Markets May Turn Attention to Mixed Corporate News - RTTNews Daily Market Analysis

Wed. August 06, 2008; Posted: 09:29 AM

(RTTNews) - The major U.S. index futures are pointing to a mixed opening Wednesday. Corporate news has been mixed, with mortgage lender Freddie Mac (FRE | Quote | Chart | News | PowerRating) announcing a loss for the fourth straight quarter and a substantial reduction in its dividend payout, while the Cisco (CSCO | Quote | Chart | News | PowerRating) posted better-than-expected results for its calendar year second quarter. The weak results could trigger some profit taking after yesterday's sharp advances. The markets could also track the direction of oil prices amid the release of the weekly inventory data during the trading session.

U.S. stocks opened Tuesday's session higher, encouraged by a sharp decline in the price of oil and a better than expected reading on the service sector. The major averages moved steadily higher over the course of the trading, sustaining the buying momentum even after the announcement of the Federal Reserve interest rate decision. The Dow Industrials climbed 331.62 points or 2.94% to 11,616 and the Nasdaq Composite gained 64.27 points or 2.81% to 2,350, while the S&P 500 Index rose 35.87 points or 2.87% to 1,285.

On Tuesday, the Dow Industrials ended near its January lows, and it is approaching its 50-day moving average of 11,739. Although there aren't many meaningful catalysts in the near term to give a meaningful and sustainable upward thrust to the markets, a climb above the 50-day moving average could lead to a short-term rally. The other overhead resistances are around 12,254, the average's 200-day moving average of 12,542, 12,730 and 13,167. On the downside, traders should be wary of the 11,380 and 10,810 levels.

The Dow Jones Transportation Average rallied 4.92% and the Amex Airline Index surged up 9.60%. While the Amex Securities Broker/Dealer Index advanced 4.63%, the KBW Bank Index climbed 5.48%. The interest rate-sensitive S&P Retail Index and the Philadelphia Housing Sector Index gained 5.41% and 2.76%, respectively. The Philadelphia Semiconductor Index, the Amex Internet Holders Index and the Amex Software Holders Index advanced over 3% each. On the other hand, the Amex Gold Bugs Index declined 5.79%.

Fed's Decision - A No Surprise

As expected, the Fed left the fed funds target rate unchanged at 2% at its August meeting. Dallas Fed President Richard Fisher cast the only dissenting vote against the decision to pause. The post-meeting policy statement relayed a balanced outlook on growth and inflation, but it did not provide much clarity on the future rate outlook.

On growth, the Fed noted that economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. That said, the central bank retained its comments that labor markets have softened further and remain under considerable stress, and while it also repeated its comments that tight credit conditions, housing and energy prices will weigh on growth over the next few quarters.

Compared to the previous statement, the FOMC shifted up the positioning of the phrase, "Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth."

While reiterating that it expects inflation to moderate later this year and next year, the committee also commented on the highly uncertain inflation outlook against the backdrop of continued increases in energy and commodities prices.

The Committee left out the part on its belief that the monetary policy easing along with its ongoing liquidity boosting measures should help to promote moderate growth over time. Meanwhile, the Fed modified the statement on perceived risk to 'Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee.'

Currency, Commodity Markets

Crude oil futures are trading down $0.14 at $119.03 a barrel after receding $2.24 to $ 119.17 a barrel on Tuesday. Meanwhile, gold futures are currently rising $3.30 to $889.40 an ounce. In the previous session, the yellow metal declined $8.10 to $886.10 an ounce.

On the currency front, the U.S. dollar is trading at 108.315 yen compared to the 108.34 yen it fetched at the close of New York trading on Tuesday. The greenback is currently valued at $1.5499 a euro, weaker than yesterday's $1.5454.

Asia

Stock markets across the Asia-Pacific region closed higher Wednesday, boosted by Wall Street's rally overnight on the back of the U.S. Federal Reserve's decision to leave the benchmark interest rate unchanged at 2 percent. The Australian and Taiwanese markets surged more than 3 percent, while the Japanese and South Korean markets gained 2.6 percent and 2.8 percent respectively. The Hong Kong stock market cancelled Wednesday's trading session due to a typhoon. The Japanese stock market snapped a three-day losing streak to finish sharply higher. The benchmark Nikkei 225 Index closed up 340.23 points or 2.6% at 13,255. On the economic front, a preliminary report from the Cabinet Office showed that the Japanese leading index dropped to 91.2 in June from 92.9 in May. Economists were looking for a reading of 91.1. Meanwhile, the coincident index stood at 101.7, in line with expectations.

Automakers posted sharp gains, with Honda rising 3.9%, Toyota climbing 3.1%, Mazda surging 7.2%, Nissan gaining 4.5% and Mitsubishi Motors advancing 3.6%. Technology stocks also rallied. Sony rose more than 5% after it said that it signed a deal with German company Bertelsmann AG to buy out that company's equity interest in music producer Sony BMG, making the joint venture a wholly-owned unit. Other gainers in the tech sector included Olympus 1.7%, Toshiba gained 3.9% and Canon 5.0%. However, the big banks closed mixed.

The South Korean market also snapped a three-session losing streak and rallied on Wednesday. Exporters and airlines led the markets higher. The KOSPI closed up 43.17 points or 2.81% at 1,579, its biggest daily gain in over two weeks.

Airline, technology and construction stocks found significant buying interest. Daewoo Engineering & Construction added 2.8%, Hyundai Engineering & Construction soared 7.0% and Samsung Engineering advanced 8.4%. In the financial sector, Samsung Securities advanced 4.6% and top lender Kookmin Bank rose 2.4%. The Chinese market also closed higher, led by financial and airline stocks, as crude oil prices continued to decline. The Shanghai Composite Index closed up 28.62 points or 1.06% at 2,719.

The Australian stock market closed sharply higher, with the broader All Ordinaries index climbing 136.1 points or 2.8% to finish at 5,027. Media giant News Corp jumped 3.9% after the company reported higher profits for its fourth quarter and fiscal year. Among others in the sector, Fairfax Media rose 0.4%, but Seven Network plunged 4.7%.

Banks extended their gains, with Commonwealth Bank of Australia surging 6.3%, National Australia Bank jumping 5.1%, Westpac Banking Corp rising 5.3% and ANZ Banking Group gaining 5.8%. Takeover target St George Bank climbed 5.1% and investment bank Macquarie Group advanced 4.5%. The major miners also gained despite weaker metals and oil prices.

Europe

The major European averages are showing mixed sentiment on Wednesday. The French CAC 40 Index and the German DAX Index are gaining 1.46% and 0.89%, respectively, while the U.K.'s FTSE 100 Index is receding 0.01%.

In corporate news, miner Xstrata announced a 5 billion pound take over offer for peer Lonmin. Meanwhile, Xstrata also announced today that net income for the first half of the year slid 8.3%. French banking giant BNP Paribas reported a 34% decline in its second quarter profits, primarily due to a decline in profits at its corporate and investment banking business. However, the earnings were ahead of the estimates of some analysts. The bank reassured investors that it no longer needs to raise finances.

On the economic front, the National Institute of Economic and Social Research said today that the U.K.'s economic growth in three months ended July is likely to be 0.1%, slower than the 0.2% growth forecast for the three months ended June. A report released by the U.K.'s Nationwide showed that the U.K.'s consumer confidence index declined by 11 points from the previous month to 51 in July. Annually, the index is down 46%. The dismal reading reflects pessimism due to the weakness in the housing market and a surge in inflation.

U.S. Economic Reports

The Energy Information Administration is scheduled to release its weekly petroleum inventory report at 10:30 AM ET on Wednesday. The report is expected to show decreases in both crude oil and gasoline inventories.

The EIA's weekly petroleum inventory report 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 stockpiles edged down by 0.1 million barrels, distillate fuel inventories increased 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.

Earnings

Time Warner (TWX | Quote | Chart | News | PowerRating) reported that its second quarter earnings to 22 cents per share from 28 cents per share in the year-ago period. The recent quarter's results included a charge of 2 cents per share. Revenues rose 5% to $11.6 billion. Analysts, on average, estimated earnings of 23 cents per share on revenues of $11.46 billion.

Marsh & McLennan (MMC | Quote | Chart | News | PowerRating) said its second quarter earnings rose declined to 13 cents per share from 31 cents per share in the year-ago quarter. On a non-GAAP basis, earnings were 41 cents per share. However, revenues rose to $3.05 billion from $2.79 billion in the year-ago period. The consensus estimate had called for earnings of 35 cents per share.

Sprint Nextel (S | Quote | Chart | News | PowerRating) reported a second quarter loss of 12 cents per share compared to earnings of 1 cent per share in the same period last year. On an adjusted basis, the company reported earnings of 6 cents per share, exceeding the 3 cents per share consensus estimate. Revenues fell 11% to $9.06 billion.

Stocks in Focus

Networking giant Cisco Systems (CSCO | Quote | Chart | News | PowerRating) reported that its fourth quarter earnings rose to 33 cents per share from 31 cents per share in the year-ago period. On an adjusted basis, the company reported earnings of 40 cents per share, a penny ahead of the consensus estimate. Sales climbed 10% to $10.4 billion. In the conference call, the company issued revenue guidance for the first quarter that was almost in-line with the consensus estimate.

Computer Sciences (CSC | Quote | Chart | News | PowerRating) could be in focus after it reported a first quarter profit of 79 cents per share compared to 61 cents per share last year, which included a charge of 19 cents per share. Revenues increased 16% to $4.44 billion. Analysts, on average, had estimated earnings of 76 cents per share on revenues of $4.29 billion. The company reiterated its full year earnings estimate of $4.20-$4.40 per share compared to the consensus estimate of $4.30 per share.

Fidelity National Information Services (FIS | Quote | Chart | News | PowerRating) is also likely to be in focus after it reported second quarter revenue growth of 19% to $1.3 billion. The company's adjusted net earnings from continuing operations climbed 15.8% to 57 cents per share. The consensus estimates had called for earnings of 34 cents per share on revenues of $845.13 million. Giving effect to a lower-than-expected tax rate, the company revised up its full year earnings estimate to $1.51-$1.57 per share from its earlier estimate of $1.48-$1.54 per share.

Jack in the Box (JBX | Quote | Chart | News | PowerRating) may move in reaction to its announcement that its third quarter earnings fell to 51 cents per share from 54 cents per share in the year-ago period, which included a benefit of 4 cents per share. The bottom-line result was in-line with the consensus estimate. Same store sales at Jack in the Box company restaurants eased 0.4%. The company expects fiscal year 2008 earnings of $2.01-$2.05 per share.

News Corp. (NWS | Quote | Chart | News | PowerRating) could be in focus after it said fourth quarter earnings climbed to 43 cents per share from 28 cents per share last year. On an adjusted basis, the company's earnings were 35 cents per share, a penny ahead of the consensus estimate. Revenues climbed 17% to $8.59 billion. The company expects operating income for 2008 to grow by 4%-6%.

Priceline.com, Inc. (PCLN | Quote | Chart | News | PowerRating) traded lower in Tuesday's after hours session despite reporting second quarter adjusted earnings of $1.55 per share, ahead of the consensus estimate of $1.41 per share. Revenues climbed 44% to $514 million, also exceeding the mean analysts' estimate of $495.7 million.

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