M&A Activity May Help Markets Extend Gains; Housing Market Data In Focus - RTTNews Daily Market Analysis

Add as your preferred news source on Google

Add Now

The major U.S. index futures are pointing to a higher opening on Monday. Once again M&A rumors may serve as positive catalysts to extend the buoyancy witnessed in the recent sessions. Alcoa (AA) is back in the news as a target, with BHP Billiton reportedly eyeing the aluminum maker, while a rival offer seems to be emerging for Dow Jones (DJ) from across the Atlantic. The price of oil has turned lower, and this should encourage traders to make purchases. Nonetheless, the trading direction of the session largely hinges on the housing market report to be released later in the day.

The major averages advanced in the week ended June 15th after posting losses in the previous week. Although higher bond yields pressured stocks early in the week, the markets regained the lost ground over the rest of the week. The buoyancy was in part aided by tamer core wholesale and consumer price inflation readings, which provided some leeway for an unchanged stance in terms of interest rates when the markets were bracing for higher rates following a few strong economic readings. The Federal Reserve's Beige Book, which showed that growth continued amid moderating inflationary pressures, also supported sentiment.

The Dow Industrials advanced 215.09 points 1.6% to 13,640. The broader S&P 500 Index rose 25.24 points or 1.67% to 1,533, while the Nasdaq Composite advanced 53.17 points or 2.07% to 2,627.

Intel has been having a good run up in recent sessions, and the shares of the Dow component were higher in the past six sessions, rising about 13.8%. Some of the upside is due to a more optimistic outlook from brokerages. Last week, Goldman Sachs raised its rating on the chipmaker to a Buy, while Raymond James resumed coverage of the company's shares with a Strong Buy rating. Goldman believes that Advanced Micro Devices (AMD) may soon begin outsourcing jobs, as it fights tooth and nail to improve profit margins. The decision is expected to bring in technologically inferiority to AMD's products, while the Sunnyvale, California-based company is also likely to be hurt by a delay in the launch of its Barcelona processor. Further, Intel is also expected to benefit from a fall in the size of the chips, which in turn is expected to boost yield. According to reports, the company's forthcoming Penryn processor is about 107 square millimeters in size compared to 143 square millimeters for its Conroe generation of processors.

However, there are others on the Street who believe that Intel can improve its margin despite competitive threats by reducing capital expenditure. Intel's gross profit margin in the first quarter of 2007 was 50.06%, a far cry from the 59% it recorded in its halcyon days of the year 2005.

Intel's shares are trading at 22.4 times its estimated earnings for 2007 and 18.2 times its estimated earnings of $1.33 per share for 2008. The stock is trading above its long-term support level around $22.75 and its 50-day and 21-day moving averages of $20.4 and $21.06, respectively. The shorter period moving average crossed over the long period's in late 2006 and this is suggestive of bullishness. On the upside, the stock faces resistance around the $27.25 level.

Meanwhile, last week, the Semiconductor Industry Association revised down its chip demand growth forecast for 2007 to 1.8% from its earlier estimate of 10%. The Association now expects total sales of $252 billion in 2007, which it expects to increase to $306 billion in 2010. The downside was blamed on rapid price attrition in the three key market segments, namely microprocessors, DRAM and NAND flash memories. Despite anticipating that the unit sales of PCs will increase by 10% in 2007 to 255 million units, sales are likely to suffer due to intense competition and thereby resulting in price. erosion.

Currency, Commodity Markets

A barrel of crude is currently fetching $67.60, representing a loss of $0.40. Crude oil futures climbed 5% in the week ended June 15th to $68 a barrel, which represents their highest level since September 2006. The rally in the recent week came amid a jump in gasoline futures following the release of U.S. weekly inventory data that showed that gasoline stocks remained unchanged in the week ended June 8th. Higher gasoline prices are primarily due to concerns that refineries cannot step up production to meet the rising demand that is characteristic of the summer driving season.

Meanwhile, gold futures also advanced in the recent week. Gold futures for August delivery rose $8.40 or 1.8% to $658.70 an ounce. Currently, the yellow metal is trading up $3.40 at $662.10 an ounce.

On the currency front, the U.S. dollar ran up strongly against the yen after economic readings pointing to stronger growth in the U.S. propped up the greenback. A Bank of Japan decision to hold interest rates unchanged in its June meeting and indications from the central bank that interest rates will be raised only gradually served to exert a bullish influence on the dollar. The dollar rose 1.4% against the yen before closing the week at 123.44 yen, off an intra-week high of 123.67.

However, the dollar dipped 0.11% against the euro in the week ended June 15th to $1.3388. The softness was mainly due to the narrowing of interest rate differentials between the U.S. and the European Union countries.

Currently, the dollar is fetching 123.535 yen and is trading at $1.3405 versus a euro.

Asia

The major Asian markets were mostly higher on Monday, with the exception of the Indian market. The upward momentum was aided by the buoyancy on Wall Street on Friday.

Japan's Nikkei 225 average gap-opened higher and moved sideways thereafter before closing up 178.03 points or 0.99% at 18,150, its highest closing level since February 27th. A majority of the stocks advanced in the session.

Daikin Industries climbed 3.24% and Ebara was up 3.72%. Fujikura rallied 5.05% and Heiwa Real Estate advanced 3.25%. Japan Steel Work rose 4.29% compared to a 5.08% climb by Kumagai Gumi. Mitsubishi Real Estate, Mitsui Fudosan, Mitsui OSK Lines, Mitsumi Electric, Nippon Yusen, Toho, Tokyu, Tokyu Land, Toshiba and Yokohama Rubber also revealed significant buying interest.

Sony rose 0.75%. Auto stocks also advanced. On the other hand, Meidensha slumped 4.37%. Nippon Suisan, KDDI, GS Yuasa and Oji Paper also saw some weakness.

Japan's Cabinet Office released its monthly economic report for June, which suggested that the economy is recovering despite weakness in industrial production in some sectors. According to the Cabinet Office's assessment, corporate profits are improving and business investment is on the rise. While acknowledging that the employment situation is improving on a broader basis, the Cabinet Office noted that some severe aspects remain. The Office also indicated that private consumption is picking up, while exports and industrial production are flat.

Hong Kong's Hang Seng Index gap-opened higher and advanced further over the course of trading to close up 565.84 points or 2.69% at 21,583, representing a new closing record.

The market benefited from an all round buying spree. Financial, property and China-related stocks rallied strongly. China Resources, Hong Kong Exchange, China Unicom, CCB, CNOOC, China Mobile, ICBC and China Life posted substantial gains.

Australia's All Ordinaries hovered in positive territory throughout the session. At the close of trading, the index was up 48.20 points or 0.76% at 6,365. All the sectors, barring property trust and telecom stocks, advanced.

Mining stocks BHP Billiton and Rio Tinto rose sharply. All the four major banks also advanced. Media stocks News Corp., PBL and Seven Network receded, while John Fairfax gained. In the retail space, Woolworths and David Jones rose. However, David Jones declined.

After opening modestly higher, South Korea's Kospi rose steadily throughout the session to close up 34.62 points or 1.95% at a new record closing high of 1,807. The index ended higher for a third straight day today and climbed above the 1,800 level for the first time ever. Export stocks including Samsung Electronics and LG Philips LCD posted gains.

India's Sensex, which opened higher, surrendered much of its gains and traded with a slightly positive bias in late afternoon trading. Thereafter, the index fell 82.57 points or 0.58% to 14,080. IT, technology, capital good and auto stocks receded sharply.

Europe

The major European markets are trading higher after closing at 7-year highs in the previous session. Currently, the French CAC 40 Index is rising 0.02%, while the German DAX Index is gaining about 0.52%. The U.K. FTSE 100 Index is edging up 0.04%.

In Paris, Lafarge is advancing about 1.80% and Saint-Gobain is rising nearly 1.60%. Arcelor Mittal, Alstom, STMicroelectronics and Dexia are also seeing significant strength. On the other hand, Michelin, L'Oreal, Schneider Electric, Lagardere , Veolia Environment, Sanofi-Aventis, Bouygues, Peugeot, Thomson and LVMH are receding in the session.

Among Frankfurt stocks, BASF is advancing about 2.60% and Linde is rising 2.30%. Infineon Technologies has gained about 2%, while SAP is surging about 3%. Thysseenkrupp, Volkswagen, Man, Henkel, E.ON, Deutsche Bank and Allianz are advancing more than 1% each. However, Hypo Real Estate and Siemens are seeing significant weakness.

In the U.K., miners and oil stocks are receding. Barratt Developments and Persimmon are among the top losers thus far in the session.

However, Imperial Chemical Industries is surging over 16.75% after it rejected a take over offer from Akzo Nobel that valued the company at 7.2 billion pounds. Centrica, Prudential, United Utilities and Standard Chartered are among the other significant advancers. Cadbury Schweppes is trading flat after announcing an open tender offer for a small Japanese confectionary maker. Reports also suggested that the company may soon announce an agreement to sell its U.S. beverage business and unveil job cuts at its confectionary business.

The Rightmove released its U.K. house price index for June, which rose to 194.7 in June from 193.1 in May. The average property asking price advanced 0.8% on a monthly basis to 239,317 pounds, while annually the increase was 13.2%. The increases were higher than the rates recorded in the prior month.

U.S. Economic Reports

With the economy spawning some good tidings, traders may look forward to the upcoming week for confirmation of their conjectures that the economy is still expanding without a concomitant increase in inflationary pressures. Although the week's economic calendar is relatively light, some key housing market reports are due out in the week.

The May housing starts report of the Commerce Department is expected to reveal softness, in-line with the slump in the building permits for April. Building permits serve as a leading indicator for housing starts, as they are based on actual filings. Economists are now reconciled to the fact that the housing market will remain weak for an extended period and it will be long before construction activity rebounds. An interesting observation is that there has not been a proportional reduction in jobs in the sector despite the prolonged downturn.

Further, the markets may also focus on the results of the Philadelphia Fed's manufacturing survey and the Conference Board's leading index for May. Speeches by Federal Reserve officials are also expected to be on the radar ahead of the Federal Reserve Open Market Committee meeting scheduled for the 27th and 28th of June.

The housing market index based on a survey done by the National Association of Home Builders is expected to be released at 1 PM ET on Monday. The respondents of the survey are asked to rate the general economy and housing market conditions.

The National Association of Home Builders/Wells Fargo Housing Market Index declined 3 points in May to 30, marking the lowest level in its current cycle. The Association attributed the pessimism to ongoing concerns about subprime-related problems in the mortgage markets. The index of current single-family home sales fell 2 points to 31 and the index measuring sales expectations for the next six months dipped 3 points to 41. The index of traffic of prospective buyers also declined, falling 4 points to 23.

Stocks in Focus

Shares of Friendly Ice Cream (FRN) may rally after the company said it has agreed to be acquired by an affiliate of Sun Capital Partners for $15.50 per share in cash for a total consideration of $337.2 million. The company announced earlier on March 6th that it was exploring strategic alternatives. ECI Telecom (ECIL) could be in focus after it confirmed that it is in negotiation with an investor group led by Swath Investments regarding a buyout for $10 per share in cash.

Alcoa (AA) and BHP Billiton (BHP) are expected to react to reports that BHP Billiton will reviving its $40 billion offer for the U.S. aluminum maker after its current CEO Chip Goodyear retires in October. Encysive Pharma (ENCY) could see some weakness after the FDA issued a third approvable letter for its pulmonary arterial hypertension drug Thelin. The FDA reasoned that Thelin does not demonstrate evidence of effectiveness. The company also said that it may have to reduce its U.S. infrastructure and workforce due to the FDA decision.

New York Mercantile Exchange (NMX) is expected to be in focus after Chicago Mercantile Exchange (CME) said it is not in discussions with New York Mercantile Exchange regarding a possible merger. Instead, Chicago Mercantile Exchange said it is focused on completing its merger with Chicago Board of Trade (BOT). Gilead Sciences (GILD) may see some buying interest after it said the FDA has approved its once-daily treatment of its pulmonary arterial hypertension drug Letairis of 5mg and 10 mg strengths. The company noted that the product will be available in the U.S. next week.

Boeing (BA) is expected to react to an announcement from U.S. Airways (LCC) that it has placed orders for 90 Airbus planes. Meanwhile, Boeing said GE Commercial Aviation Services had placed orders for 6 Boeing 777 Freighters worth $1.42 billion at list prices. Genesco (GCO) could rally after it revealed an agreement to be acquired by Finish Line (FINL) for $54.50 per share. Another stock that could see buying interest on M&A activity is AuthorizeNet (ANET), which has agreed to be acquired by CyberSource (CYBS) for $565 million.

For comments and feedback contact: editorial@rttnews.com