| LastUpdated 8/28/2008 9:32:48 AM
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Traders May Express Optimism Over Strong Upward Revision to Second Quarter GDP Growth
The major U.S. index futures are pointing to a higher opening on Thursday. Stocks may benefit from better-than-expected GDP growth reported for the second quarter and a slide in the weekly claims for unemployment benefits. Nevertheless, some degree of apprehension may be expressed over the climb in oil prices.
After some indecisive moments in early trading, the major U.S. averages advanced strongly over the course of trading on Wednesday. The major averages gave back some of their gains towards the close, but they still ended on a strong note. The upside was crafted by a strong increase in durable goods orders for July and a rally among oil stocks amid a sharp rise in oil prices.
The Dow Industrials ended up 89.64 points or 0.79% at 11,503 and the S&P 500 Index gained 10.15 points or 0.80% to 1,282. Meanwhile, the Nasdaq Composite Index ended the session up 20.49 points or 0.87% at 2,383.
Twenty-six of the thirty Dow components ended the session higher. General Electric (GE) (down 0.18%), Hewlett-Packard (HPQ) (down 0.13%), Pfizer (PFE) and McDonald’s (MCD) (down 0.08%) were the only decliners in the session, while 3M Co. (MMM) closed unchanged. AIG (AIG), American Express (AXP), Boeing (BA), Bank of America (BAC), Citigroup (C), General Motors (GM) and AT&T (T) were among the notable gainers.
Among the sector indices, the Amex Securities Broker/Dealer Index and the KBW Bank Index gained 2.32% and 1.54%, respectively. The Dow Jones Transportation Average rose 1.07% compared to a 3.90% advance by the Philadelphia Housing Sector Index. While the Amex Oil Index surged up 1.94%, the Philadelphia Oil Service Sector Index gained 1.09%. The Amex Gold Bugs Index jumped 1.77%.
Hardware, networking and software stocks also found some buying interest. However, the Amex Airline Index slipped 2.88% and the Amex Biotechnology Index fell 1.80%.
For much of August, the major averages have shown range-bound trading on contracting volume. The Dow Industrials has been locked in a trading range between 10,960 and 11,800 since late June and it held support around its 50-day moving average of 11,471 on Wednesday. The index’s 14-day relative strength index is at 52.12 and is trending up, suggesting that the index is in a neutral zone. Nevertheless, the index has to convincingly break above the resistance levels around 11,795, 12,171 and 12,827 to have any meaningful move to the upside, which looks like a remote possibility, given the macro economic situation.
An encouraging piece of economic evidence came about on Wednesday with the release of the durable goods orders report for July. Durable goods orders rose 1.3% in July, while orders rose 0.7% excluding transportation equipment. The readings were better than the consensus estimate that called no change in durable goods orders. On a more positive note, June durable goods order growth were revised up by an additional 0.5 percentage points. Non-defense capital good orders, excluding aircrafts, increased 2.6% in July.
Lehman Brother estimates that the better-than-expected durable goods orders should add 0.3 percentage points to its third quarter GDP estimate. The firm attributes the outperformance in July to the relatively healthy growth abroad and the competitive value of the dollar, which is driving up demand for U.S. made capital goods.
Currency, Commodity Markets
Oil is going from strength to strength, as prices rose in reaction to fears of supply disruptions that were triggered by the approach of Tropical storm Gustav towards the U.S. Gulf of Mexico region, which supplies about one-tenth of the 21 million barrels of oil the U.S. consumes each day. A barrel of oil is currently trading up $1.42at $119.57 a barrel. The commodity gained $1.88 to $118.15 a barrel in the previous session.
Wednesday’s advance was also facilitated by the weekly inventory report that showed a decline in crude oil and gasoline stockpiles in the recent reporting week. The EIA reported that crude oil stockpiles eased 0.1 million barrels in the week ended August 22nd to 305.8 million barrels, remaining in the middle of the average range for this time of the year. Gasoline inventories fell by 1.2 million barrels, while distillate fuel stockpiles remained unchanged. Refinery capacity utilization averaged 86.5% over the four-weeks ended August 22nd compared to 86.4% in the previous week.
Meanwhile, gold futures are currently advancing $12.20 to $846.20 an ounce after ending Wednesday’s session up $5.90 at $834 an ounce.
On the currency front, the U.S. dollar is trading at 109.08 yen compared to the 109.4985 yen at the close of New York trading on Wednesday. Against the euro, the dollar is currently valued at $1.4791 a euro.
Asia
Stock markets across the Asia-Pacific region closed mixed on Thursday in seesaw trading despite Wall Street finishing firm overnight. Crude oil futures continued to rise for a fourth day Thursday on fears that Tropical Storm Gustav could enter the Gulf of Mexico as a powerful hurricane and disrupt oil and natural gas production.
The Japanese stock market opened higher, but it surrendered it all its gains after the first hour of trading. Thereafter, the index traded below the unchanged for most of the session before recovering in late hour trading. The benchmark Nikkei 225 index closed up 15.29 points or 0.12% at 12,768.
Semiconductor equipment makers gained, while real estate stocks closed lower.
Auto stocks and other exporters were hit due to a stronger yen. Sony slipped 0.5%, Nikon fell 2.3%, Komatsu lost 2.4%, Honda Motor declined 1.1% and Toyota Motor closed unchanged.
Consumer loan company Acom surged up 8.8% on news that Mitsubishi UFJ intends to raise its stake in the consumer lender Acom to about 40% from the present 15% to make it a subsidiary. However, rival Aiful slumped 8.0% amid worries that its business might suffer if a major bank does not back it.
Office machinery maker Ricoh advanced 2.9% after the company agreed to buy U.S.-based equipment distributor Ikon Office Solutions Inc. for $1.62 billion in cash. Rival Canon tumbled 5.4% on concerns that it could lose half of its copier sales in North America.
The South Korean market surrendered all its gains and fell into negative territory within a few minutes of trading. Thereafter, the index languished in the red. The Korea Composite Stock Price Index or KOSPI closed down 19.77 points or 1.32% at 1,474, marking a 16-month closing low.
In the tech sector, market heavyweight Samsung Electronics dropped 1.7%, Hynix Semiconductor plunged 3.0% and LG Electronics shed 2.4%. Automakers fell across the board after unionized workers at Hyundai Motor and Kia Motors launched another round of partial strikes Wednesday over a wage deal and working conditions.
News that Hyundai Motor is planning to recall some 65,000 units of the Elantra in the United States to fix a defect in the compact car's fuel pump also weighed on automakers. Hyundai Motor fell 2.9% and Kia Motors plunged 5.5%.
The Chinese market held above the unchanged line for most of Thursday’s session before closing on a positive note. Property stocks fell after the central bank called on commercial banks to tighten lending to property developers. The benchmark Shanghai Composite Index closed up 8.0 points or 0.34% at 2,350. The key index has lost 55.3% so far this year.
The Hong Kong market closed sharply lower as China Mobile fell, dragging down other mainland telecom firms on the back of a slew of broker downgrades. The market was also hit by weakness triggered by disappointing earnings and cautious guidance issued by fashion apparel retailer and exporter Esprit Holdings. The benchmark Hang Seng closed down 492.43 points or 2.29% at 20,972.
China Mobile tumbled 6.3%, China Unicom slumped 7.3%, China Telecom shed 4.4% and China Netcom plunged 7.7%. Esprit slid 17.9%.
Refiner China Petroleum and Chemical Corp plunged 5.3% following a jump in oil prices overnight and PetroChina plummeted 3.3% after the company reported a bigger-than-expected decline in first-half profit. However, CNOOC jumped 2.9% after the company reported an 89.3% surge in first-half earnings, topping analyst forecasts.
The Australian market opened unchanged and climbed sharply in early trading. Thereafter, the All Ordinaries moved sideways to close up 55.3 points or 1.1% at 5,067. Resources gained on strong commodity prices, while financial stocks also posted gains.
Europe
The major European markets are trading higher on Thursday, reversing some of the gains in the past two sessions. The French CAC 40 Index is receding 1.45% compared to a 1.10% decline by the German DAX Index, while the U.K.’s FTSE 100 Index is advancing 1.11%.
On the economic front, the German Federal Statistical Office reported today that the number of employed persons rose 1.4% in July compared to the year-ago period. On a monthly basis, the number of persons in employment eased 0.1%. However, the number of employed edged up 0.1% on a seasonally adjusted basis. The seasonally adjusted unemployment rate stood at 7.3% in July compared with 8.4% in the year-ago period.
Another report released by the agency showed that consumer prices rose 3.3% year-over-year in July compared with the year-ago period. The inflation rate marked the highest in about 15 years. On a monthly basis, consumer prices increased 0.6%. Economists had expected a 3.1% year-over-year increase and a 0.2% monthly decline in consumer prices. The price increase was led by non-durable goods, mainly food and energy products.
U.S. Economic Reports
The Bureau of Economic Analysis is due to release its preliminary second quarter GDP report at 8:30 AM ET on Thursday. The economy is likely to have expanded at a pace of 2.7% in the quarter.
Preliminary second quarter GDP report released by the Bureau of Economic Analysis showed that second quarter GDP rose at an annual rate of 3.3% compared to the advance estimate of 1.9% and first quarter growth of 0.9%. Economists expected the advance estimate to have been revised up to 2.7% in the second quarter. On a year-over-year basis, second quarter GDP growth was 2.2% compared to 2.5% in the first quarter
The increase in second quarter GDP compared to the previous quarter reflected positive contributions from exports, personal consumption expenditures, non-residential structures, federal government spending and state and local government spending. However, private inventory investment, residential fixed investment and investments on equipment and software deducted from growth. The GDP price index, excluding food and energy prices, rose at an annual rate of 2.2%, the same pace as in the previous quarter, while the GDP price index increased 4.2%.
Meanwhile, the Labor Department said that the number of individuals claiming unemployment benefits declined 10,000 in the week ended August 23rd to 425,000 from the previous week's upwardly revised average of 435,000. Economists had expected claims to have ticked down to 425,000 from the originally reported 432,000 for the previous week.
The four-week average that removes volatility declined 6,000 in the recent week to 440,250 from the previous week's revised average of 446,250. Continuing claims, which is calculated with a week's lag, increased 64,000 in the week ended August 16th to 3.3655 million.
Stocks in Focus
William Sonoma (WSM) is likely to react to its announcement its second quarter revenues declined 4.6% to $819.6 million and its earnings per share rose 26.1% to 17 cents per share. The recent quarter’s earnings included a gain of 9 cents per share. On an adjusted basis, the company reported earnings of 8 cents per share, representing a 65.2% decline. Analysts expected earnings of 7 cents per share on revenues of $832.61 million.
Shears Holdings (SHLD) may be in focus after it said its second quarter earnings declined to 50 cents per share from $1.15 per share in the year-ago period. Revenues declined to $11.76 per billion from $12.26 billion in the year-ago period. The consensus estimates had called for earnings of 33 cents per share on revenues of $11.7 billion.
Fannie Mae (FNM) could react to a management shakeup it announced Wednesday after the markets closed. The company appointed Peter Niculescu as Chief Business Officer, David Hisey as CFO and Michael Shaw as Chief Risk Officer, effective immediately. Niculescu would replace Robert Levin, who served the company as Chief Business Officer and would be retiring early next year. Hisey will replace Stephen Swad, while Michael Shaw is to replace Enrico Dallavecchia.
Another stock that may be in the spotlight over a management change is Oracle (ORCL), which announced the appointment of Jeff Epstein as its Chief Financial Officer. The incumbent CFO Safra Catz will continue to serve as the company’s co-President and will oversee the finance department. Epstein will be reporting Catz.
Bank of America (BAC) is likely to be in focus after it announced that it would redeem $43 million in auction rate securities held by the Massachusetts Turnpike Authority.
United Airlines (UAUA) could move in reaction to its announcement that it will furlough 1,550 flight attendants, as it is reducing flights this fall as a cost cutting measure. The company also said it intends to implement a reduction of 7,000 jobs by the end of 2009.
Coldwater Creek (CWTR) may come under selling pressure after it announced that its second quarter profits declined to 3 cents per share from 9 cents per share last year. The recent quarter’s results included a charge of 1 cent per share. Sales fell 5% to $241.4 million. Analysts, on average, estimated earnings of 1 cent per share on revenues of $242.5 million.
Men’s Wearhouse (MW) is expected to move to the downside after it lowered its full year earnings estimate for 2008 to $1.50-$1.60 per share from its earlier estimate of $1.75-$1.85 per share. The consensus estimate calls for earnings of $1.63 per share. The company’s third quarter earnings estimate of 36-40 cents per share was also below the mean analysts’ estimate of 53 cents per share. The company also announced a fall in its second quarter net profits to 63 cents per share from $1 per share on a 4% revenue decline to $545.3 million. Analysts, on average, estimated earnings of 70 cents per share on revenues of $554.6 million.
Tivo (TIVO) is also likely to recede after it said it expects third quarter revenues of $49-$51 million compared to the $57 million consensus estimate. Additionally, the company expects a net loss of $7-$9 million for the quarter. Tivo also reported second quarter earnings of 3 cents per share compared to a loss of 18 cents per share last year. The results were ahead of the mean analysts’ estimate that had called for a loss of 2 cents per share.
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