Selling Spree May Stall as Central Banks Express Solidarity in their Support - RTTNews Daily Market Analysis

Thu. September 18, 2008; Posted: 09:29 AM

(RTTNews) - The major U.S. index futures are pointing to a higher opening on Thursday. The Fed along with the other global central banks has injected liquidity into the financial system, thereby attempting to calm the frazzled nerves of the markets. Although the action cannot guarantee cleansing of the tarnished financial firms, traders are likely to be comforted by hopes the central banks stand ready to tackle any further deterioration in the financial markets. Additionally, commodity stocks could rally on the sharp gains by commodities and bargain hunting could also infuse some optimism into the markets. That said, underlying fears are likely to persist, given the continuing uncertainty behind the survival of companies such as Morgan Stanley (MS | Quote | Chart | News | PowerRating) and Washington Mutual (WM | Quote | Chart | News | PowerRating).

U.S. stocks opened Wednesday's session lower and continued to move to the downside for much of the session, as traders came to terms with the latest government bailout late Tuesday. The Fed announced an $85 billion investment in insurer AIG (AIG | Quote | Chart | News | PowerRating). The Dow Industrials declined 449.36 points or 4.06% to 10,610, its lowest level since November 9, 2005, and the Nasdaq Composite fell 109.05 points or 4.94% at a 2-year low of 2,099. Meanwhile, the S&P 500 Index declined 57.20 points or 4.71% to 1,156, its lowest level since May 13, 2005.

Among the sectors, the Amex Securities Broker/Dealer Index tumbled 10.23% and KBW Bank Index declined 7.67%. The Amex Airline Index and the Dow Jones Transportation Average fell 3.46% and 10.17%, respectively, while the Dow Jones Utility Average slumped 5.33%. Oil, biotechnology, housing, semiconductor, hardware, software, networking, Internet and retail stocks also came under significant selling pressure. On the other hand, the Amex Gold Bugs Index rallied 11.72%.

The major averages have all broken below their mid-July lows and have been in free fall in recent sessions. The Dow fell through its mid-July lows of 10,805, and if the downside continues, the next support could be at 10,176. On any near-term reversal in sentiment, the upside target could be its 50-day moving average of 11,393 and 11,664, which happens to be the upper bound of its 2-month trading range.

S&P believes that we are close to a bottom from a time perspective, but is not very clear about the level that the markets will end at. The firm is of the view that a very important zone of long-term technical support for the S&P 500 index lies between 1,160 and 1,171. There index also has a layer of chart support from the consolidation in 2004 that runs from 1,060 to 1,160. Given the fact the CBOE Volatility Index is near a 5-year high, there is every likelihood of the markets experiencing a small bounce in the next couple of sessions.

On the economic front, housing starts fell 6.2% in August to a seasonally adjusted annual rate of 895,000 in August, according to a report by the Commerce Department. In July, starts tumbled 12.4%. Housing starts are currently at their lowest level since January 1991. Building permits, an indicator of future housing activity, also dipped 8.9% in August. Meanwhile, the U.S. current account deficit widened to $183.1 billion in the second quarter from $175.6 billion in the first quarter.

Currency, Commodity Markets

Crude oil futures are currently rising $3.79 to $100.95 a barrel. On Wednesday, the commodity climbed $6.01 to $97.16 a barrel. The increase came following the release of the Energy Information Department's weekly oil inventory report, which showed a 6.3 million barrel-drop in crude oil inventories in the week ended September 12th to 291.7 million barrels. Crude oil stockpiles are now in the lower half of the average range for this time of the year.

Gasoline stockpiles fell by 3.3 million barrels, dropping below the average range for this time of the year, while distillate inventories edged down by 0.9 million barrels. Refinery capacity utilization averaged 82.9% over the four-weeks ended September 12th compared to 85% in the previous week. Meanwhile, demand also dropped, with the demand for gasoline and distillate fuels falling 2.6% and 2.7%, respectively over the four weeks ended September 12th compared to the same period last year.

Meanwhile, gold is going from strength to strength. After advancing $70 to $850.50 an ounce in the previous session, the precious metal is currently rallying $26.70 to $877.20 an ounce.

Wednesday's rally in the commodity space was attributed to the shifting of investment money out of equities in response to the financial market turmoil and into commodities.

Among the currencies, the U.S. dollar is currently trading down at 104.7850 yen, stronger than the 104.61 yen it fetched at the close of New York trading on Wednesday. Against the euro, the dollar is valued at $1.4453.

Asia

Stock markets across the Asia-Pacific region closed mostly lower on Thursday after Wall Street plunged overnight as the U.S. government's bailout of AIG failed to allay investor concerns about further fallout from the credit crunch. However, emergency actions by central banks and governments around the world helped some of the markets cut their losses late in the session.

Japan's Nikkei 225 average opened lower and saw further losses in early trading before moving sideways, though it pared some of its losses in late trading. The market closed sharply lower, but off the day's low, reversing Wednesday's gains. The benchmark Nikkei index shed 260.49 points to end at 11,489.

On the economic front, the index of tertiary industry activity in Japan increased 1.2% in July to a seasonally adjusted score of 110.6, while nationwide department store sales continued to decline for the sixth month in a row in August and as fears of economic slowdown and higher prices reduced household spending. Meanwhile, the Bank of Japan cut its assessment on business investment in its monthly economic report on Thursday, citing the impact of weaker corporate profits. The central bank reiterated that economic growth was sluggish due to higher energy costs and weakening export growth, keeping its overall assessment unchanged.

Financials witnessed intense selling pressure, while Sony slumped 8.7% to hit a five-year low following a rating cut by Goldman Sachs to Neutral from Buy on a three-rank scale. Among other exporters, heavy machinery maker Komatsu dropped 5.7%, Nikon tumbled 8.8%, Toyota Motor fell 3.1%, Canon slipped 0.7% and Honda Motor plummeted 4.5%. Hitachi edged up 0.3%. The company will reportedly buy plasma TV panels from Panasonic maker Matsushita in a bid to cut costs.

The South Korean Kospi traded below the unchanged line throughout the session to end down 32.84 points or 2.3% at 1,392. South Korea's inclusion in the Financial Times Stock Exchange advanced market category failed to have a major impact on the market. Financial stocks suffered the most, while technology stocks also came under selling pressure.

The Chinese stock market closed lower, extending its losses for the third consecutive trading session. The benchmark Shanghai Composite Index closed down 33.21 points or 1.72% at 1,896.

Hong Kong's Hang Seng Index opened lower and plunged sharply in the mid-session only to snap back most of its losses towards the close. The index closed down 4.73 points at 17,632. China Mobile jumped 4.3%, while HSBC slipped 0.2%. ICBC edged up 0.3% and Bank of Communications advanced 1.8%.

Australia's All Ordinaries opened unchanged, but it declined sharply in early trading. Thereafter, the index moved sideways before ending down 117.8 points or 2.5% to finish at 4,652.

Australia's biggest investment bank Macquarie slumped 23.2%, Commonwealth Bank shed 2.5%, ANZ plunged 3.4%, Westpac tumbled 4.4% and its takeover target St George Bank plummeted 5.2%. Babcock & Brown plunged 17.4%. Insurers finished lower, with Suncorp-Metway falling 5.8% and Insurance Australia Group losing 3.4%. Sharp drops in base metal prices weighed on the big miners.

Australia's biggest telecommunications provider Telstra declined 1.2% after the company said that it would cut 800 jobs. Bank of Queensland shed 1.7% though the bank reaffirmed that its full year earnings would grow by 10% and said that it had no exposure to Lehman Brothers, AIG or Merrill Lynch.

Europe

The major European averages are trading higher in Thursday's session. The French CAC 40 Index and the German DAX Index are rising 1.07% and 0.73%, respectively, while the U.K.'s FTSE 100 Index is rising 0.83%. The markets have recovered after a shaky start following the announcement of a concerted effort from the central banks across the globe, expanding their swap lines.

A report released by the UK National Statistical Office showed that the U.K.'s retail sales rose 1.2%, with the increase primarily driven by higher clothing and footwear sales. Economists had expected a 0.4% decline.

U.S. Economic Reports

On the economic front, a Labor Department report showed that jobless claims rose to 455,000 from the previous week's unrevised figure or 445,000. The increase came as a surprise to economists, who had been expecting jobless claims to edge down to 440,000. With the increase, weekly jobless claims came in just below the six-year high of 457,000 set in the week ended August 2nd.

The Labor Department also said that the less volatile four-week moving average rose to 445,000 from the previous week's unrevised average of 440,000.At the same time, the report showed that continuing claims in the week ended September 6th fell to 3.478 million from the preceding week's revised level of 3.533 million. The Conference Board is scheduled to release a report on the U.S. leading index for August at 10 AM ET on the same day. The consensus estimate calls for a 0.2% decline in the leading indicators index for the month.

In July, the index of leading economic indicators fell by 0.7% on a monthly basis. The steep decline reflected a sharp drop in building permits, which was pushed lower due to a change in the building code for the New York City area making new multi-family constructions less favorable after July 1. Additionally, the recent extension of unemployment insurance benefits has served to increase the temporary filers. However, the coincident index was up 0.1% compared to the previous month.

The results of the Philadelphia Federal Reserve's manufacturing survey are also due out at 10 AM ET on Thursday. Economists expect the diffusion index of current activity to show a reading of -10 for September, an improvement over the previous month's -12.7.

The index of manufacturing activity rose to -12.7 in August from -16.3 in the previous month, suggesting a slower rate of contraction.

Earnings

ConAgra (CAG | Quote | Chart | News | PowerRating) reported first quarter earnings from continuing operations of 23 cents per share, including a charge of 4 cents per share. On an adjusted basis, the company reported earnings from continuing operations of 27 cents per share, as sales rose 17% to $3.07 billion. Analysts, on average, estimate earnings of 24 cents per share on revenues of $2.83 billion.

FedEx's (FDX | Quote | Chart | News | PowerRating) first quarter earnings declined to $1.23 per share from $1.58 per share last year. However, revenues rose 8% to $9.97 billion. The consensus estimates called for earnings of $1.23 per share on revenues of $9.92 billion. The company predicts earnings of $1.40-$1.60 per share for the second quarter compared to $1.54 per share in the year-ago quarter. The company also affirmed its full year earnings estimate of $4.75-$5.25 per share. The company also announced a 6.9% increase in its shipping rates for U.S. and U.S. export services, effective January 5, 2009.

Stocks in Focus

Washington Mutual (WM | Quote | Chart | News | PowerRating) is likely to be in focus after reports suggested that the company has received expression of interest from Well Fargo (WFC | Quote | Chart | News | PowerRating), Citigroup, JP Morgan and a few other bigger banks. Securing additional capital is now made easier due to the concession extended by one of its biggest investors, the Texas Pacific Group. An agreement that WaMu has with TPG gives the private equity firm the right to get more shares if the price of the fresh equity is less than $8.75 per share. TPG has reportedly agreed to waive this condition.

CKE Restaurants (CKR | Quote | Chart | News | PowerRating) could be in focus after it reported that its second quarter income from continuing operations was 23 cents per share compared to 18 cents per share last year. Revenues declined to $267.08 million from $287.80 million in the year-ago period. Analysts, on average, estimated earnings of 20 cents per share on revenues of $353.23 million.

Comtech Telecommunications (CMTL | Quote | Chart | News | PowerRating) is also likely to react to its reports that its fourth quarter net sales rose to $126.5 million from $117.8 million in the year-ago period. On a non-GAAP basis, the company's net income per share was flat at 67 cents per share. The consensus estimates had called for earnings of 48 cents per share on revenues of $124.63 million.

Constellation Energy (CEG | Quote | Chart | News | PowerRating) could react to reports that French utility EDF is contemplating a bid for the company. EDF is already pursuing U.K. utility British Energy with a sweetened 12 billion pound bid.

Herman Miller (MLHR | Quote | Chart | News | PowerRating) could find buying interest after it reported first quarter earnings of 60 cents per share, higher than 55 cents per share last year. Revenues declined to $489.01 million from $491.7 million in the year-ago period. Analysts were expecting revenues of $489 million. The company said it expects sales in the second quarter to be between $490 and $515 million, while it expects earnings of 59-66 cents per share. Analysts estimate earnings of 64 cents per share on revenues of $502.8 million for the quarter.

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