Markets May Find Right Catalyst In Alcoa's Earnings - RTTNews Daily Market Analysis

Thu. July 09, 2009; Posted: 09:05 AM

(RTTNews) - The major U.S. index futures are pointing to a higher opening on Thursday. Alcoa's (AA | Quote | Chart | News | PowerRating) earnings set a positive tone to the reporting season and the optimism is resurfacing and this is reflected by the resumption in the uptrend of the prices of commodities. Additionally, a labor market report released earlier in the day, showing a decline in first time claims for unemployment benefits, was comforting, suggesting that we may begin to see an improvement in labor market conditions any time soon. That said, caution among traders may keep sentiment subdued.

While bargain hunting lifted the major U.S. averages early in Wednesday's session, selling pressure set in shortly after, reflecting caution among traders about the outlook for the market as well as the economy. The major indexes tumbled to their intra-day lows by early afternoon trading before they began recouping their losses throughout the rest of the session.

The Dow Industrials and the Nasdaq Composite Index scrapped through and closed slightly higher, while the S&P 500 Index ended modestly lower. At the close of trading, the Dow Industrials was up 14.81 points or 0.18% at 8,178 and the Nasdaq Composite was higher by 1 point or 0.06% at 1,747, while the S&P 500 Index slid 1.47 points or 0.17% to 880.

Among the sector indexes, the S&P Retail Index rose 2.01%, the Philadelphia Oil Service Index moved up 1.17%. On the other hand, the KBW Bank Index fell 2.07%, the NYSE Arca Securities Broker/Dealer Index slipped 1.41% and the NYSE Arca Networking Index declined 1.43%.

The Treasury auction of $19 billion worth of ten-year notes received a good reception, with the yield at 3.65% and the bid-to-cover ratio at an impressive. The response is attributed to the investors overlooking inflation concerns as they chase less risky assets. Meanwhile, the Federal Reserve said consumer credit declined by $3.2 billion to $2.519 trillion, with the decline much smaller than the $5.6 billion drop expected by economists. The bulk of the decline was in revolving credit, which declined by $2.9 billion, while non-revolving credit declined by a more modest $400 million.

Currency, Commodity Futures

Crude oil futures are moving up $1.05 to $61.19 a barrel after receding $2.79 to $60.14 a barrel on Wednesday amid the release of the weekly inventory report, which showed that crude oil stockpiles declined by 2.9 million barrels in the week ended July 3rd to 347.3 million barrels. Inventories of crude oil remained above the upper bound of the average range.

However, gasoline and distillate inventories increased by 1.9 million barrels and 3.7 million barrels, respectively. While gasoline stockpiles climbed into the upper half of the range, distillate inventories were above the upper boundary of the average range. Refinery capacity utilization averaged 86.7% over the four weeks ended July 3rd compared to 86.4% in the previous week.

Gold futures, which fell $19.80 to $909.30 an ounce in the previous session, are currently gaining $3.90 to $913.20 an ounce. Gold is being hit by a firmer dollar, the weakening of oil prices and stagnant investment demand. Commerzbank is of the view that gold even an equity market tumble won't be able to prevent the slide of the precious metal below $900 an ounce.

On the currency front, the U.S. dollar is strengthening to 93.10 yen after it declined sharply to 92.882 yen at the close of the New York session on Wednesday. At the same time, the greenback is currently valued at $1.4003 versus the euro.

Asia

The major Asian markets ended Thursday's session on a mixed note, with the Japanese, South Korean, Australian and New Zealand markets ending lower, while the rest of the major markets in the region closed higher.

Japan's Nikkei 225 average opened lower and remained below the unchanged line throughout the session before closing near the lows of the session. The index ended lower for the seventh straight session, ending down 129.69 points or 1.38% at 9,291. The weakness stemmed from continued selling pressure in the commodity space and the yen's strength early in the Asian session.

Australia's All Ordinaries moved lower in early trading and moved roughly sideways for much of the rest of the day, stuck below the unchanged line. The index closed down 4.6 points or 0.12% at 3,761.

Energy stocks advanced in the session, while material stocks also showed a moderate amount of buying interest. Among the heavily weighted mining stocks, BHP Billiton rose, while Rio Tinto receded. Bank stocks were mostly lower.

Hong Kong's Hang Seng Index opened higher and receded below the unchanged line in early trading. After trading in the red for most of the session, the index recovered in late trading. At the end of the session, the index was up 11.69 points or 0.08% at 17,791.

China-related finance stocks ended higher, while Hong Kong-based financial stocks closed mixed. Resource stocks also traded higher. However, property stock receded on profit taking.

The Indian market ended a volatile session flat despite gains in European stocks and U.S. index futures. Trading was volatile, as worries about the progress of monsoon rains and fears of a possible downgrade of the nation's sovereign rating by international rating agencies led to intermittent profit taking. Traders also expressed caution before the release of May industrial output report on Friday. After trading in a range of 13,879-13,644, the BSE Sensex finished at 13,757, down 12 points or 0.08%.

Europe

The major European markets are advancing on Thursday after three straight sessions of declines, with mining stocks leading the gains after their U.S. peer Alcoa reported better-than-expected results yesterday. The French CAC 40 Index and the German DAX Index are moving up 1.59%, and 1.65%, respectively, while the U.K.'s FTSE 100 Index is advancing 0.84%.

The Bank of England announced today that it is maintaining its key interest at 0.5% as expected. The rate remains at its lowest since the central bank was established in 1694. The Monetary Policy Committee expects the asset purchase scheme to take another month to be completed. The central bank said it would review the scale of the program again at its August meeting, alongside its latest inflation projections.

Among the economic reports released today, the German Federal Statistical Office confirmed its preliminary CPI annual inflation rate estimate of 0.1% for June. In May, consumer prices remained unchanged. Another report released by the agency showed that Germany's trade surplus increased to 9.6 billion euros in May from 9.4 billion euros in the previous month. The trade surplus was 10.3 billion euros on a seasonally adjusted basis.

At the same time, the U.K.'s visible trade deficit narrowed to 6.3 billion pounds in May from a deficit of 7.1 billion pounds in the previous month. Imports declined 4% compared to a 0.8% drop by exports.

U.S. Economic Reports

First-time claims for unemployment benefits showed a substantial decrease in the week ended July 4th, according to a report released by the Labor Department on Thursday, with jobless claims falling below the 600,000 level for the first time since January.

The report showed that jobless claims fell to 565,000 from the previous week's revised figure of 617,000. Economists had been expecting a more modest decrease to 603,000 from the 614,000 originally reported for the previous week.

The Commerce Department is due to release its wholesale inventories report at 10 AM ET. Economists expect wholesale inventories at the end of May to show a 1% decline.

In April, wholesale sales edged down 0.4% month-over-month to $309.4 billion. Annually, sales declined a steeper 19.5%. Sales of non-durable goods edged up 0.8%, helping to offset the weakness in durable goods sales to some extent. Meanwhile, wholesale inventories at the end of April were down 1.4% month-over-month and were trailing 6.2% on an annual basis. The April inventories to sales ratio was 1.31 compared to 1.12 in the year-ago period.

Earnings

Chattem (CHTT | Quote | Chart | News | PowerRating) reported that its second quarter revenues rose to $121.8 million from $116.7 million last year. The company's adjusted earnings were $1.33 per share, higher than $1.10 per share last year. Analysts estimated earnings of $1.21 per share on revenues of $123.37 million. The company expects its 2009 adjusted earnings per share in the range of $4.80-$4.90 compared to the consensus estimate of $4.51 per share.

3Com (COMS | Quote | Chart | News | PowerRating) said its fourth quarter earnings non-GAAP net income was 10 cents per share compared to 9 cents per share in the year-ago period. Revenues fell 8.2% to $321.3 million. Analysts estimated earnings of 5 cents per share on revenues of $294.78 million.

Stocks in Focus

Alcoa rallied in Wednesday's after hours session after it reported an adjusted second quarter loss from continuing operations of 26 cents per share compared with a profit from continuing operations of 67 cents per share in the year-ago quarter. Revenues rose 2% to $4.2 billion. Analysts, on average, estimated a loss of 38 cents per share on revenues of $3.93 billion.

WD-40 (WDFC | Quote | Chart | News | PowerRating) may react to its announcement that its third quarter earnings declined to 41 cents per share from 49 cents per share last year, as revenues fell 16% to $68.8 million. Analysts, on average, estimated earnings of 38 cents per share on revenues of $70 million. For the full year, the company expects earnings of $1.45-$1.55 per share on revenues of $283 million to $290 million. The Street estimates earnings of $1.48 per share on revenues of $286.08 million.

Deluxe Corp. (DLX | Quote | Chart | News | PowerRating) is likely to gain ground after it raised its June quarter adjusted earnings guidance to 54-56 cents per share from its earlier guidance of 43-51 cents per share, citing a favorable product mix, lower spending and a lower effective tax rate. The company expects revenues of $332 million for the quarter. Additionally, the company also announced a definitive agreement to purchase certain of the shared web services customer assets of Aplus.net, the completion of the purchase of the search engine marketing firm MerchEngines and two moves by its Hospira unit to help expand Deluxe's Web services customer base.

YRC Worldwide (YRCW | Quote | Chart | News | PowerRating) may attempt to recover some of its previous session's losses, triggered by bankruptcy rumors, after it elaborated on the additional progress in its comprehensive plan, which contemplates integrating its Yellow Transportation and Roadway Networks into YRC. The company also said it has continued support from lenders and made progress with its pension fund liabilities.

Scotts Miracle-Gro (SMG | Quote | Chart | News | PowerRating) could react to its announcement that it will cease operating its Smith & Hawken business by the end of the calendar year. The company said it would record pre-tax charges of $25 million related to the transaction, with the bulk of the charges to be recorded in the fourth quarter and the first quarter of fiscal 2010. Beginning in 2010, the company expects the benefit from the shutdown to be 15 cents per share.

Scan Source (SCSC | Quote | Chart | News | PowerRating) is likely to move to the upside after it said its fiscal fourth quarter revenues are likely to be $434 million to $442 million. The preliminary revenues were above the consensus estimate of $408.7 million.

Watson Pharma (WPI | Quote | Chart | News | PowerRating) could see some buying interest after it said it has received FDA approval to market its over-the-counter Nicotine Polacrilex Gum of 2 mg and 4 mg strengths in the coated fruit and cinnamon flavors.

California Pizza Kitchen (CPKI | Quote | Chart | News | PowerRating) may trade higher after it raised its second quarter earnings estimate to 24-25 cents per share from its earlier estimate of 18-20 cents per share. The company attributed the optimism to its cost reduction initiatives. The consensus estimate calls for earnings of 21 cents per share. The company said it expects a 6.5% decline in same restaurant sales at its full service restaurants in the second quarter and revenue of $170.9 million.

Photronics (PLAB | Quote | Chart | News | PowerRating) could react to its announcement that it is closing down its IC photomask manufacturing facility in Shanghai, China. The company said the decision to close the facility is consistent with its strategy of reducing costs and lowering its operational breakeven point. The company expects to take a pre-tax, predominantly non-cash charge of $10 million to $14 million towards the proposed closure in fiscal year 2009. Additionally, the decision will lead to the elimination of 75 jobs.

Among retailers, Hot Topic (HOTT | Quote | Chart | News | PowerRating) reported a 7.9% decline in same store sales for June. The company also lowered its second quarter bottom line expectations to a loss of 7-9 cents per share compared to its earlier estimate of a loss of 4-6 cents per share. Zumeiz (ZUMZ | Quote | Chart | News | PowerRating) said its same store sales for June declined 19.3%. Costco (COST | Quote | Chart | News | PowerRating) said its same store sales fell 6% in June and 3% in the second quarter. The company also reported a modest dip in second quarter sales to $59.02 billion.

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