Stocks May Fight to Retain Late-week Buoyancy
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The major U.S. index futures are pointing to a lower opening on Friday, although market course of the day seems to be highly uncertain. The session is likely to witness the battle between bulls, who are betting on an economic as well as market recovery, and the bears, who are skeptical about the widely expected sustained recovery. Crude oil futures and gold are moving to the upside, mainly due to the weakness of the dollar.
The consumer price inflation report released earlier in the day showed containment in inflationary pressures. In reaction, bond yields are trending lower. Earnings and forward expectations of retailers have been fairly positive. Traders now keenly await the industrial production report to give a definitive direction towards the course of today’s market action.
U.S. stocks showed a lack of direction on Thursday, moving back and forth across the unchanged line amid the release of mixed economic reports, a rise in commodity prices and promising earnings from some of the retailers. The Dow Industrials opened slightly higher at 9,362 and moved in a 9,305-9,407 range before closing up 36.58 points or 0.39% at 9,398.
The Nasdaq Composite Index and the S&P 500 Index traded above the unchanged line for much of the session, barring a brief sharp retreat in early trading and a brief brush with negative territory in early afternoon trading. While the Nasdaq Composite closed up 10.63 points or 0.53% at 2,009, the S&P 500 Index rose 6.92 points or 0.69% at 1,013.
Eighteen of the thirty Dow components ended the session higher, with Bank of America (BAC) (up 6.72%), Alcoa (AA) (up 5.79%), DuPont (DD) (up 2.28%), Travelers Co. (TRV) (up 2.24%), Wal-Mart (WMT) (up 2.71%), Home Depot (HD) (up 1.76%) and JP Morgan Chase (JPM) (up 1.63%) showing solid gains. On the other hand, United Technologies (UTX) fell 1.32%.
Among the sector indexes, the NYSE Arca Airline Index climbed 1.79%, the KBW Bank Index rallied 3.11%, the Philadelphia Oil Service Index gained 2.92%, the Dow Jones U.S. Basic Materials Average moved up 2.65% and the NYSE Arca Gold Bugs Index rose 3.39%. However, the Philadelphia Housing Index lost close to 1%.
In the technology space, the Philadelphia Semiconductor Index jumped 2.19%, the NYSE Arca Disk Drive Index rose 2.09%, the NYSE Arca Computer Hardware Index gained 1.62% and the NYSE Arca Networking Index surged up 3.45%.
On the economic front, the Commerce Department’s business inventories report showed a bigger-than-expected 1.1% drop in business inventories in the month of June. However, business sales rose 0.9%, resulting in an inventory to sales ratio of 1.38 in June compared to 1.26 in the year-ago period.
First time claims for unemployment benefits rose to 558,000 in the week ended August 8th from a revised reading of 554,000 in the previous week. However, continuing claims for the week ended August 1st showed a decline. Meanwhile, the results of the Treasury’s 30-year bond auction were encouraging, with the yield slightly below where it was trading and the bid-to-cover ratio at a fairly decent 2.54.
Retail Sales Not Cashing in on ‘Cash-for-clunkers’ Program
The Commerce Department’s retail sales report belied expectations for a strong rebound in July sales despite a 2.4% increase in auto sales. In final analysis, spending on autos deprived consumers of money that could have been spent on other retail commodity categories. All important categories, including electronics, furniture, sporting goods, building material and department stores showed sales declines. Core retail sales that remove volatile gas, building material and autos showed a 0.2% decline.
The gain in auto sales may not be sustainable, as the artificial boost is likely to wear off even if an additional $2 billion is approved under the program. The initial euphoria, as reflected by the jump in auto sales in the July retail sales report reflects buying by people who have cars that qualify for the program and who have access to funding to cough up the rest of the sum, excluding the incentives. When this demand dries up, there may be a déjà vu of dealerships sporting a deserted look.
That apart, consumers may also have to contend with rising gasoline prices, which eats into their discretionary spending. Although oil market fundamentals do not support much upside from current levels, speculative factors and oil’s negative correlation with the U.S. dollar is helping the commodity stay above the $70-a-barrel mark.
Although some sales uptick could be expected to coincide with back-to-school purchases, spending is likely to remain below-normal conditions due to the multiplicity of negative factors that are wrenching the neck of consumers. The retail sales report reinforces the view that consumer spending will have a less of a role in the current recovery. At least in the short term, consumer spending may impede a sustainable recovery.
Currency, Commodity Futures
Crude oil futures are trading up $0.30 at $70.82 a barrel after rising $0.36 to $70.52 in Thursday’s session. The commodity rallied in the previous session despite the release of a couple of domestic economic reports that clouded the economic outlook. The rebound that began on Wednesday, spurred by the Fed’s comments about the economy leveling out, extended into Thursday’s session on the positive economic tidings from Europe.
After receding $2.90 to $956.50 an ounce yesterday, gold futures are rising $4 to $960.50 an ounce. The precious metal has now been consistently moving in tandem with riskier assets, losing its traditional appeal as a safe haven investment. According to Commerzbank, large-scale liquidation of speculative long positions would have led to weakness in gold prices if not for the prevalent dollar weakness.
On the currency front, the U.S. dollar is trading at 94.755 yen compared to the 95.480 yen it fetched at the close of New York trading on Thursday. The greenback is currently valued at $1.4282 versus the euro.
Asia
The major Asian ended mostly higher on Friday, with the exception of the Indian and Chinese markets. Japan’s Nikkei 225 average opened modestly higher and rose sharply in early trading. Thereafter, the index pared back some of its gains before closing up 80.14 points or 0.76% at 10,597.
Advantest rallied 4.47%, Chuo Mitsui Trust rose 5.85%, Credit Saison rallied 4.66%, Ebara Corp. gained 7.91%, Furukawa jumped 7.03%, Hino Motors advanced 7.08%, Hitachi Construction Materials ended up 8.37%, Jtext rose 7.33% and Marubeni advanced 5.84%. Mitsui Engineering & Shipping, Okuma and Sojitz were among the other advancers. On the other hand, Fast Retailing, Shimizu, Sompo Japan Insurance, Yokohama Rubber and Bridgestone declined.
Hong Kong’s Hang Seng Index opened higher, but it lost ground in early trading and traded below the unchanged line till late trading. The index recovered in late trading to close up 32.03 points or 0.15% at 20,893.
Esprit Holdings surged up 8.09% and Li & Fung jumped 9.23% after the latter reported that its net profit for the year to June rose to 1.4 billion Hong Kong dollars compared to 1.24 Hong Kong dollars in the year-ago period. The company also announced a deal to outsource products to Talbots (TLB). Resource stocks advanced, while property and financial stocks showed mixed sentiment.
Australia’s All Ordinaries opened unchanged, but it rose sharply in early trading before steadily paring back most of its early gains. The index ended up 28.40 points or 0.64% at 4,465. Defensive healthcare sector showed notable gains, while material, financial and real estate stocks also saw some strength.
Europe
The major European averages opened modestly higher and spiked sharply only to pare back some of their gains. The French CAC 40 Index and the German DAX Index are rising 0.24% and 0.32%, respectively, while the U.K.’s FTSE 100 Index is moving up 0.45%.
In corporate news, German steel giant Thyssenkrupp reported a third quarter loss of 639 million euros compared to a profit of 573 million euros in the year-ago period. On an adjusted basis, the company reported a pre-tax loss of 452 million euros. Sales fell 34% to 9.3 billion euros.
Meanwhile, Eurostat said the Eurozone's consumer price index dropped 0.7% year-over-year in July, revised from the 0.6% drop estimated initially. In June, consumer prices fell 0.1%. This was the second consecutive month of decline in consumer prices. A year ago, inflation was 4%. On a monthly basis, the consumer price index fell 0.7%.
U.S. Economic Reports
On the economic front, consumer prices remained unchanged in June compared to the previous month, in line with expectations. On an unadjusted basis, consumer prices showed a 2.1% drop.
Core prices, which exclude the volatile food and energy sectors, also rose in line with expectations, edging up 0.1% advanced 0.1% from the previous month. Food and beverage and housing costs were down 0.2% each, helping to offset the 0.6% increase in transportation costs.
The industrial production report of the Federal Reserve is due out at 9:15 AM ET. Economists estimate that industrial production rose 0.4% in July, while capacity utilization is expected to come in at 68.3%.
Industrial output fell 0.4% in June compared to the previous month, which was better than the 0.6% drop expected by economist. The decline marked the seventeenth drop in eighteen months. Annually, output was down 13.6%. Manufacturing output fell 0.5%, with auto-related production dropping 2.7%, while the rest of the manufacturing sector showed a smaller 0.4% decline. Capacity utilization fell two-tenths to 68% in June.
The Reuters/University of Michigan's preliminary report on the consumer sentiment index for August is scheduled to be released at 9.55 AM ET. Consumer sentiment is expected to rise to 69 from the previous month's reading of 66.
Earnings
J.C. Penney (JCP) reported break-even results in the second quarter compared to earnings of 52 cents per share in the year-ago quarter. Sales fell 7.9% to $3.94 billion. Analysts estimated a loss of 1 cent per share on revenues of $3.94 billion. The company raised its 2009 earnings per share guidance to 75-90 cents per share from its earlier estimate of 50-65 cents per share, while analysts estimate earnings of 89 cents per share.
Abercrombie & Fitch (ANF) said its loss for the second quarter was 30 cents per share compared to a profit of 87 cents per share in the year-ago period. The recent quarter’s results included $24.4 million in impairment charges. Analysts estimate, which typically excludes one-time items, called for a loss of 7 cents per share.
Stocks in Focus
Red Robin Gourmet Burgers (RRGB) is likely to see weakness after it reported that its second quarter earnings fell to 41 cents per share from 49 cents per share last year. Revenues fell 3%to $201.1 million. Analysts, on average, estimated earnings of 37 cents per share on revenues of $206.1 million.
Blockbuster (BBI) may be in focus after it said its first quarter loss was 21 cents per share, narrower than 23 cents per share last year. On an adjusted basis, the company reported a loss of 19 cents per share. Revenues fell 22% to $1.02 billion. The consensus estimates had called for a loss of 12 cents per share on revenues of $1.12 billion. For the full year, the company expects a loss of $15 million to a profit of $5 million.
Luxury retailer Nordstrom (JWN) is expected to move higher after it raised its forecast for the full year to $1.50-$1.65 per share from its earlier estimate of $1.25-$1.50 per share. The company reported second quarter earnings of 48 cents per share, lower than 65 cents per share in the year-ago period, but in line with the consensus estimate. Revenues fell 6% year-over-year to $2.29 billion, above the consensus estimate of $2.14 billion.
Autodesk (ADSK) is likely to react to its announcement that its second quarter adjusted earnings fell to 24 cents per share from the year-ago’s 56 cents per share. Revenues declined to $415 million from $619.5 million in the same period last year. The consensus estimates had called for earnings of 19 cents per share on revenues of $413.7 million. For the third quarter, the company expects earnings of 4-9 cents per share on revenues of $400 million to $420 million. Analysts estimate earnings of 21 cents per share on revenues of $419.1 million.
Elizabeth Arden (RDEN) may see weakness after it posted a loss of 7 cents per share on an adjusted basis for its fourth quarter compared to a profit of 22 cents per share last year. Sales declined 10% to $212.6 million. Analysts estimated a loss of 8 cents per share on revenues of $213.4 million.
DeVry (DV) could see strength after it reported a profit of 51 cents per share for its fourth quarter on 43% sales growth to $396.2 million. The Street had estimated earnings of 51 cents per share on revenues of $376.9 million.
Southwest Airlines (LUV) is likely to move in reaction to its announcement that its $170 million bid for Frontier Airlines was deemed unacceptable by the bankruptcy court due to its rejection of a requirement that calls for the pilots of the two airlines to work out an integration plan before the deal would close. That leaves Republic Airways with its $108.8 million bid the winner of the auction.
Boeing (BA) could see some weakness after reports suggested that the company has halted work at a plant of its Italian supplier, which assembles the fuselage of its 787 Dreamliner. The order to stop production was issued on June 23rd, the day when the company announced an indefinite delay in the first flight of the aircraft. Separately, the company settled claims that it performed defective work on military refueling planes in Iraq and Afghanistan by agreeing to pay the U.S government $25 million.
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