US & World Daily Markets Financial Briefing 03-09-2010

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Upside From Jobs Data Eases As Service Sector Reading Disappoints

Stocks are posting notable gains in mid-morning trading on Friday but have come off of their highs, as a disappointing report on service sector activity has cooled some of the initial upside from better than expected August jobs data.

The major averages have pulled back well off their best levels but currently remain firmly positive. The Dow is up 65.09 points or 0.6 percent at 10,385.19, the Nasdaq is up 17.27 points or 0.8 percent at 2,217.28 and the S&P 500 is up 7.67 points or 0.7 percent at 1,097.77.

While activity in the service sector expanded for the eighth consecutive month in August, a report from the Institute for Supply Management showed that the pace of growth in the sector slowed by much more than economists had been anticipating.

The ISM's non-manufacturing index fell to 51.5 in August from 54.3 in July, although a reading above 50 indicates continued growth in the service sector. Economists had expected the index to show a more modest decrease to a reading of 53.0.

Earlier, the Labor Department reported that non-farm payroll employment fell by 54,000 jobs in August, matching the revised decrease seen in July. Economists had expected employment to fall by about 120,000 jobs compared to the loss of 131,000 jobs originally reported for the previous month.

While employment fell by less than expected, the unemployment rate still edged up to 9.6 percent in August from 9.5 percent in July. The modest increase came in line with economist estimates.

"Double dip fears will dissipate on the back of this result, though we suspect that the U.S. labor market is not out of the woods yet," said Rob Carnell, chief international economist at ING. "Employment growth is still insufficient to stabilize the unemployment rate."

He added, "We also suspect that employment growth will struggle to attain the 140K+ employment growth it will need in order to prevent unemployment from going up. The Fed will eventually have to act again. Just not for a while yet."

In corporate news, video game maker Take-Two Interactive (TTWO) reported a third quarter profit while analysts expected a loss, with the results reflecting the strong performance of Red Dead Redemption, which was launched in May of this year. Revenues also firmly beat estimates and the company raised its guidance for the fourth quarter and fiscal year 2010.

Tax preparation company H&R Block (HRB) reported a narrower than expected loss for its first quarter on revenues that topped expectations by nearly $10 million.

Sector News

Electronic storage stocks are among the day's strongest percentage gainers in mid-morning trading, with the NYSE Arca Disk Drive Index up by 1.4 percent. The index is extending a recent upward move from last week's one-year closing low.

Railroad stocks are also posting sizable gains, driving the Dow Jones Railroads Index up by 1.4 percent. The upward move has lifted the index to its best intraday level in two months.

Health insurance, brokerage and banking stocks are also markedly higher, while weakness is visible among gold stocks amid the day's risk appetite. The NYSE Arca Gold Bugs Index is down by 1.6 percent as the price of gold is down by $10.80 to $1,242.60 an ounce.

Stocks Driven By Analyst Comments

K-Sea Transportation (KSP) is also on the upside after Stifel Nicolaus upgraded shares from Sell to Hold. The stock is up by 8.1 percent, moving further off of Wednesday's nearly two-month closing low.

Apparel store The Buckle (BKE) is also gaining ground after KeyBanc Capital Markets raised its rating on the stock from Underweight to Hold. Shares are currently up by 3.4 percent, setting a one-month intraday high.

Other Markets

Overseas, stock markets in the Asia-Pacific region ended mostly higher to close out the week. Japan's benchmark Nikkei 225 Index gained 0.6 percent, while Hong Kong's Hang Seng Index moved up by 0.5 percent.

Meanwhile, the major European markets are rallying. The U.K.'s FTSE 100 Index, The French CAC 40 Index and the German DAX Index are all up by roughly 1.2 percent.

In the bond markets, treasuries are notably lower but well off of their worst levels. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is trading at 2.706 percent, posting a gain of 7.8 basis points.

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TSX Looks To Open Higher After US Jobs Report Generates Optimism

Toronto stocks are poised to open higher Friday following better-than-expected jobs data from the U.S., Canada's largest trading partner. Also, recovery in energy prices and encouraging cues from the global equity markets may help lift trader sentiment.

However, gold stocks may surrender some recent gains amid falling bullion prices. The price of gold dipped after jobs data eased worries over a double-dip depression. Gold for December was down $12.20 to $1,241.20 an ounce, after advancing to as much as $1,255 in early dealings.

On Thursday, the S&P/TSX Composite Index added 107.31 points or 0.89% to 12,111.09, gaining for a seventh session. The price of crude oil recovered its early morning losses, after the U.S. jobs data. Crude for October was adding $0.17 to $75.19 a barrel, recovering from an intra-day low of $74.25.

In corporate news from Canada, gold mining company Goldcorp said it would acquire Australian miner Andean Resources for C$3.6 million. Andean's shareholders will be getting 0.14 common shares of Goldcorp or a cash payment in the amount of C$6.50 for each shares held. The offer offer beats an earlier C$6.36 per share bid by the Canadian miner Eldorado Gold.

Oil and gas explorer Pacific Rubiales Energy said it had entered into an agreement with South American subsidiary of Petrodorado Energy for the earn-in of an additional participating interest in the Buganviles block in Colombia.

Financial services provider Pacific & Western Credit reported a narrower third quarter net loss of C$2.53 million or C$0.18 per share, compared to C$2.97 million or C$0.22 per share in the year-ago quarter.

Space science products maker COM DEV International slipped into the red, reporting third quarter net loss of C$1.7 million or C$0.02 per share, compared with a net income of C$5.2 million or C$0.07 per share in the same quarter last year.

Interactive entertainment accessory company Mad Catz Interactive said its CFO Stewart Halpern has resigned to pursue other interests and will act in a transition role through September 30, 2010.

In economic news from south of the border, the U.S. Labor Department said that non-farm payroll employment fell by 54,000 jobs in August, matching the revised decrease in jobs seen in July. Economists were expecting employment to fall by about 100,000 jobs compared to the loss of 131,000 jobs originally reported for the previous month. Meanwhile, the unemployment rate edged up to 9.6% in August from 9.5% in July, as widely expected. Private sector created 67,000 jobs last month, much higher than around 40,000 jobs economists were expecting.

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Indian Market Ends Flat Before Payrolls Report

The Indian market ended a volatile session modestly lower on Friday, weighed by a government report that showed a modest rise in food inflation for the week ended August 21. Underlying sentiment remained extremely cautious as the U.S. government's monthly employment report loomed.

After trading choppily in a restricted range, the 30-share Sensex finally ended down 17 points or 0.09% at 18,221, while the broader Nifty eased 7 points or 0.12%. However, stock-specific buying especially in small caps and midcaps continued. In the broader market, gaining shares outnumbered declining ones by 1661 to 1246 shares.

Metal stocks pared initial gains to end considerably lower. Jindal Steel lost 2.10%, Sesa Goa eased 1.81%, Hindalco declined 1.47%, Sterlite gave off 1.28% and Tata Steel ended down 0.64%. Oil/gas stocks also witnessed significant selling pressure, led by heavyweight Reliance Industries that closed 1.23% lower.

Auto stocks like Mahindra & Mahindra, Ashok Leyland and Bajaj Auto rose between 0.6% and 3.2% after reporting strong sales numbers for August. Hero Honda Motors added 2.14%, reversing its recent losses.

In the telecom sector, Bharti Airtel, which appointed its founder's son as a manger at an overseas unit, gained 1.60% and Reliance Communication added 0.43%, while Idea Cellular slipped 0.21%.

Auto component maker Kinetic Engineering, which is ramping up production capacity at its Ahmednagar unit, rallied 4.45%. Wind turbine manufacturer Suzlon Energy fell 2.63% after Reliance Industries denied media reports that it may buy a stake in the company.

High-beta realty stocks, which underperformed the broader market in recent sessions, bounced back sharply. Orbit Corp, DB Realty, Sobha Developers, HDIL and Unitech rose by 2%-3%.

Retailers such as Pantaloon Retail and Shopper's Stop rose over a percent after commerce and industry minister Anand Sharma backed foreign direct investment in multi-brand retail sector. Trent climbed 5.50% after Reliance Capital Asset Management bought a 8.68% stake in the company.

Adani Power edged up 0.49% after a 3% loss in the previous session on an unfavorable ruling by Gujarat electricity regulator. Lupin advanced 1.48% after it reportedly received US FDA permission to seek nod for a generic version of Pfizer's cholesterol drug Lipitor.

Shipping stocks rose, mirroring gains in the Baltic dry index. Essar Shipping gained 0.64%, Mercator Lines firmed up by a percent and Varun Shipping rose nearly 2%.

Elsewhere, most Asian stock markets advanced on Thursday, as yet another positive finish on Wall Street overnight on the back of upbeat data on pending home sales, weekly jobless claims and fairly robust August retail sales bolstered investor appetite for riskier assets.

However, China's Shanghai Composite average closed flat with a negative bias, with financials and property developers leading the losses, amid concerns about banks' bad loans and speculation over the government introducing more tightening measures to curb property prices. The European markets were cautiously optimistic, while the U.S. index futures fluctuated.

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The major European markets are trading with modest gains on Friday, with the French CAC 40 Index and the German DAX Index rising 1.78% and 1.46%, respectively, while the U.K.’s FTSE 100 Index is gaining 1.36%.

Markit Economics’ service sector survey showed that Germany’s service sector expanded at a downwardly revised rate, with the business activity index coming in at 57.2 for August compared to the 58.5 estimated initially. In July, the index was at 56.5. However, the service sector purchasing managers' index for the euro zone rose to a seasonally adjusted 55.9 from 55.8 in July and was also higher than the preliminary reading of 55.6.

Meanwhile, the service purchasing managers’ index for France fell to a 4-month low of 60.4 in August from 61.1 in July, but it was upwardly revised from the preliminary estimate of 59.9.

U.S. Economic Reports

Employment in the month of August fell by much less than economists had been expecting, according to a report released by the Labor Department, with the report also showing a much smaller than previously reported drop in employment in July.

The report showed that non-farm payroll employment fell by 54,000 jobs in August, matching the revised decrease in jobs seen in July. Economists had expected employment to fall by about 120,000 jobs compared to the loss of 131,000 jobs originally reported for the previous month.

While employment fell by less than expected, the unemployment rate still edged up to 9.6% in August from 9.5% in July. The modest increase came in line with economist estimates.

Atlanta Federal Reserve Bank President Dennis Lockhart is due to speak about the regional and national economies at East Tennessee State University at 10 AM ET.

The Institute for Supply Management is scheduled to release the results of its non-manufacturing survey at 10 AM. The non-manufacturing index is likely to show a reading of 53.0 for August.

The non-manufacturing index rose to 54.3 in July from 53.8 in June. Economists had expected a slight dip to 53. While the new orders index rose 2.3 points to 56.7, the business activity index edged down 0.7 points to 57.4 and the backlog of orders index declined by 3.5 points to 52. The employment index rose back up above the 50 level to 50.9. Out of the 18 industries surveyed, 13 reported growth and 4 reported contraction.

Stocks in Focus

Alaska Air Group (ALK) is likely to be in focus after it reported that its load factor rose 2.2 points year-over-year in August to 86.5%. Traffic increased 10% and capacity rose 7.1%. Bigger peer U.S. Airways Group (LCC) said its mainline load factor edged down 0.5% year-over-year to 85.2%.

Hewlett-Packard (HPQ) may see some activity after it has said it sealed the deal to buy 3PAR (PAR). HP sweetened its offer to buy 3PAR to $33 per share, trumping the $32 per share revised offer from rival Dell (DELL) and executed a definitive agreement. HP also said it expects the deal to close by the end of the calendar year. Earlier Dell said it would not revise its $32 per share bid and has entered into negotiations to receive the $72 million break-up fee it is entitled to based on its negotiated agreement with 3PAR.

Nabors (NBR) may see some buying interest after it announced that it has received commitments for an unsecured revolving credit facility with an aggregate principal amount of up to $700 million and an accordion feature that provides for an increase in the principal amount up to $850 million. The term of the credit facility is expected be four years.

H&R Block (HRB) gained ground in Thursday’s after hours session after it reported that its first quarter net loss from continuing operations narrowed to 36 cents per share from 39 cents per share last year. On an adjusted basis, the company’s net loss from continuing operations was 40 cents per share. Revenues were slightly lower at $274.47 million. Analysts estimated a loss of 41 cents per share on revenues of $265.12 million.

Take-Two Interactive (TTWO) also rallied sharply in Thursday’s after hours session after it reported third quarter non-GAAP net income of 28 cents per share compared to a net loss of 68 cents per share last year. Net revenue rose to $354.1 million from $94.9 million in the year-ago period. Analysts estimated a loss of 9 cents per share on revenues of $294.67 million. The company attributed the better than expected results to the strong performance of Red Dead Redemption, which was launched in May this year, and better showing of its other catalogs as well.

The company also raised its guidance for the fourth quarter and the fiscal year 2010. The company now expects non-GAAP earnings of 20-30 cents per share for the fourth quarter on revenues of $270 million to $320 million and non-GAAP earnings of 60-70 cents per share for the full year on revenues of $1.05 billion to $1.1 billion.

Esterline Corp. (ESL) may also be in focus after it reported that its third quarter earnings from continuing operations rose to $1.30 per share from $1.09 per share last year, exceeding the consensus estimate of $1.19 per share. Net sales rose to $383.49 million from the year-ago’s $361.49 million, shy of the mean analysts’ estimate of $385.19 million. Citing an improving outlook, the company raised its full year earnings per share guidance to $3.85-$3.95 from its earlier estimate of $3.45-$3.65, while analysts estimate earnings of $3.58 per share.

Goldcorp. (GG) is likely to move in reaction to its announcement that it will acquire all outstanding share of Andean Resources by way of a scheme of arrangement for a total consideration of C$3.6 billion.

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Euro Rebounds After Mildly Encouraging US Jobs Report

The euro rallied on increased risk appetite Friday, after an encouraging US jobs report raised hopes the world's largest economy is on a sustainable path toward recovery.

Talk of a double-dip recession in Europe and the US has recently made the safe haven yen the most attractive currency option.

However, a reversal of sentiment could mean a rapid strengthening of the euro, which slipped to multi-year lows against the dollar and yen this summer.

The euro edged to a fresh 2-week high of $1.2870 versus the dollar, but failed to sustain its initial gains after the jobs report. Approaching the opening bell on Wall Street, the euro was back to 1.2840, near its overnight levels.

The big move to the upside was seen against the yen. The euro surged to Y109.50, away from a recent 9-year low of Y105.41.

The euro wobbled versus the sterling, bouncing back and forth near 0.8320.

The closely-watched report from the Labor Department said that US non-farm payroll employment fell by 54,000 jobs in August, matching the revised decrease in jobs seen in July. Economists had expected employment to fall by about 120,000 jobs compared to the loss of 131,000 jobs originally reported for the previous month.

Surprisingly, private sector employment increased for the eight consecutive month, rising by 67,000 jobs.

In economic news from across the Atlantic, Eurozone retail sales volume increased in July for the third straight month, largely led by sales of food.

July's modest 0.1 percent increase in Eurozone retail sales raises hopes that Eurozone's export-led recovery is gradually becoming more broad-based, commented Martin van Vliet, an economist at ING Bank NV.

Eurozone private sector continued its expansion with services activity picking up to a three-month high in August. France and Germany led the strong performance, while some others struggled to sustain recovery.

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