Governmental Commitment to Support Economies Should Increase Investor Confidence - RTTNews Daily Market Analysis

Mon. November 10, 2008; Posted: 09:27 AM

(RTTNews) - The major U.S. index futures are pointing to a higher opening on Monday. Concerted efforts to tackle the financial crisis and its aftermath should increase investor confidence. China's mega stimulus package is likely to alleviate concerns that the global economies would be entrenched in a long and deep recession phase. Commodities have moved to the upside in reaction to the all these trouble-shooting measures. That said, a sustainable reversal in sentiment is unlikely to be accomplished with these measures unless concrete evidence emerges that they are bearing fruit.

U.S. stocks closed the week ended November 7th on a negative note despite the solid gains the major averages notched up in the last trading session of the week. On Monday, the major averages closed on a mixed note amid the release of a few lackluster economic reports. However, stocks advanced solidly on Tuesday ahead of the U.S. presidential elections, with the Dow Industrials surging up over 300 points.

Data that suggested a deterioration in private sector employment pushed stocks lower on Wednesday. The markets slumped sharply again on Thursday, as traders sold off holdings on recession fears. Over Wednesday and Thursday, the Dow Industrials lost about 929 points or 10%, marking the worst 2-day losses since 1987. On Friday, the major averages rebounded sharply despite the release an insipid non-farm payroll employment report, as bargain hunters bid up stocks.

During the week, the Dow Industrials fell 4.21% and the S&P 500 Index receded 3.90%, while the Nasdaq Composite declined 4.27%.

Among the sector indexes, the Philadelphia Housing Sector Index and the S&P Retail Index fell over 9% each for the week. The Amex Securities Broker/Dealer Index and the KBW Bank Index posted weekly losses of 7.38% and 8.21%, respectively. The Dow Jones Transportation Average declined 5.66% for the week compared to a 6.27% drop by the Amex Airline Index, while the Philadelphia Semiconductor Index was off 6.80%. On the other hand, the Amex Gold Bugs Index rose 3.73%.

Even amid the volatility, the Dow Jones Industrial Average has been forming an upward channel formation. This is mildly positive amid all the other negative chart indications. In-line with the recent volatile trend, the index may bounce around within this channel. Near-term, the index may find support around the 8,624, 8,156 and 7,864 levels. On the upside, the index has resistance around the 9,324 and 10,800 levels.

Currency, Commodity Markets

Crude oil futures are gaining ground and are trading up $4.33 at $65.37 a barrel after the commodity declined in the week ended November 7th. A barrel of oil ended the previous week down $5.17 or 7.8% at $61.04. The commodity started the week on a downbeat note, but it advanced strongly on Tuesday on the back of the weakness in the value of the dollar and reports that OPEC members were implementing the production cuts they announced last month.

However, the black gold pulled back sharply on Wednesday after the weekly inventory report revealed a strong build-up in gasoline stocks. The commodity declined further on Thursday before recovering on Friday, although finishing the week lower.

Gold futures are rising $18.30 to $752.50 an ounce after the commodity climbed $32.30 or 4.5% to $734.20 an ounce in the previous week.

Among the currencies, the U.S. dollar closed the week ended November 7th modestly lower against the yen, but modestly stronger against the euro. The greenback eased 0.38% against the yen to 98.24 yen, while it gained 0.26% against the euro to $1.2746 a euro.

Currently, a dollar is trading at 99.15 yen and is worth $1.2914 versus then euro.

Asia

Stock markets across the Asia-Pacific region closed sharply higher on Monday after Wall Street rebounded Friday. The benchmark Shanghai Composite Index soared more than 7% as investors cheered China's $586 billion stimulus plan aimed at countering the effects of a global slowdown on its economy. China's announcement came as economic officials from 20 leading nations called Sunday for increased government spending to boost the troubled global economy. Oil prices jumped above $63 a barrel on Monday in Asia on expectation that the Chinese economic stimulus plan will boost energy demand.

Japan's Nikkei 225 average opened with a modest gain and rose sharply in early trading. Thereafter, the index moved sideways for the rest of the session to close up 498.43 points or 5.81% at 9,081. Investors shrugged off gloomy economic data and focused on the weaker yen, China's $586 billion economic stimulus package and Wall Street's rebound on Friday.

Japan's core machinery orders dropped 10.4% in the July-September quarter from the previous three months, matching the biggest plunge on record, according to data released by the Cabinet Office before the market opened for trading. However, core private-sector machinery orders, a key gauge of corporate capital spending, rose 5.5% in September from the previous month compared to analysts' forecast for a 4.9% rise.

Stocks gained across the board, with exporters, commodity-based stocks and heavy equipment stocks showing particularly strong buying interest. Sanyo Electric plunged 6.9% after the company said Friday that it was in talks with Panasonic on a buyout deal. Panasonic edged up 0.8%.

South Korea's Kospi showed some degree of volatility, although it held above the unchanged line for the bulk of the session, before closing up 17.97 points or 1.58% at 1,153. The market shrugged off Fitch Ratings' downgrade of the country's sovereign rating outlook.

Top steel maker POSCO surged up 9.7% and shipbuilder Hyundai Mipo Dockyard rallied by the daily limit of 15%. Auto makers were hit hard on concerns that U.S. President-elect Barack Obama will likely move to protect his country's automobile industry. Top carmaker Hyundai Motor plunged 5.7% and its affiliate Kia Motors shed 4.5%.

Financial shares lost ground, hurt by Fitch's decision and after industry sources and financial regulators said Sunday that South Korean banks' capital adequacy ratios deteriorated in the third quarter amid rising household debts, a wobbling property market and poor earnings.

The Chinese stock market closed sharply higher, extending its gains for the second straight trading session, spurred by the country's 4 trillion yuan or $586 billion economic stimulus plan revealed over the weekend. The benchmark Shanghai Composite Index closed up 127.1 points or 7.3% at 1,875.

Hong Kong's Hang Seng Index hovered in positive territory throughout the session before closing up 618.3 points or 9.1% at 7,413. Among market leaders, HSBC Holdings edged up 0.3% and China Mobile surged up 5.4%. China National Building Material rocketed 42.3%, steel maker Angang Steel jumped 27.0%, and cement maker Anhui Conch rallied 31.5%. Integrated copper maker Jiangxi Copper gained 18.6% and Aluminum Corp of China advanced 19.0%.

Offshore oil producer CNOOC advanced 9.2%, Sinopec rose 7.7%, and PetroChina jumped 8.2%. Financial stocks also advanced. On the other hand, Lenovo Group plummeted 13.5% after it announced that its quarterly earnings plunged 78% year-over-year.

The Australian stock market closed higher, as energy and resources stocks rallied on expectations that China's $586 billion economic stimulus plan will drive demand for commodities. The All Ordinaries index advanced 53.4 points, or 1.3% to 4,060.

Major miners posted strong gains. BHP Billiton jumped 7.0% and Rio Tinto surged up 7.9%. Rio Tinto said that it would cut production of iron ore by 10% due to slowing demand from China. Among energy stocks, Santos advanced 3.8% and Woodside Petroleum rose 3.5%. Gold miners gained on the back of firmer gold prices in Sydney. Lihir Gold climbed 1.9% and Newcrest Mining soared 6.9%.

However, the big banks suffered significant losses. Commonwealth Bank of Australia and Westpac Banking Corp plunged 5.2% each, ANZ Banking Group lost 2.4%, and St George Bank dropped 2.3%. National Australia Bank was in a trading halt after the bank announced an A$2 billion institutional capital raising at A$20 a share that was oversubscribed by the early afternoon. Macquarie Group declined 1.1% and Babcock and Brown plummeted 24.0%.

Europe

The major European markets are trading higher, with the French CAC 40 Index and the German DAX Index rising 3.14% and 2.65%, respectively, while the U.K.'s FTSE 100 Index is advancing 2.61%.

In corporate news, HSBC Holdings (HBC | Quote | Chart | News | PowerRating) reported that net profit for the first half of the year declined to $7.7 billion from $10.9 billion last year. The North American operations posted a loss of $2.9 billion.

On the economic front, the French National Institute of Statistics and Economic Studies said French industrial production eased 0.5% month-over-month in September. Output by goods-producing industries, excluding food and energy fell 0.8%.

Meanwhile, U.K. National Statistical Office's producer price index report showed that the input price inflation rose 13.8% year-over-year in October. The annual inflation rate was tamer than the 24% rate witnessed in September. On a monthly basis, input prices fell 5.6%. Meanwhile, output prices climbed 6.8% year-over-year.

U.S. Economic Reports

The unfolding week's economic calendar is fairly light, both in terms of numbers and the importance of the reports. Markets may anxiously look forward to the University of Michigan's preliminary consumer sentiment report for November and the Commerce Department's retail sales report for October, given their fears over anemic consumer spending. Additionally, trades may pay close attention to the trade balance report for September and the October import and export price index report of the Labor Department.

Other reports that are likely to have a relatively lesser degree of significance are the Commerce Department's business inventories report for September and the regularly scheduled weekly oil inventory and jobless claims reports.

Economists expect the trade deficit to narrow, given the continued weakness in oil prices and slowing growth domestically, which is expected to trim imports. Wachovia Securities believes that export orders may also slacken due to slower growth in the rest of the world and the Boeing (BA | Quote | Chart | News | PowerRating) strike, which depressed aircraft orders. That said, third quarter growth will benefit from a positive contribution of at least 1 percentage point by the real net exports.

Market participants do not harbor much hope for retail sales, with economists expecting a second straight month of declines in October. The headline retail sales are likely to be hurt by falling gasoline prices and weak auto sales. Chain store sales released this week showed a 0.9% decline in October, with luxury, department and apparel stores showing marked weakness.

There aren't any major economic reports scheduled to be released on Monday and Tuesday.

Earnings

AIG (AIG | Quote | Chart | News | PowerRating) reported a third quarter loss of $9.05 per share compared to a profit of $1.19 per share. On an adjusted basis, the company reported an operating loss of $3.42 per share compared to the 90 cents per share loss estimated by analysts. The insurer also announced that the U.S. Treasury and Federal Reserve have agreed to establish a durable capital structure for the company through provision of ongoing financing facilities and one-time transactions.

Nortel (NT | Quote | Chart | News | PowerRating) said its third quarter revenues declined 14% to $2.32 billion. The company reported a loss of $6.85 per share compared to a profit of 5 cents per share last year. The company also announced restructuring programs that include decentralization of several corporate functions, a transition to a vertically integrated business unit structure and the elimination of 1,300 jobs, with 25% of the net reduction taking place in 2008. The company lowered its full year revenue and management operating margin outlook toward the low-end of the previously announced ranges.

Stocks in Focus

Berkshire Hathaway (BRK-A, BRK-B) could be in focus after it reported earnings of $683 per Class A share for the third quarter compared to $2,942 per share in the year-ago period, which benefited from a gain of $2 billion from the sale of PetroChina shares. Revenues fell to $27.9 billion from $29.9 billion last year, missing the mean analysts' estimate of $29.95 million.

Consolidated Edison (ED | Quote | Chart | News | PowerRating) is also expected to be in focus after it reported third quarter adjusted earnings of 98 cents per share compared to $1.18 per share in the year-ago period. Analysts expected earnings of $1 per share. For 2008, the company expects adjusted earnings in the range of $2.95-$3.05 per share compared to its previous guidance of $2.95-$3.15 per share and the mean analysts' estimate of $3.04 per share.

Las Vegas Sands (LVS | Quote | Chart | News | PowerRating) may react to its announcement that it has appointed Kenneth Kay as its CFO. Kay will assume the office on December 1st. MBIA (MBI | Quote | Chart | News | PowerRating) could also be in focus after it said it disagrees with rating agency Moody's way of capital modeling for mortgage-related losses. Moody's had earlier downgraded MBIA's insurance financial strength to Baa1 from A2, with a developing outlook.

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