Stocks May Open Higher on Smaller-Than-Expected Job Losses - RTTNews Daily Market Analysis

Fri. August 01, 2008; Posted: 09:26 AM

(RTTNews) - The major U.S. index futures are pointing to a higher opening on Friday. The fewer-than-expected job losses reported by the Labor Department could result in a relief rally. Nevertheless, the climb in the jobless rate should weigh down on sentiment. Earnings news of the day has been mostly negative. The trading direction of the day could also hinge on the results of the ISM's manufacturing survey for July and the construction spending report for June, to be released after the markets open.

U.S. stocks began Thursday's notably lower on a pair of reports that showed that the economy expanded at a slower-than-expected rate and a steep climb in weekly claims for unemployment benefits. Additionally a few disappointing earnings also weighed on the averages. The Dow declined 205.67 points or 1.78% to 11,378 and the S&P 500 Index receded 16.88 points or 1.31% to 1,267.

The Nasdaq Composite Index, which recovered after the initial slump on deal news and Motorola's (MOT | Quote | Chart | News | PowerRating) better-than-expected results, dipped below the unchanged line in late trading to close down 4.17 points or 0.18% at 2,326.

Among the sub-indexes, the Amex Oil Index and the Philadelphia Oil Service Sector Index declined 2.76% and 4.20%, respectively. The KBW Bank Index fell 1.53% compared to a more modest 0.69% slippage by the Amex Securities Broker/Dealer Index. Networking, Internet and retail stocks also came under selling pressure. On the other hand, the Amex Airline Index gained 2.33%, while the Amex Biotechnology Index climbed 4.08%.

On Thursday, the Nasdaq Composite fared better than the other two major averages. The technology-weighted average has lost about 12.32% in the year-to-date period. The index is forming a double-bottom pattern following a downtrend that began in late October 2007, and has the trough around 2,168. For the trend reversal to be confirmed the index has to complete the pattern and break above resistance around 2,539. Between these levels, the index has an intermediate support around 2,279 and resistance around 2,387.

On the economic front, a report released by the Bureau of Economic Analysis said second quarter GDP rose 1.9%, slower than the consensus estimate of 2.3%. The shortfall relative to the estimate was mainly due to a sharp retreat in inventory investment. Net exports contributed a solid 2.4 percentage points in the second quarter compared to 0.8 points in the first quarter. Housing investment declined by 15.6%, slower than the 25.1% drop in the previous quarter, and deducted 0.6 percentage points from growth.

Meanwhile, jobless claims spiked sharply to 448,000 in the week ended July 26th from 404,000 in the previous week. A separate report released by the Labor Department showed that the employment cost index rose by 0.7% in the second quarter compared to the previous quarter, as wages and salaries rose at a slower rate of 0.6% compared to 0.8% growth in the first quarter.

The NAPM-Chicago's survey showed that manufacturing activity in the region expanded in July. The business barometer index rose to 50.8 in July from 49.6 in June. The new orders index climbed 1.5 points to 53.5. However, on a very worrisome note, the prices paid index rise 5.2 points to 90.7 and the employment index eased 0.8 points to 45.9.

Currency, Commodity Markets

Crude oil futures are easing $0.58 to $123.50 a barrel after the commodity weakened by $2.69 to $124.08 a barrel in the previous session. The weakness seen on Thursday was mainly due to disappointing economic readings that drove investors away from the commodity on fears that slowing growth will temper the demand for oil.

Gold futures are also seeing some weakness and are trading down $3.20 at $919.50 an ounce. On Wednesday, the precious metal rose $10.40 to $922.70 an ounce, pushed higher by the weakness in the value of the dollar.

Among the currencies, the dollar is trading at 107.66 yen compared to the 107.9095 yen it was worth at the close of New York trading on Wednesday. The greenback is currently valued at $1.5533 versus the euro.

Asia

Stock markets across the Asia-Pacific region closed mixed on Friday after opening lower on concerns about the strength of the world's largest economy. The markets in China, Hong Kong and India recovered to finish in positive territory, but Japan lost more than 2%.

The Japanese market closed sharply lower after posting gains in the previous two sessions. The market opened on a weak note and extended its losses amid weakness throughout Asian equity markets and poor Japanese corporate earnings.

The benchmark Nikkei 225 index fell to its lowest level in two weeks. The key index finished the session at 13,094.59, down 282.22 points or 2.1%, its lowest level since July 18 when it finished at 12,804. For the week, the index has lost 1.8%.

The financial sector witnessed selling after major companies posted weak earnings. Mizuho Financial Group plunged 3.6% after the bank's quarterly results released Thursday showed a fall in its core business. Sumitomo Mitsui Financial Group tumbled 7.7% after the banking group reported a 51.5% fall in quarterly earnings on Thursday. Mitsubishi UFJ Financial dropped 4.3% and top brokerage Nomura Holdings fell 3.9%.

Europe

The major European markets are showing weakness on Friday. While the French CAC 40 Index is receding 0.33%, the German DAX Index is losing 0.03%. The U.K.'s FTSE 100 is currently declining by 0.34%.

A report released by the German Federal Statistical Office showed that Germany's retail sales declined 3.9% in real terms in June compared to the previous year. Upon adjusting for seasonal and calendar variations, retail sales fell 1.4% in real terms from the previous month. U.S. Economic Reports

The Labor Department reported that the U.S. economy lost 51,000 jobs in July, which is lesser than the 75,000 job losses predicted by economists. The previous month's job loss was revised down to 51,000 from the originally reported decline of 75,000.

The unemployment rate rose to 5.7%, a tad higher than the 5.6% rate expected by economists. Average hourly earnings rose 0.33% to $18.06.

Among the sectors, the good producing sector lost 46,000 jobs, with the construction and manufacturing sectors losing 22,000 and 35,000 jobs, respectively. Meanwhile, the services sector lost 5,000 jobs. Retail trade and professional and business services lost about 17,000 and 24,000 jobs, respectively. The leisure and hospitality segment added 39,000 jobs.

The Commerce Department's construction spending report to be released at 10 AM ET on Friday is expected to show a 0.3% decline in spending for June.

The construction spending report for May showed a 0.4% decline in spending compared to the consensus estimate that called for a 0.6% decline. Annually, spending on construction declined 6%. Dragged down by a 1.6% drop in residential construction spending, private construction spending fell 0.7%. However, spending on public construction improved by 0.4%.

The results of the manufacturing survey of the Institute for Supply Management, which are based on data compiled from purchasing and supply executives nationwide, are due out at 10 AM ET on the same day. Economists expect the index to show a reading of 49.2 for July.

In June, the manufacturing purchasing managers' index showed an unexpected increase. The headline index rose 0.6 points to 50.2, moving above the '50' level that segregates expansion and contraction following a four-month hiatus.

Earnings

Insurer Cigna (CI | Quote | Chart | News | PowerRating) announced Friday before the bell a 37% increase in its second quarter net profits to $272 million from $198 million in the year-ago period. On a per share basis, the company reported earnings of 97 cents per share, higher than 68 cents per share in the year-ago period. The company's adjusted earnings of $1.08 per share were ahead of the consensus estimate of 97 cents per share. Cigna's revenues climbed 11% to $4.86 billion and exceeded the average analysts' estimate of $4.76 billion. For the full year, the company estimates earnings of $4.05-$4.25 per share, also ahead of the expectations of $4.17 per share.

Canadian telecommunication company Nortel (NT, NT.TO) said its net loss for the second quarter widened to $113 million or 23 cents per share from $37 million or 7 cents in the year-ago period. The recent second quarter's results included special items, the net impact of which was a negative $54 million. However, the company's gross margin improved from the year-ago period. Revenues rose 2% year-over-year to $2.62 billion. Analysts, on average, estimated a loss of 4 cents per share on revenues of $2.50 billion for the quarter. The company reiterated its full year revenue growth outlook in the low-single digits.

General Motors (GM | Quote | Chart | News | PowerRating) reported a net loss of $15.5 billion or $27.33 per share for its second quarter compared with net income of $891 million or $1.57 per share last year. The steep loss was blamed on the costs associated with the American Axle (AXL | Quote | Chart | News | PowerRating) and local U.S. strikes and charges related to attrition programs. On an adjusted basis, the company reported a loss of $6.35 billion or $11.21 per share for the recent quarter compared with a profit of $1.41 billion or $2.48 per share in the second quarter of 2007. Revenues declined to $38.2 billion from $46.7 billion in the year-ago period. The results were shy of the consensus estimates that had called for a loss of $2.62 per share on revenues of $44.57 billion.

Sun Microsystems (JAVA | Quote | Chart | News | PowerRating) announced Friday before the markets opened non-GAAP net income of $275 million or 35 cents per share for the fourth quarter compared with $458 million or 50 cents per share in the year-ago period. On a net basis, earnings declined to 11 cents per share from 36 cents per share last year. Revenues slipped 1.4% to $3.835 billion, yet were higher than the consensus estimate of $3.78 billion. The company also announced that its board has approved the repurchase of up to $1 billion worth of shares.

Stocks in Focus

Activision Blizzard (ATVID | Quote | Chart | News | PowerRating) could be in focus after it reported first quarter earnings of 18 cents per share compared to 9 cents per share in the year-ago period. On an adjusted basis, the company's earnings were 23 cents per share, as revenues rose 32% to $654.2 million. The consensus estimates had called for earnings of 19 cents per share on revenues of $598.1 million.

Aon (AOC | Quote | Chart | News | PowerRating) is likely to react to its announcement that its second quarter revenues rose 6% to $2 billion and its adjusted earnings from continuing operations were 71 cents per share. Analysts expected earnings of 69 cents per share on revenues of $1.93 billion.

Wachovia (WB | Quote | Chart | News | PowerRating) may also remain in the spotlight over the resignation of its Chief Risk Officer Donald Truslow. Real Networks (RNWK | Quote | Chart | News | PowerRating) is likely to recede after it reported a second quarter loss of 1 cent per share compared to a profit of 1 cent per share last year, as revenues increased 12% to $152.6 million. The consensus estimates had called for a loss of 2 cents per share on revenues of $153.1 million. The company issued second quarter and full year sales guidance, both of which were below the consensus estimates.

McAfee (MFE | Quote | Chart | News | PowerRating) may trade higher after it reported adjusted earnings of 45 cents for the second quarter, in-line with the consensus estimate of 45 cents per share. Revenues were up 26% to $396.8 million. Analysts, on average, estimated revenues of $369.1 million. The company also announced an agreement to buy private-held Reconnex for $46 million in cash. McAfee also raised its earnings and revenue guidance for the full year.

KLA-Tencor (KLAC | Quote | Chart | News | PowerRating) is likely to react to its announcement that its fourth quarter non-GAAP earnings were 60 cents per share compared to 91 cents per share last year. Revenues fell to $591 million from $736 million in the year-ago period. Analysts expected earnings of 57 cents per share on revenues of $572.80 million.

CSX Corp. (CSX | Quote | Chart | News | PowerRating) could react to its announcement that four board nominees who have the support of hedge funds TCI and 3G received more votes than four of its own nominees. However, CSX said it is contesting the election of the two of the nominees of TCI and 3G.

Cognizant Technology (CTSH | Quote | Chart | News | PowerRating) receded in Thursday's after hours session despite reporting second quarter earnings of 35 cents per share compared to 27 cents per share last year. Revenues rose 33% to $685.4 million. The Street had forecast earnings of 35 cents per share on revenues of $682.5 million.

CA (CA | Quote | Chart | News | PowerRating) may react to its announcement that its first quarter earnings rose to 37 cents per share from 24 cents per share, as revenues rose 6% to $1.09 billion. Analysts expected earnings of 35 cents per share on revenues of $1.1 billion.

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