Markets Still Unnerved By Crisis in Credit Markets
The major U.S.
indexes are pointing to a lower opening on Thursday. Renewed
credit concerns are engulfing the markets, as interventions by
central banks are making traders nervous. Additionally,
traders may also harp over a steeper than expected increase in
producer prices. Lehman Brothers (LEH), which is the first
investment bank to report its fourth quarter earnings score
card, posted a decline in earnings but steel beat analyst
estimates. Strong retail sales growth may mitigate some of the
After trading significantly higher for most of Wednesday’s
session, the major U.S. averages receded into negative
territory in the last hour of trading. Nonetheless, the
markets recovered by the close. The early optimism was
triggered by a plan unveiled by the major central banks of the
world, including the U.S. Federal Reserve, the European
Central Bank, the Bank of England, the Bank of Canada and the
Swiss National Bank, to support the cash strapped credit
market. The Fed has agreed to make available at least $40
billion to banks through short-term loans, and has also
promised to provide at least $24 billion to central banks in
Europe, which face a dollar shortage. According to Wachovia
Securities, the action has the potential to end the crunch
that has paralyzed the credit market for the past few months.
The Dow Industrials ended Wednesday’s session up 41.13 points
or 0.31% at 13,474 and the Nasdaq Composite Index rose 18.79
points or 0.71% to 2,671. Meanwhile, the S&P 500 Index
advanced 8.94 points or 0.61% at 1,487.
Among the Dow components, AT&T (T) rallied 5.70%, Alcoa (AA)
gained 2.08% and 3M Co. (MMM) rose 2.37%. However, Citigroup
(C), Boeing (BA) and McDonald’s (MCD) came under significant
selling pressure. The Amex Oil Index advanced 2.62% and the
Amex Biotechnology Index gained 1.16%, while the KBW Bank
Index declined 1.78%.
On the economic front, a Labor Department report on import &
export prices showed that import prices increased 2.7% in
November, marking the fastest pace of growth since 1990. The
increase was primarily due to a sharp spike in prices of
petroleum, natural gas and industrial supplies. More
importantly, prices of other imported goods like consumer
products, capital goods and automobiles also increased,
suggesting that the weak dollar is feeding into import prices.
As expected, the trade gap for October widened to $57.8
billion, as imports rose 1% due to higher oil imports. Exports
increased 0.9%. On an inflation-adjusted basis, the goods
trade deficit narrowed in volume terms.
Based on survey results, AG Edwards predict that economic
growth will slow down in major countries in 2008. While noting
that a slowdown is currently underway in the U.S., the firm
noted that most other countries are at an earlier stage in
their economic cycles. The slowdown in these countries will
become evident only well after the New Year begins. Slowing
global growth may force other central banks to abandon their
bias towards higher interest rates or even lead them to cut
rates. This could help the undervalued dollar to stabilize or
even rally. Additionally, the soft patch may also lead to weak
final demand, thereby toning down demand for some commodities.
AG Edwards expects commodity prices to remain negative
Currency, Commodity Markets
Crude oil futures are currently trading down $0.53 at $93.86 a
barrel. On Wednesday, the black gold jumped $4.37 to $94.39 a
barrel. Unexpected declines in crude oil and distillate
inventories and bullish comments on prices by investment bank
Goldman Sachs (GS) supported prices. Goldman believes that the
price of oil will average around $95 a barrel in 2008 and
could reach $105 a barrel a year from now.
The Energy Information Administration’s weekly oil inventory
data showed that crude stocks declined by 700,000 barrels to
304.5 million barrels in the week ended December 7th. Gasoline
stocks increased by 1.6 million barrels to 202.2 million
barrels, while distillate stocks slipped by 800,000 barrels to
131.5 million barrels. Refinery capacity averaged 88.8% in the
four weeks ended December 7th, down 0.6 percentage points from
the previous week.
Gold futures, which closed Wednesday’s session up $1.70 at
$818.80 an ounce, are currently receding $7.20 to $811.60 an
The U.S. dollar is trading at 112.208 yen compared to the
111.938 yen it fetched at the close of New York trading on
Wednesday. The dollar is currently at $1.4677 versus the euro.
Notwithstanding the positive close on Wall Street overnight,
the major Asian markets declined in Thursday’s session.
Japan’s Nikkei 225 average opened lower and declined steadily
over the course of trading to close down 395.74 points or
2.48% at 15,537. A majority of the stocks declined, as the
yen’s strength generated some selling pressure in the export
Auto, mining, technology, finance and steel stocks came under
selling pressure. Advantest, Bank of Yokohawa, Chu Mitsui
Trust, Dowa Holdings, IHI, Mitsubishi Estate, Mitsubishi UFJ,
Mitsumi Electric, Mizuho Financial, Sumitomo Mitsui, Softbank,
T&D Holdings, Taiheiyo Cement and Taiyo Yuden were among the
However, Sumitomo Heavy, Sony, Sharp, NTT DoCoMo, Meiji
Dairies, Kuraray, Konami, KDDI, Isuzu Motors, Inpex Holdings
and Denso bucked the downtrend.
Japan’s Ministry of Economy, Trade and Industry released its
revised industrial production report for October, which showed
a 1.7% increase in industrial production. This represents an
upward revision from the previously reported 1.6% growth.
Shipments increased an upwardly revised 2.1%, while
inventories grew at an unrevised pace of 0.6%.
Australia’s All Ordinaries traded close to the unchanged line
for most of Thursday’s session before closing down 14.30
points or 0.21% at 6,661. All the sectors, with the exception
of gold, energy, IT, telecom and healthcare stocks, ended
In the mining space, Rio Tinto fell, while BHP Billiton
advanced. Among the four major banks, Westpac, ANZ and
Commonwealth fell, but National Australia Bank gained. Media
stocks News Corp. and Seven Network came under selling
pressure, while John Fairfax advanced.
Hong Kong’s Hang Seng Index, which traded with modest losses
in the morning session, receded sharply in the afternoon to
close down 776.61 points or 2.72% at 27,744. The market
witnessed broad based selling pressure, with only New World
Development and Yue Yuen Industries bucking the downtrend.
Yuen Yuen Industries advanced after it revealed plans to spin
off its retail business.
South Korea’s Kospi revealed some volatility before closing
down 11.55 points or 0.60% at 1,916. Communication and
machinery stocks receded in the session. Technology stocks
Samsung Electronics and LG Electronics also posted modest
India’s Sensex, which managed to hold above the unchanged line
in early trading, lost ground and declined through the rest of
the session. The index closed down 271.48 points or 1.33% at
20,104. Most sector stocks declined in the session, with only
FMCG stocks bucking the downtrend.
The major European markets are also receding in Thursday’s
session. The French CAC 40 Index is receding sharply, while
the German DAX Index is receding 1.08%. Meanwhile, the U.K.’s
FTSE 100 is declining about 2.07%.
In Paris, most stocks, with the exception of EDF, are
declining. Bank, technology, telecom and resource stocks are
leading the declines.
Among Frankfurt stocks, Daimler, Commerzbank, Infineon
Technologies, Continental, Lufthansa, Linde, Metro and
Thyssenkrupp have come under severe selling pressure. On the
other hand, Merck KgaA, BASF, Fresenius Medical Care and Hypo
Real Estate have gained ground in the session.
In the U.K., a majority of the stocks are receding. Rentokil
Initial is slumping over 23.17% after it said its full-year
pre-tax profit may be hurt by softness in its City Link parcel
service business. Rexam is receding about 10% after it said
full year profits would be hurt by weaker dollar. HBOS is
slipping over 6.50% in reaction to its announcement that its
earnings will be hurt by write downs. Mining and financial
stocks are also seeing weakness. However, BG Group is rising
over 5.50%. GlaxoSmithKline and Reckitt Benckiser are also
gaining ground in the session.
U.S. Economic Reports
The markets are likely to sift through a slew of economic
reports on a day, which is heavy on the economic calendar. A
report released by the Labor Department showed that the
producer price index rose 3.2% in November following a 0.1%
increase in October. Excluding food and energy prices,
producer prices rose 0.4% following unchanged prices in
October. Economists had expected a 1.5% increase in the
headline number and 0.2% growth in the core reading.
The price of food increased at monthly rates of 2%, while
energy prices slid 17%. Annually, the price of intermediate
goods increased 8.1% compared to a 22.4% increase in the price
of crude goods.
Retail Sales, which measure the dollar receipts at the stores
that sells durable as well as non-durable goods, are expected
to be released at 8:30 AM ET on Thursday. Economists estimate
that retail sales rose 0.5% in November, while retail sales
growth excluding autos is expected to be 0.5%.
Retail sales increased by a better than expected 1.2% in
November following an unrevised 0.2% increase in October.
Economists had expected sales to increase by 0.5%. The annual
rate of retail sales growth was 6.3%.
Excluding auto sales, retail sales rose 1.8% in November after
a 0.4% increase in October. The annual rate of ex-auto sales
The Business Inventories report is scheduled for release at 10
AM ET on Thursday. The dollar value of inventories held by
manufacturers, wholesalers and retailers is likely to have
increased 0.3% in October.
The September business inventories report showed 0.4% growth
in inventories and a 0.6% increase in business sales,
confirming the fact that inventories added substantially to
third quarter growth. Nevertheless, the inventories to sales
ratio remained an anemic 1.27.
Stocks in Focus
Euronet (EEFT) may react to its announcement that it has
offered to buy Moneygram (MGI) for $1.65 billion in stock.
Pepsi Bottling Group (PBG) could come under selling pressure
after it said it expects adjusted earnings FOR 2008 of
$2.30-$2.38 per share, which is lower than the consensus
estimate of $2.40 per share. For 2007, the company estimates
adjusted earnings of $2.17-$2.20 per share, higher than its
initial estimate of $2.15-$2.18 per share.
Honeywell (HON) is expected to be in focus after it reaffirmed
its 2007 financial guidance. The company also said it expects
2008 earnings per share of $3.65-$3.80. The company expects
sales growth of 5%-7% to $36.1-$36.7 billion. The consensus
estimates call for earnings of $3.67 per share on sales of
Boeing (BA) could rebound after it said NASA has awarded the
company an initial contract valued at about $265 million to
produce the Ares I crew launch vehicle’s instrument unit
avionics. Boeing is expected to produce three IUA flight test
units and 6 production units, with an option to produce four
additional units per year from 2014 to 2016. ADC
Telecommunications (ADCT) traded higher in Wednesday’s after
hours session despite reporting a loss of 5 cents per for the
fourth quarter compared to a profit of 33 cents per share last
year. The recent quarter’s results included items which
lowered earnings by 36 cents per share. Analysts expected a
profit of 22 cents per share for the quarter. Revenues rose 7%
to $329.6 million, exceeding the consensus estimate of $318.4
Assured Guaranty (AGO) is expected to be in focus after it
said it would initiate a public offering of about $300 million
shares, plus additional common shares of about $45 million
towards covering overallotments.
Biogen Idec (BIIB) is expected to see significant weakness
after it said it has received no acquisition offers following
its attempts to sell itself. Consequently, the company said it
chooses to remain independent.
Charles River Labs (CRL) is expected to react to its
announcement that it is maintaining its previously issued
earnings outlook of $2.22-$2.25 for 2008. The company expects
adjusted earnings of $2.56-$2.59 per share and revenues of
$1.21-$1.23 billion. The consensus estimates call for earnings
of $2.60 per share on revenues growth of 14%-16%. The company
forecast 2008 adjusted earnings from continuing operations of
$2.87-$2.97 per share. Charles River estimates revenue growth
of 11%-15% for 2008.
Children’s Place (PLCE) is expected to be in focus after it
announced that Richard Paradide, its Senior VP of Finance,
would be promoted to the role of CFO and Principal Accounting
CKE Restaurants (CKR) could come under pressure after it said
its third quarter income from continuing operations declined
to 13 cents per share from 16 cents per share last year.
Consolidated revenues eased 0.8% to $351.6 million. The
company also reported that its same store sales for November
rose 2.8%. Cytec Industries (CYT) is likely to react to its
announcement that its board has approved a $100 million share
Danaher (DHR) could be in focus after it reaffirmed its
adjusted earnings from continuing operations guidance of
$1.09-$1.14 per share for the fourth quarter. Analysts expect
earnings of $1.11 per share for the quarter. For 2008, the
company expects adjusted earnings from continuing operations
of $4.30-$4.40 per share compared to the consensus estimate of
$4.36 per share.
United Technologies (UTX) may react positively to the
announcement that Sikorsy, a United Technologies company, has
secured a 5-year, multi-service contract to supply 537 H-60
Hawk helicopters to the U.S. Army and U.S. Navy. The company
noted that deliveries are scheduled to be made from 2007 to
Martek BioSciences (MATK) may rally after it said its fourth
quarter earnings were 55 cents per share compared to
break-even results in the year-ago period. The company’s
adjusted earnings were 10 cents per share, as revenues rose
23.8% to $79 million.
Merck (MRK) is likely to see some weakness after it said it
voluntarily recalled 11 lots of its Haemophilus influenzae
type B vaccine. The recall was done suspecting potential
contamination. However, Nokia (NOK) could see some strength
after it said a U.S. International Trade Commission ruled in
favor of the Finnish company in patent infringement litigation
brought by Qualcomm (QCOM).