Market Analysis

Beyond the Numbers

Risk Aversion in Play as Economic Worries Return
3/6/2012 9:10 AM

The major U.S. index futures are pointing to a lower opening on Tuesday, with sentiment taking a beating from economic fears. Another chapter in the Greek debt saga unfolds, as Greece woes its private sector investors in an exchange offer, which could result in the PSIs taking a 53.5 percent haircut. In the absence of any major catalysts, traders are expected harp on these uncertainties, fuelling risk aversion in the markets. The resource space is seeing a steep sell-off as a result of the risk aversion and safe haven currencies are getting a boost.

U.S. stocks languished below the unchanged line for much of Monday’s session, with global worries returning in the wake of a muted GDP growth forecast for 2012 by China and some disappointing data points from across the Atlantic.

The major average opened modestly lower but fell sharply despite the release of a better than expected service sector reading. Thereafter, the major averages gradually recouped their losses over the course of the session, but still ended the day in the red. The Dow Industrials ended down 14.76 points or 0.11 percent at 12,963 and the S&P 500 Index closed 5.30 points or 0.39 percent lower at 1,364, while the Nasdaq Composite Index closed at 2,951, down 25.71 points or 0.86 percent.

Sixteen of the thirty Dow components closed lower, with Alcoa (AA) leading the retreat with a 3.61 percent drop. Bank of America (BAC) and Caterpillar (CAT) also declined sharply. On the other hand, IBM (IBM) and Merck (MRK) advanced notably.

Airline, semiconductor, basic material, oil service, gold, biotechnology and financial stocks were the worst performing sectors of the session.

On the economic front, the Institute for Supply Management’s service sector survey showed that activity in the sector expanded at a faster rate in February. The service sector index came in at 57.3 in February, up 0.5 points and also marking the highest reading in over a year. The business activity index climbed 3.1 points to 62.6, the new orders index was up 1.8 points to 61.2 and the order backlogs index rose 3.5 points to 53.

Meanwhile, the employment index slid 1.7 points to 55.7.
A separate report from the Commerce Department showed a 1 percent drop in factory orders in January, although the decrease was smaller than the 1.6 percent drop forecast by economists.

Commodity, Currency Focus

Crude oil futures are trading down $1.38 at $105.34 after edging up $0.02 to $106.72 a barrel on Monday. Gold futures are currently slipping $23 to $1,680.90 an ounce. In the previous session, the precious metal fell $5.90 to $1,703.90 an ounce.

Among currencies, the U.S. dollar is trading 81.03 yen compared to the 81.55 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is valued at $1.3133 compared to yesterday’s $1.3217.


The major Asian markets ended mostly lower, with the Singaporean Straits Times Index and Hong Kong’s Hang Seng Index leading the declines with losses of 2% or more. Worries of a slowdown in Chinese growth exerted downward pressure on resource stocks in the region, while traders also remained concerned about the results of the Greece debt swap.

After holding up in early trading, Japan’s Nikkei 225 average gave back ground and languished below the unchanged line for the rest of the session. The index closed down 60.96 points or 0.63 percent at 9,638.

Australia’s commodity-heavy All Ordinary index lost 58.70 points or 1.35 percent before closing at 4,296. In the first of the four major central bank decisions due for the week, the Reserve Bank of Australia left its key official cash rate unchanged at 4.25 percent, citing the appropriateness of the bank’s current monetary policy stance. The central bank also indicated that the inflation outlook could provide scope for further easing if demand conditions weaken materially.


A major sell-off is underway in Europe, with all of the major averages in the region down over 1 percent each. The French CAC 40 Index and the German DAX Index are plunging 1.93 percent and 1.51 percent, respectively, while the U.K.’s FTSE 100 Index is down 1.07 percent.

The exchange offer for tarnished Greek sovereign debt held by private sector investors is underway and uncertainty abounds over the outcome of the exchange offer. The offer is set to expire on March 8th. The PSIs are required to take a 53.5 percent haircut and receive new bonds guaranteed by the EFSF. Market estimates suggest that the acceptance level has to be 90 percent for the deal to go through.

Second estimates released by Eurostat showed that the eurozone economy experienced a sequential contraction of 0.3 percent in the fourth quarter. On a year-over-year basis, GDP rose 0.7 percent. Both estimates were in line with estimates and were unrevised from the first estimates.

Stocks in Focus

Pepco Holdings (POM) said it has priced an offering of 15.58 million shares of its common stock at $19.25 per share, slightly lower than the $19.57 at which it closed yesterday.

AIG (AIG) said it has priced the sale of 1.72 billion ordinary shares of AIA Group. The company expects to generate gross proceeds of $6 billion based on a purchase price of HK$27.15 per share.

JAKKS Pacific (JAKK) said it has adopted a stockholder rights plan in response to Oaktree Capital Management’s unsolicited interest in the company. The company declared a dividend of one right for each outstanding share of its stock.

ABM Industries (ABM) reported first quarter adjusted income from continuing operations of 22 cents per share, flat with last year. Revenues rose 4.3 percent to $1.07 billion. The results were in line with estimates. For 2012, the company expects adjusted income from continuing operations of $1.40-$1.50 per share, which surrounds the consensus estimate of $1.43 per share.

AMR (AMR) unit American Airlines reported a load factor of 75.8 percent for February, up 1 point year-over-year. Traffic and capacity rose 6 percent and 4.7 percent, respectively. The company’s American Eagle unit reported a 2.9 point-year-over-year increase in its February load factory, as traffic and capacity improved 18.9 percent and 14 percent, respectively.

Nutrisystem (NTRI) reported a loss from continuing operations of 4 cents per share for the fourth quarter compared to a profit of from continuing operations of 25 cents per share last year. Revenues fell to $66.89 million from $87.86 million last year. While the company’s loss was wider than what analysts had expected, its revenues exceeded estimates. The company issued below-consensus earnings per share guidance for 2012.

Verifone (PAY) said its first quarter non-GAAP earnings rose to 58 cents per share from 43 cents per share last year. The company’s non-GAAP revenues climbed to $425 million from the year-ago quarter’s $284 million. The results were better than expected. For the full year, the company expects non-GAAP net income of $2.60-$2.66 per share on non-GAAP net revenues of $1.90 billion to $1.93 billion. The guidance was fairly upbeat.

Shuffle Master (SHFL) reported better than expected first quarter results. Separately the company announced a deal to buy Ongame Network by paying 19.5 million euros in cash and a contingent payment of up to 10 million euros in cash within five years of closing.

Casey’s (CASY) reported third quarter earnings that missed estimates by a penny, while its revenue were also below consensus estimates.
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