption expenditures, non-residential structures, federal government spending and state and local government spending. However, private inventory investment, residential fixed investment and investments on equipment and software deducted from growth. The GDP price index rose at an annual rate of 1.1%, significantly lower than 2.5% in the previous quarter.

A separate report released by the U.S. Labor Department showed that the number of individuals claiming for unemployment benefits rose 44,000 in the week ended July 26th to 448,000 from the previous week's revised average of 404,000. Economists had expected claims to decline to 395,000 from the previously reported reading of 406,000 for the previous week.

The four-week average that removes volatility rose 11,000 in the recent week to 393,000 from the previous week's revised average of 382,000. Continuing claims, which is calculated with a week's lag, rose 185,000 in the week ended July 19th to 3.282 million.

The results of the National Association of Purchasing Management-Chicago's business survey for July are scheduled to be released at 9:45 AM ET on Thursday. Economists expect the business barometer index based on the survey to come in at 49.

In June, the business barometer index rose 0.5 points, although it remained in the contraction zone at 49.6. The production index dipped below '50' to 45.1 and the new orders index, while remaining in the expansion zone, declined 4.1 points to 52. The backlog of orders index retreated further into contraction territory to 42.3. On the other hand, the inventories and employment indexes improved from year-ago levels. Although remaining elevated, the prices paid index eased 2 points to 85.5.

Earnings

Motorola (MOT | Quote | Chart | News | PowerRating) reported that its second quarter earnings were less than 1 cent per share, including a charge of 2 cents per share. Sales declined 7.4% to $8.1 billion. Analysts expected a loss of 3 cents per share on revenues of $7.69 billion.

Altria (MO | Quote | Chart | News | PowerRating) said its second quarter declined to 45 cents per share from $1.05 per share last year. On an adjusted basis, the company's earnings were 46 cents per share, a cent ahead of the consensus estimate. Revenues climbed 4% to $5.05 billion, exceeding the mean analysts' estimate of $4.17 billion.

Exxon Mobil's (XOM | Quote | Chart | News | PowerRating) second quarter adjusted earnings were $11.97 billion or $2.27 per share, higher than $10.26 billion or $1.83 per share in the year-ago quarter. On average, 13 analysts polled by First Call/Thomson Financial expected earnings of $2.52 per share. Total revenues and other income for the quarter surged to $138.07 billion from $98.35 billion in the comparable quarter a year-ago.

Stocks in Focus

Walt-Disney (DIS | Quote | Chart | News | PowerRating) could see weakness due to its bleak outlook for the advertising market. The company reported third quarter adjusted earnings from continuing operations of 62 cents per share, ahead of the consensus estimate, and revenue growth of 2% to $9.24 billion, also exceeding the mean analysts' estimate of $9.14 billion.

Allied Waste (AW | Quote | Chart | News | PowerRating) came under selling pressure in Wednesday's after hours session despite the company reporting adjusted earnings of 27 cents per share, exceeding the consensus estimate of 24 cents per share. However, revenues of $1.58 billion were shy of the consensus estimate of $1.6 billion.

Digital River (DRIV | Quote | Chart | News | PowerRating) could see some buying interest after it raised its adjusted earnings guidance for the full year to $2 per share from its earlier estimate of $1.89 per share and raised its revenue guidance to $410 million. The company also reported that its second quarter earnings rose to 33 cents per share from 32 cents per share last year, even while net income fell $1.3 million to $13.2 million. The company's adjusted earnings were 37 cents per share on 26% revenue growth to $98.4 million. Analysts, on average, estimated earnings of 33 cents per share on revenues of $91 million.

DTE Energy (DTE | Quote | Chart | News | PowerRating) may remain in focus after its reported second quarter earnings of 17 cents per share compared to $2.20 per share last year, which included a gain of $1.91 per share on the sale of one of its gas exploration and production business in June 2007. Operating earnings slid to 16 cents per share from 38 cents per share last year. Analysts estimated earnings of 43 cents per share for the quarter. The company reiterated its 2008 operating earnings guidance of $2.80-$3.20 per share.

Express Scripts (ESRX | Quote | Chart | News | PowerRating) may gain ground after it reported second quarter earnings of 75 cents per share compared to 57 cents per share last year, as revenues climbed to $190.2 million from $152.7 million last year. Revenues rose about 3% to $4.71 billion. Analysts expected earnings of 72 cents per share on revenues of $4.75 billion. The company raised its earnings from continuing operations outlook for the year to $3.03-$3.10 per share from its earlier estimate of $2.95-$3.03 per share.

Murphy Oil (MUR | Quote | Chart | News | PowerRating) is expected to trade higher after it reported that its second quarter earnings rose to $3.27 per share from $1.32 per share last year. The recent quarter's results included a gain of 35 cents per share compared to a charge of 13 cents per share last year. Analysts expected a profit of $2.19 per share for the quarter. Revenues almost doubled to $8.36 billion. The company also issued an above-consensus earnings outlook for the third quarter.

Symantec (SYMC | Quote | Chart | News | PowerRating) is also likely to see buying interest after it reported first quarter earnings that rose to 22 cents per share from 10 cents per share last year. On an adjusted basis, the company's profit was 40 cents per share, exceeding the 35 cents per share consensus estimate. Revenues rose 18% to $1.65 billion, exceeding the mean analysts' estimate of $1.58 billion.

Video game publisher THQ (THQI | Quote | Chart | News | PowerRating) is expected to edge lower after it reported a loss of 41 cents per share for its first quarter compared to a loss of 14 cents per share last year, which included a tax benefit of 10 cents per share. The company's adjusted net loss of 38 cents per share was in-line with the consensus estimate. Sales rose 32% to $137.6 million, exceeding the consensus estimate of $121.1 million. The company forecasts a loss of 35-39 cents per share for its second quarter.

Credit card processor Visa (V | Quote | Chart | News | PowerRating) may gain ground after it reported a jump in its second quarter adjusted earnings to 59 cents per share, exceeding the consensus estimate of 48 cents per share. Revenues of $1.61 billion were also above the mean analysts' estimate.

Insurance company Prudential Financial (PRU | Quote | Chart | News | PowerRating) reported an increase in its after-tax adjusted operating profit to $2.02 per share compared to $1.84 per share last year. The consensus estimates had called for earnings of $1.85 per share. The company also reaffirmed its earnings guidance for the full year. Meanwhile, Unum Group (UNM | Quote | Chart | News | PowerRating) reported an increase in its second quarter net income to 69 cents per share from 43 cents per share last year.

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