Market Analysis

Beyond the Numbers

Earnings Boost May Help Markets Consolidate
7/13/2010 9:12 AM

The major U.S. index futures are pointing to a higher opening on Tuesday. Alcoa’s (AA) results seems to have gone well with traders, with the forecast-beating results from the aluminum giant offering hopes that corporate profit growth is still live and kicking. This realization may trigger some buying, although the sustainability of gains throughout the session is questionable, given the 5-session winning streak of the major averages and lingering doubts over economic conditions.

The technology space may see some activity ahead of Intel’s (INTC) results after the markets close today. An economic report released earlier in the day showed that the trade deficit of the U.S. unexpectedly widened, as imports rose at a faster rate than exports. Meanwhile, economic reports released from across the Atlantic weren’t enterprising. In Germany, economic sentiment continued to deteriorate.

On Monday, traders held firm to the optimism that all is going to be well despite the run up witnessed in the markets last week. However, trading remained lackluster, as market participants waited with bated breath for the impending reporting season and several key economic reports due to be released during the course of the week.

The major averages opened lower, but continued to show volatility, moving back and forth across the unchanged line throughout the session. In late trading, all three of the major averages popped decisively into positive territory to close modestly higher. The Dow Industrials ended up 18.24 points or 0.18% at 10,216, while the Nasdaq Composite Index gained 1.91 points or 0.09% to close at 2,198 and the S&P 500 Index ended 0.79 points or 0.07% higher at 1,079.

Twenty of the thirty Dow components closed the session higher, with Wal-Mart (WMT), Pfizer (PFE), Microsoft (MSFT), McDonald’s (MCD) and Intel advancing strongly in the session.

On the other hand, DuPont (DD) and United Technologies (UTX) ended down over 1% each. Alcoa slid moderately ahead of its earnings. The aluminum maker reported second quarter income from continuing operations of 13 cents per share compared to a loss of continuing operations of 32 cents per share, which includes restructuring charges. Revenues rose 6% year-over-year to $5.2 billion. Analysts estimated earnings of 12 cents per share on revenues of $5.05 billion.

Among the sector indexes, the Philadelphia Semiconductor Index added 1.13%, while the Dow Jones U.S. Basic Materials Average fell 1.74%.

Currency, Commodity Markets

Crude oil futures are moving up $0.88 to $75.83 a barrel after declining $1.14 to $74.95 a barrel on Monday. In its monthly oil market report released earlier in the day, the International Energy Agency left its global oil demand forecast for 2010 largely unchanged at 86.5 million barrels per day. The growth is expected to be driven by non-OECD nations, while OECD demand is expected to decline. The agency expects global oil demand growth to slow to 1.6 in 2011 from the 2.1% growth estimated for 2010.

Gold futures are currently advancing $12 to $1,210.70 an ounce. In the previous session, the precious metal fell $11.10 to $1,198.70 an ounce.

Among currencies, the U.S. dollar is trading at 88.445 yen compared to the 88.6168 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is valued at $1.2582 compared to yesterday’s $1.2597.

The major Asian markets closed Tuesday’s session on a mixed note, with the Indian, Indonesian, Malaysian, Singaporean and South Korean markets closing higher, while the rest ended in negative territory. Although stocks in the region opened on a promising note, weakness crept in following an assertion from China that it will continue to implement measures to cool down the property market. The Chinese Shanghai Composite Index retreated 1.62%.
Japan’s Nikkei 225 average opened higher, but it declined steadily throughout the morning session. The index consolidated below the unchanged line in the afternoon to close down 10.88 points or 0.11% at 9,537.
Financial stocks came under selling pressure. Auto, utility and pharma stocks ended mostly lower, while other export stocks showed mixed sentiment.
In economic news, Japan’s Cabinet Office released the results of its consumer confidence survey, showing that Japan’s consumer confidence index rose to 43.5 in June, the highest reading since September 2007, from 42.8 in May. Economists had expected the index to stay at 42.5, almost unchanged from May. The revised industrial production report released by the ministry showed a revised 0.1% increase for May, upwardly revised from its earlier estimate of a 0.1% drop.


The major European markets look set to extend their gains for a sixth straight session, as traders focused on Alcoa’s stellar quarterly results. Earnings optimism helped the markets overlook a negative rating action by Moody’s on Portugal.

The French CAC 40 Index and the German DAX Index are rising 1.77% and 1.76%, respectively, while the U.K.’s FTSE 100 Index is advancing 1.94%.

Moody’s today downgraded Portugal’s credit rating by 2 notches to A1, although with a stable outlook. Though it is a retrograde step, the rating action brings Moody’s ratings for the nation closer to the ratings of rivals S&P, which rates Portugal A- with a negative outlook and Fitch, which has a AA- rating with a negative outlook for Portugal. Moody’s attributed its action to the government’s rising debt-to-GDP ratio and debt-to-revenue ratio.

On the economic front, a house price survey by the Royal Institution of Chartered Surveyors showed that the balance for real estate agents who said house prices rose versus those who saw prices decline in the United Kingdom was 9 percent in June. This was below expectations for 20%. Meanwhile, the results of the U.K. Department of Communities and Local Government’s survey showed that house prices in the U.K. rose 11% year-over-year in May compared to the 10.2% growth expected by economists.

The German Federal Statistical Office reported that Germany’s wholesale price index rose 5.1% year-over-year in June, slower than the 6.2% growth in May. Economists had expected a 5.5% increase for the month. On a monthly basis, wholesale prices fell 0.2%, reversing some of the 0.3% increase seen in May.

A report released by French statistical agency INSEE showed that French consumer prices rose 1.5% year-over-year in June, with the increase in line with economists’ expectations.

At the same time, U.K. consumer prices rose by more than economists had expected, according to a report released by the U.K. Office for National Statistics. The consumer price index rose 0.1% month-over-month in June and was 3.2% higher than a year-ago. Economists had expected unchanged prices compared to May and a 3.1% annual increase.

The Zew indicator of economic sentiment for Germany released earlier in the day showed a 7.5-point decline in July to 21.2. The index has now fallen below its historical average of 27.4.

The insipid reading was blamed on the sovereign debt crisis and the resulting need for budget consolidation in various countries. However, the assessment of the current economic situation rose by 22.5 points to 14.6, turning positive for the first time since July 2008. The improvement signals that the potential for further improvement seems to be widely used up.

U.S. Economic Reports

Imports in the month of May rose at a slightly faster pace than exports, according to a report released by the Commerce Department, with the report subsequently showing an unexpected increase in the size of the U.S. trade deficit.

The report showed that the trade deficit widened to $42.3 billion in May from $40.3 billion in April. The wider trade deficit came as a surprise to economists, who had expected the trade deficit to narrow to $39.4 billion.

The Treasury Budget, a monthly account of the surplus or deficit of the federal government is due to be released at 2 PM ET. The budget is considered an indicator of budgetary trends and the thrust of fiscal policy. Economists estimate a deficit of $70 billion for June.

Stocks in Focus

Brooks Automation (BRKS) may see some activity after it said it expects to report revenues of $156 million to $157 million in its third quarter. Citing the stronger than expected revenues, the company raised its earnings guidance for the quarter to 22-24 cents per share. Analysts estimate earnings of 19 cents per share on revenues of $152.68 million. The company also said it expects sequential revenue growth, margin expansion and earnings growth for the fourth quarter due to strong backlog and new order booking trends.

SRA International (SRX) could see some strength after it said it has won a $57 million single-award indefinite delivery indefinite contract from the Federal Aviation Administration to continue supporting the airport technology R&D technical/engineering support program. The contract value is spread over five years.

MoneyGram International (MGI) may react to its announcement that it has appointed James Shields as its EVO and CFO, effective July 13th, 2010.

Chip equipment maker Novellus Systems (NVLS) could also be in focus after it reported that its second quarter net sales rose to $321.4 million from $119.2 million in the year-ago period. The company reported earnings of 66 cents per share compared to a loss of 52 cents per share last year. Analysts estimates, which typically exclude one-time items, called for earnings of 60 cents per share on revenues of $312.01 million.

Railroad operator CSX (CSX) is likely to see some activity after it said its second quarter revenues rose 22% to $2.7 billion. The company’s earnings improved to $1.07 per share from 71 cents per share in the year-ago period. The consensus estimates called for earnings of 98 cents per share on revenues of $2.63 billion.

Indian outsourcing giant Infosys (INFY) may see weakness after it reported a decline in its fiscal first quarter profits in rupee terms to 14.88 billion rupees from 15.25 billion rupees in the year-ago quarter, weighed down by staffing expenses. The company’s earnings trailed estimates by some analysts. However, revenues rose to 61.98 billion rupees from 54.72 billion rupees in the same quarter last year. Looking ahead, the company raised its guidance for fiscal year 2011.
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