Job Losses and Profit Warnings Could Weigh on Markets - RTTNews Daily Market Analysis

Wed. January 07, 2009; Posted: 09:26 AM

(RTTNews) - The major U.S. index futures are pointing to a lower opening on Wednesday. The markets have a slew of negative news to digest in today's session and traders could use them to take some profits on their recent gains. A private sector survey showed bigger-than-expected job losses for December, while a few bellwether companies such as Intel (INTC | Quote | Chart | News | PowerRating) and Time Warner (TWX | Quote | Chart | News | PowerRating) have issued warnings. Therefore a pullback looks the most probable development in today's session.

Although U.S. stocks showed some degree of volatility in Tuesday's trading, especially in the morning in reaction to mixed economic readings, they remained mostly above the unchanged line. The positive momentum that has characterized trading since late 2008 seemed to linger, as traders bought into beaten down stocks on hopes of seeing a turnaround in economic conditions in the near future.

The Dow Industrials was up 62.21 points or 0.69% by the end of the session at 9,015, while the Nasdaq Composite Index gained 24.35 points or 1.50% to 1,652 and the S&P 500 Index rose 7.25 points or 0.78% to 935.

Among the sub-indexes, the Amex Securities Broker/Dealer Index surged up 5.19%. The Philadelphia Oil Service Index rallied 4.95% despite a retreat in oil prices. The Amex Gold Bugs Index climbed 2.28%. The Dow Jones Transportation and the Amex Airline Index ended up 2.50% and 4.22%, respectively. While the S&P Retail Index gained 2.33%, the Philadelphia Housing Sector Index rose a more modest 1.26%.

The Philadelphia Semiconductor Index soared 5.05% and the Amex Disk Drive Index gained 5.75%, while the Amex Hardware Index climbed 6.62%. The Amex Software Index and the Amex Networking Index advanced 1.92% and 3.87%, respectively. The Amex Internet Index ended up 3.30%.

The sharp rally seen in the semiconductor space has once again brought technology stocks back into focus. The Philadelphia Semiconductor Index is still very much within the down trending line that has been in place since mid-July 2008. That said, the index looks set to complete a reverse head and shoulder pattern. Therefore, a close above 248.78 is important for the index to take off from current levels. On the downside, the index has support around 202.08.

On the economic front, the ISM's non-manufacturing survey showed that the service sector activity continued to contract in December, although at a slower pace than in the previous month. The non-manufacturing index rose to 40.6 in December from November's record low reading of 37.3. The indexes for prices paid and imports fell further in the month, while the new orders index increased modestly from a record low level in the previous month. Although the employment index rose 3.4 points, it still remained depressed at 34.7.

A report released by the Commerce Department showed that factory goods orders slipped 4.6% month-over-month in November, marking the fourth consecutive month of declines. Parsing the report, Wachovia commented that fourth quarter business spending may now fall by more than the 12% it had predicted earlier. Non-defense capital goods orders, excluding aircrafts, were up 3.9%, revised down from the 4.7% gain reported last week in the durables goods orders report.

The National Association of Realtors' pending home sales report showed a 4% monthly drop in the index for November. Annually, the index was down 5.6% year-over-over. The pending home sales indexes for the Northeast declined 7.2%, while the index for the Midwest, the South and the West fell 6.7%, 2.2% and 2.4%, respectively.

The minutes of the December FOMC meeting revealed that the Fed had revised down sharply its estimates for 2009, as financial market conditions worsened, credit conditions tightened further and household wealth continued to decline. The committee members also noted that economic conditions had deteriorated substantially in both advanced and emerging markets, worsening the export outlook.

The FOMC had also discussed the merits of quantitative targets for reserves and monetary base. The minutes reflected the Fed's thinking of keeping the fed funds target rate low for a long period and using the central bank's balance sheet more aggressively.

Currency, Commodity Markets

Crude oil futures are slipping $0.56 to $48.02 a barrel after receding $0.23 to $48.58 a barrel in the previous session. Gold futures, which rose $8.20 to $866 an ounce on Tuesday, are currently trading up $0.20 at $866.20 an ounce.

On the currency front, the U.S. dollar is trading at 92.8850 yen, up from 93.655 yen at the close of New York trading on Tuesday, when it gained 0.3%. The dollar is currently valued at $1.3674 versus the euro.

Asia

The major Asia-Pacific markets closed Wednesday's session on a mixed note. While the Japanese, the South Korean and the Australian market closed higher, the Chinese, the Hong Kong and the Indian markets retreated.

Japan's Nikkei 225 average opened modestly higher, but it rose sharply in early trading. Thereafter, the index moved sideways before closing off the highs of the session. At the close of trading, the index was up 158.40 points or 1.74% at 9,239, its highest level since October 21st.

Auto stocks rose in high gear, benefiting from the yen's continued weakness. Tech exporters Advantest, Canon, Casio Computer, Sharp and Fanuc, shipbuilders Fuji Heavy Industries and Kawasaki Heavy Industries and Tokyo Electron also advanced strongly. Daikin Industries, Denso, Hitachi Construction Material, Nikon, NSK, Taiyo Yuden, Sumitomo Chemicals and Sumitomo Chemical Industries also showed strength.

On the other hand, utilities, pharma, breweries, retail and paper stocks came under heavy selling pressure.

Australia's All Ordinaries opened higher and advanced throughout the session to end up 39 points or 1.06% at 3,728. Most sector stocks advanced, with the exception of healthcare stocks.

Among individual stocks, BHP Billiton and Rio Tinto advanced sharply. However, Newcrest Mining and Lihir Gold fell. In the banking space, ANZ Bank, Commonwealth Bank and Westpac receded, while National Australia Bank rose. Wesfarmer also receded sharply.

South Korea's Kospi opened higher and rose sharply in early trading. Although the buying momentum waned, the index continued to climb steadily to close up 33.89 points or 2.84% at 1,228. Technology stocks climbed sharply, lifting the Kospi to a 3-month high. Steel maker Posco also rose in the session.

Hong Kong's Hang Seng Index opened higher, but soon receded into negative territory and began to show volatility. In the afternoon, the index moved decisively into negative territory to close down 522.05 points or 3.37% at 14,988.

CCB plunged more than 8% in reaction to an announcement that Bank of America sold part in the bank. China Unicom plunged 10.60% and index heavyweight HSBC Holdings ended down 2.53%. However, Swire Pacific, Citic Pacific and China Resources showed strength.

Stung by a corporate accounting scandal surrounding Satyam (SAY | Quote | Chart | News | PowerRating), which was recently mired in a controversy over corporate governance, the Indian market plunged sharply, with the Sensex ending at 9,587, representing a decline of 7.25% or 749.05 points.

Europe

The major European markets are showing significant weakness in Wednesday's session. The French CAC 40 Index and the German DAX Index is receding 1.23% and 1.37%, respectively, while the U.K.'s FTSE 100 Index is trading down 2.11%.

In Germany, a majority of the stocks are receding, with the declines led by steel maker Thyssenkrupp, utility E.ON, Adidas and SAP. However, Infineon is bucking the downtrend.

Mining stocks are leading the U.K. market lower on a day of broad based selling pressure. However, asset management and life insurance firms are seeing a reprieve.

A report released by the German Federal Statistical Office showed that Germany's wholesale sales declined 3.2% in real terms in November compared to the year-ago period. Upon adjusting for calendar and seasonal variations, wholesale sales edged up 0.4%.

The harmonized unemployment rate calculated based on ILO standards in Germany came in at 7.1% in November, according to another report released by the statistical agency. A year ago, the unemployment rate was 8%.

U.S. Economic Reports

On the economic front, the ADP National Employment report, which sheds light on non-farm private employment, showed that non-farm private employment declined by 693,000 in December. The report also showed that the service providing sector lost 473,000 jobs compared to a 220,000 decline in jobs in the goods producing sector. The report is likely to increase anxieties about labor market conditions, which has taken a serious hit due to the ongoing turbulence in the economy.

The Energy Information Administration is also due to release its weekly oil inventory report at 10:30 AM ET on Wednesday.

The weekly oil inventory data for the week ended December 26th showed a 0.5 million barrel-increase in crude oil inventories to 318.7 million barrels. Crude oil stockpiles were near the upper limit of the average range for this time of the year.

Gasoline inventories increased by 0.8 million barrels but were in the lower half of the average range. Meanwhile, distillate inventories rose by 0.7 million barrels and were in the middle of the average range for this time of year. Refinery capacity utilization averaged 84.7% over the four weeks ended December 26th compared to 85.1% in the previous week.

Earnings

Constellation Brands (STZ | Quote | Chart | News | PowerRating) reported that its third quarter adjusted net income rose to 60 cents per share from 55 cents per share last year. Net sales eased to $1.03 billion from $1.1 billion last year. Analysts, on average, estimated earnings of 59 cents per share on sales of $1.13 billion. The company now expects 2009 adjusted earnings of $1.68-$1.72 per share last year compared to the consensus estimate of $1.69 per share.

Family Dollar (FDO | Quote | Chart | News | PowerRating) said its first quarter earnings rose to 42 cents per share from 37 cents per share in the year-ago period. Sales were up 4.2% to $1.75 billion. The consensus estimates had called for earnings of 40 cents per share on revenues of $1.75 billion. The company expects full year earnings in the range of $1.63-$1.81 per share, surrounding the consensus estimate of $1.69 per share.

SuperValue's (SVU | Quote | Chart | News | PowerRating) third quarter net sales were $10.2 billion, flat with the year-ago period. The company's non-GAAP earnings were 62 cents per share, a decline from 69 cents per share last year. The Street estimated earnings of 60 cents per share on revenues of $10.18 billion. The company reduced its 2009 adjusted earnings guidance to $2.80-$2.90 per share from $2.90-$3 per share. The consensus estimate calls for earnings of $2.79 per share for the year.

Monsanto (MON | Quote | Chart | News | PowerRating) said its first quarter sales rose 29% to $2.6 billion, ahead of the mean analysts' estimate of $2.41 billion. The company's ongoing earnings per share were 98 per share. The company raised its full year ongoing earnings per share estimate to $4.20-$4.40 per share from its previous estimate of $4.40-$4.50 per share, while analysts estimate earnings of $4.56 per share.

Stocks in Focus

Alcoa (AA | Quote | Chart | News | PowerRating) may see weakness after it announced a series of actions to tackle the economic downturn. The company announced an additional 135,000 metric tones per year reduction in smelting, which is expected to trim total primary aluminum output by more than 750,000 metric tones per year or 18% of annualized output. The company also expects to reduce alumina production across the global refining system to 1.5 million metric tons per days. The company said the curtailments would be fully implemented by the first quarter of 2009.

Additionally, the company is looking to reduce its headcount by more than 13,500 employees or 13% of the worldwide workforce by the end of 2009, while also trimming contractor positions by 1,700. Alcoa also said it is instituting a global salary and hiring freeze.

Advanced Micro Devices (AMD | Quote | Chart | News | PowerRating) could see buying interest after it announced that the Committee on Foreign Investment in the U.S. has given its clearance for the creation of the 'Foundry Company'- its proposed semiconductor manufacturing joint venture.

Global Payments (GPN | Quote | Chart | News | PowerRating) receded in Tuesday's after hours session in reaction to the company reducing its 2009 earnings guidance to $2.14 to $2.21 per share from its earlier estimate of $2.37-$2.45 per share. The company also reduced its revenue outlook to $1.55-$1.58 billion, citing the dollar's strength. The consensus estimates call for earnings of $2.39 per share on revenues of $1.65 billion. However, the company reported 30% revenue growth in its second quarter to $401.1 million. The company's earnings per share rose 25% to 60 cents per share. Analysts, on average, estimated earnings of 57 cents per share on revenues of $405.45 million.

Lear Corp. (LEA | Quote | Chart | News | PowerRating) is also likely to trade higher after it said it is seeking an amendment and waiver under its primary credit facility in light of current and longer-term industry conditions. The company said it would seek to complete the amendment and waiver prior to finalizing its 2008 financial statements. Lear also said it had cash and cash equivalents of about $1.6 billion as of December 31st, 2008 following the borrowing of the full amount available under its revolving credit facility.

Microchip Technology (MCHP | Quote | Chart | News | PowerRating) may move to the downside in reaction to its warning regarding third quarter results. The company now expects third quarter sales to show a 29%-31% sequential decline. On an adjusted basis, the company estimates earnings of 23-26 cents per share. The Street estimates earnings of 32 cents per share on revenues of $231.74 million for the quarter.

VMWare (VMW | Quote | Chart | News | PowerRating) is likely to be in focus after it announced the appointment of Todd Nielsen to the newly created role of Chief Operating Officer. Nielsen will report to chief executive officer Paul Maritz.

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