Stocks Could Face Resistance From Lack Of Clarity On Economy's Course - RTTNews Daily Market Analysis

Thu. June 25, 2009; Posted: 09:21 AM

(RTTNews) - The major U.S. index futures are pointing to a lower opening on Thursday. After a strong increase in durable goods orders failed to rev up sentiment yesterday, the markets are likely to express apprehensions once again following the release of a labor market report that showed an unexpected increase in first time claims for the recent reporting week. The final first quarter GDP report released earlier in the day did not spring in any surprise, coming in almost in-line with expectations.

Some of the corporate earnings had come in worse than expectations and most companies had expressed apprehensions about their future outlook. All these are going to add to the uncertainty and weigh down on the markets.

A strong durable goods orders report gave stocks a running start on Wednesday, but buying interest waned after they rallied to the day's high in mid-morning trading, as traders expressed apprehension ahead of the Fed decision. While the major averages moved mostly sideways till the Fed rate announcement, negative reaction to the decision generated selling pressure, dragging the Dow Industrials lower in late afternoon trading."

The Nasdaq Composite held its ground till the end of the session, closing up 27.42 points or 1.55% at 1,792. Although the S&P 500 Index came close to moving below the unchanged line, it remained in positive territory before closing up 5.84 points or 0.65% at 901. Meanwhile, the Dow Industrials closed down 23.05 points or 0.28% at 8,300, closing lower for the fourth straight session.

Among the sector indexes, the Dow Jones Transportation Average and the Dow Jones U.S. Basic Materials Average gained about 1.50% each, while the NYSE Arca Gold Bugs Index rallied 3.34%. The NYSE Arca Biotechnology Index advanced 1.88% and the KBW Bank Index and the NYSE Arca Securities Broker/Dealer Index ended up more than 1% each.

In the technology space, the Philadelphia Semiconductor Index, the NYSE Arca Computer Hardware Index and the NYSE Arca Networking Index moved up over 1% each. The NYSE Arca Disk Drive Index, the NYSE Arca Networking Index and the NYSE Arca Software Index all rallied about 2%.

On the economic front, durable goods unexpectedly increased in May, rising 1.8% month-over-month compared to the 0.9% decline expected by economists. Excluding transportation, the gain was 1.1%. The headline durable goods orders number received a boost from a 68.1% jump in the highly volatile non-defense aircraft orders category. That said, non-defense capital goods orders, excluding aircrafts, jumped 4.8% month-over-month, although they are down 23.1% annually.

Meanwhile, a housing report showed that new home sales declined 0.6% in May from the previous month to a seasonally adjusted annual rate of 342,000. Sales rose in the Northeast, Midwest and West, but declined in the South. The months supply of new homes declined to 10.2 in May from 10.4 in April, with the decline coming about due to a decline in inventories to 292,000 in May. The median sales price of new homes declined 3.4% year-over-year to $221,600.

Meanwhile the 5-year bond auction by the Treasury elicited a good response, with the bid-to-cover ratio at 2.58 and the yield at 2.7%.

The FOMC decided along the expected lines, opting to hold interest rates unchanged at 0%-0.25%. The central bank did not make any changes to its qualitative easing measures, instead suggesting that as previously announced, it will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. The Fed also will be buying up to $300 billion of Treasury securities by autumn.

On economic conditions, the central bank noted that the pace of contraction has been slowing. The Fed also observed that financial market conditions have improved. While constrained by job losses, lower housing wealth and tight credit, household spending has been showing signs of stabilization. The central bank said firms have been successful in bringing inventories in line with sales, although they are continuing to reduce fixed investment and workforce.

The FOMC expressed confidence that concerted policy actions will lead to the resumption of a sustainable recovery due to concerted policy actions. The committee also said it expects inflation to remain subdued for some time due to substantial resource slack.

Currency, Commodity Markets

Crude oil futures are rising $0.71 to $69.38 a barrel after receding $0.57 to $68.67 a barrel. Yesterday's retreat came amid the release of a weekly inventory report that showed that crude oil inventories declined by 3.8 million barrels to 353.9 million barrels in the week ended June 19th, but they were still above the upper boundary of the average range.

Gasoline and gasoline stockpiles increased by 3.9 million barrels and 2.1 million barrels, respectively. While gasoline inventories were in the lower half of the average range, distillate inventories were above the upper boundary of the average range. Refinery capacity utilization averaged 86.3% over the four-weeks ended June 19th compared to 85.8% in the previous week.

Gold futures, which rose $10.10 to $934.40 an ounce in the previous session, are currently trading at $937.70 an ounce, representing a gain of $3.30.

On the currency front, the U.S. dollar is trading at 96.087 yen compared to the 95.6648 yen it fetched at the close of trading on Wednesday. Against the euro, the greenback is trading at $1.3937.

Asia

The major Asian markets ignored a lackluster lead from Wall Street and closed mostly higher, benefiting from a rally in commodity prices. The major averages in Hong Kong, Indonesia, Japan and South Korea closed up over 2% each, while the Indian market bucked the uptrend and ended lower.

Japan's Nikkei 225 average opened higher and saw further upside throughout much of the session before flattening in late trading to close up 205.76 points or 2.15%. Export stocks rallied strongly, as the yen weakened. Financial stocks also saw some strength.

Australia's All Ordinaries also advanced steadily throughout the session, aided by a rally in resource and financial stocks. The index ended up 49.30 points or 1.30% at 3,852. However, the upside came amid thin volumes, reflecting caution among traders.

Hong Kong's Hang Seng Index opened sharply higher and moved sideways throughout much of the morning session before legging up further. The index went about a consolidation move in the afternoon to close up 382.88 points or 2.14% at 18,275. Thirty-four of the forty-two index components ended higher. Property stocks led from the front, with Shopping Property, Henderson Land and New World Development advancing solidly.

After trading higher till the mid-session on the back of positive Asian cues and short covering on the last day of monthly derivatives contracts, the Indian market fell sharply in the afternoon amid fears about stretched valuations and a delay in monsoon rains for the June-September season, which could hurt an already slowing gross economy.

However, the market cut its loss significantly in late trading, helped by reports that the monsoon would catch up by the first or second week of July and the shortfall so far can be made up in July, if the timing and distribution are good. After rising to the day's high of 14,578 in the morning, the BSE Sensex hit a low of 14,261 in the afternoon before finishing at 14,346, down 77 points or a modest 0.53%.

Europe

The major European markets are moving to the downside on Thursday after they rallied sharply yesterday on the back of strong U.S. durable goods orders. The French CAC 40 Index is trading down 2.05% and the U.K.'s FTSE 100 Index is moving down 1.37%, while the German DAX Index is receding 2.20%.

U.K.-based consumer electronics retailer DSG International reported underlying earnings of 0.7 pence per share for its fiscal year ended May 2nd, 2009 compared to 7.2 pence per share last year, as revenues fell to 8.36 billion pounds from 8.49 billion pounds a year-ago. The company said it expects the difficult economic environment to continue in many of its markets this year.

On the economic front, Eurostat said the euro area's industrial new orders declined 1% month-on-month in April compared with a 0.2% drop in March. Economists had expected a flat reading for April.

On a year-on-year basis, industrial new orders decreased 35.5% in April after falling 26.5% in March.

U.S. Economic Reports

According to the final first quarter GDP report released by the Bureau of Economic Analysis, U.S. GDP shrank at a 5.5% rate compared to a 6.3% GDP decline in the previous quarter. The contraction was smaller than the 5.7% decline estimated initially. On a year-over-year basis, the first quarter GDP declined by 2.5% compared to 0.8% decline in the fourth quarter.

The decline in fourth quarter GDP compared to the previous quarter reflected negative contributions from exports, private inventory investment, equipment and software, non-residential structures and residential fixed investment. The weakness was offset to some extent by positive contributions from personal consumption expenditures. Imports, which are a deduction from GDP calculations, declined

A Labor Department report showed that initial jobless claims rose 15,000 to 627,000 in the week ended June 20th from an upwardly revised figure of 612,000 for the previous week. Economists expect a decline in claims to 600,000 from the initially estimated figure 608,000 for the previous week.

The 4-week moving average for initial claims, a statistic that flattens out week-to-week fluctuations in the data, rose 500 to 617,250. Continuing claims, which measures people receiving ongoing unemployment help, rose 29,000 in the week ended June 13th to 6.738 million.

Earnings

ConAgra (CAG | Quote | Chart | News | PowerRating) said its adjusted fourth quarter earnings from continuing operations were 41 cents per share, up from 18 cents per share in the year-ago period. Sales rose 7.5% to $3.30 billion. Analysts, on average, estimated earnings of 42 cents per share on revenues of $3.33 billion. For 2010, the company expects adjusted earnings per share from continuing operations of $1.63-$1.66 compared to the consensus estimate $1.63 per share.

Christopher & Banks (CBK | Quote | Chart | News | PowerRating) reported first quarter earnings from continuing operations of 5 cents per share, sharply lower than 33 cents per share in the year-ago period. Sales fell to $120.37 million from $155.40 million in the year-ago quarter.

Lennar's (LEN | Quote | Chart | News | PowerRating) second quarter revenues declined 21% year-over-year to $891.9 million. The company reported a loss of 76 cents per share, including a 38 cent per share related to valuation adjustments and other write-offs and a 27 cent per share charge related to a non-cash deferred tax asset valuation allowance.

Stocks in Focus

Watson Pharma (WPI | Quote | Chart | News | PowerRating) may see some strength after it said it has received FDA approval for its ANDA for levonorgestrel tablets, used to prevent pregnancy. The company said it intends to market the product under the trade name Next Choice and plans to launch the product shortly.

CKE Restaurants (CKR | Quote | Chart | News | PowerRating) may see some buying interest after it reported first quarter adjusted earnings of 29 cents per share, ahead of the 25 cents per share consensus estimate. Revenues declined 4% to $446.8 million compared to the $449.5 million consensus estimate.

Bed Bath & Beyond (BBBY | Quote | Chart | News | PowerRating) is also likely to gain ground after it said its first quarter earnings climbed to 34 cents per share from 30 cents per share in the year-ago period, as sales rose 2.8% to $1.69 billion. The consensus estimates had called for earnings of 25 cents per share on revenues of $1.68 billion.

Nike (NKE | Quote | Chart | News | PowerRating) could be in focus after it said its fourth quarter earnings fell to 70 cents per share from 98 cents per share last year. Excluding restructuring charges, the company reported earnings of 99 cents per share, 3 cents ahead of the average analysts' estimate. Revenues were down 7% to $4.7 billion, almost in-line with the consensus estimate of $4.72 billion. The company said it expects fiscal year 2010 revenues to be flat to be down on a constant currency basis, while it also suggested that orders for the next several months are down 12% year-over-year.

Seagate Technologies (STX | Quote | Chart | News | PowerRating) may trade higher after it lifted its revenue outlook for the fourth quarter to $2.2 billion to $2.3 billion, higher than its initial guidance of $1.9 billion to $2.2 billion. The consensus estimates call for revenues of $2.09 billion. For the fiscal first quarter, the company expects revenues of $2.35 billion to $2.5 billion, above the mean analysts' estimate of $2.27 billion. The company attributed the upside to improving demand and favorable pricing.

Paychex (PAYX | Quote | Chart | News | PowerRating) may see weakness after it reported that its fourth quarter earnings fell to 32 cents per share from 38 cents per share last year. Revenues declined 4% year-over-year to $495.9 million. Analysts estimated earnings of 33 cents per share on revenues of $510.5 million.

Jeffries (JEF | Quote | Chart | News | PowerRating) is expected to move to the upside after it said it expects its second quarter net income and revenues to exceed $50 million and $500 million, respectively. The guidance was above the consensus estimate that calls for revenues of $341.2 million.

Herman Miller (MHLR | Quote | Chart | News | PowerRating) may also be in focus after it reported fourth quarter adjusted earnings of 20 cents per share compared to 18 cents per share estimated by analysts. Revenues were down 38% year-over-year to $319.9 million, shy of the mean analysts' estimate of $339 million. Separately, the company said it has completed the acquisition of Nemschoff for $32 million in cash and the issuance of 2.04 million Herman Miller shares.

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