MarketView for February 3

MarketView for Tuesday, February 3
 

 

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Tuesday, February 3, 2009

 

 

 

Dow Jones Industrial Average

8,078.36

p

+141.53

+1.78%

Dow Jones Transportation Average

3,024.61

p

+115.94

+3.99%

Dow Jones Utilities Average

376.41

p

+4.28

+1.15%

NASDAQ Composite

1,516.30

p

+21.87

+1.46%

S&P 500

838.51

p

+13.07

+1.58%

 

 

 

Summary

 

It seems that Wall Street likes to alternate up days and down days, with Tuesday being a definite up day. A surprise rise in December pending home sales helped momentum, while a solid profit from Merck offered up some welcome news in an otherwise gloomy earnings season.

 

However, bank shares fell due to uncertainty about the Obama administration's plans to shore up the beleaguered financial sector. JPMorgan, down 4.6 percent at $24.05, was the top drag on the Dow, followed by American Express, down 5.2 percent to $16.09.

 

Bank of America closed lower for the fourth consecutive day, ending the day down 11.8 percent at $5.30. The Obama administration is due to make an announcement about its bank plan next week.

 

Merck ended the day up more than 6 percent, making health-care stocks one of the best sectors on Tuesday within   both the Dow Jones industrial average and the S&P 500 indexes. Schering-Plough also posted quarterly results ahead of Wall Street targets, sending its stock up more than 8 percent.

 

Technology chalked up a solid advance for the second straight day as shares of such bellwethers as Microsoft rallied on hopes that government stimulus plans will boost consumer and business spending, offsetting a disappointing outlook from SanDisk. Shares of SanDisk fell 23.2 percent to $8.66, a day after it gave a disappointing outlook and said it may undertake an equity offering that could dilute shares as much as 20 percent.

 

Microsoft ended the day up 3.8 percent to close at $18.50, was the top performer among the stocks making up the NASDAQ, and the shares turning in their strongest two-day run-up in nearly two months. IBM led the Dow, finishing up 2.8 percent at $93.48.

 

Merck shares finished up 6.4 percent at $30.24, while Schering-Plough climbed 8.2 percent to $18.91. Drug companies are a defensive play as their business is considered better able to withstand a downbeat economy.

 

Pending sales of existing homes rose 6.3 percent in December, sending the shares Toll Brothers up 6.4 percent to $18.06, while D.R. Horton ended the day up 21.4 percent at $7.42 after the home builder posted a smaller-than-expected quarterly loss.

 

Option Traders Turning Bullish on Financial Sector

 

Option players are turning bullish on the financial sector on the idea that President Obama’s administration will soon offer up a plan as to how it will stabilize the banking sector. As a result, there has been activity tied to the Financial Select Sector SPDR XLF.P has been building up recently in the popular exchange-traded fund that tracks all the financial-related companies from the Standard & Poor's 500 index .SPX.

 

Specifically there has been buying activity in the ETF's upside call options. Much of that volume included spreads in which downside put options were sold to pay for new call positions. The interest in call options, which give buying rights to the fund's shares, persisted on Tuesday as the ETF's stock dropped 2.44 percent to $9.01 in late afternoon trading, after hitting a session low of $8.87.

 

On Tuesday, there was buying activity on February $10 calls and sales of February $11 calls and $8 puts in huge size, a bullish bet on the financial sector. There was large buying interest in the February $10 XLF calls, giving the right to buy the ETF at $10 a share by February option expiration.

 

One trader is said to have bought the June $9/$11 call spread while selling June $6 puts, a bullish bet that the XLF will move beyond $11 by June expiration, while the June $6 puts expire worthless. The implied volatility, a measure of the market's estimate of future stock moves, has also been moving higher.

 

A Rise in Pending Home Sales

 

Pending home sales rebounded in December, as buyers took advantage of lower prices and lower mortgage interest rates. The National Association of Realtors pending home sales index, based on contracts signed in December, rose 6.3 percent to 87.7. It was the first increase since August. Compared with the same period a year-ago, pending homes sale were up 2.1 percent in December.

 

Data from the housing market, which is at the center of the worst financial and economic crisis in decades, has sent conflicting signals in recent days. Last week, the NAR reported an unexpected rise in existing home sales in December, driven mainly by distressed sales, with prices falling from a year earlier by the biggest margin in over 40 years.

 

The NAR's housing affordability index rose 10.9 percent in December to 158.8, the highest since it began tracking records in 1970. The index rose on falling home prices and low mortgage rates. However, government data released last Thursday showed sales of new single-family homes fell in December by the largest margin since 1994.

 

Stability in the housing market is critical to economic recovery. Falling house prices, coupled with the stock market collapse and tight access to credit, have hit consumer spending, which accounts for about two thirds of U.S. economic activity.

 

Lower Earnings Sends Disney Downward

 

Disney reported lower-than-expected quarterly earnings on Tuesday as global economic woes weighed on TV advertising, DVD sales and theme parks attendance, pushing its shares 9 percent lower. At the same time, weakness at Disney's retail and licensing businesses also hurt overall performance, while its movie business had difficult comparisons with last year's strong holiday DVD sales of "Pirates of the Caribbean: At World's End" and "Ratatouille."

 

Fiscal first-quarter net earnings were down 32 percent to $845 million, or 45 cents per share, from $1.25 billion, or 63 cents per share, in last year's first quarter. If you exclude gains from the sale of investments in Latin American pay-TV services, earnings fell to 41 cents per share. Revenue fell 8 percent to $9.6 billion, from $10.45 billion a year earlier.

 

Operating income at Disney's theme parks fell 24 percent to $382 million in the quarter, buffeted by slowing domestic consumer spending and a stronger dollar. Revenue at the parks fell 4 percent to $2.67 billion, despite deep discounts for park stays and tickets instituted last fall.

 

At media networks, operating profit fell 29 percent to $655 million and revenue slid 5 percent to $3.9 billion on lower ratings for ABC programing and weaker ad sales at ESPN.

 

The company said last month that it was cutting hundreds of jobs at its theme parks, ABC Media Group and ESPN, and consolidating ABC's production and network businesses.

 

DVD sales for Disney Studios' "Wall-E" and "Prince Caspian" were no match for last year's titles, bringing the unit's operating profit down 64 percent to $187 million, and revenue down 26 percent to $1.95 billion in the quarter. The Consumer Products division saw its operating profit fall 8 percent to $265 million, but revenue rose 18 percent to $773 million for the quarter.

 

Disney shares fell more than 9 percent to $18.70 in after-hours electronic trade, after closing at $20.62 in regular trading.

 

Auto Sales Collapse to 27 Year Low

 

General Motors' domestic vehicle sales fell 49 percent in January while Ford's sales dropped 40 percent, starting 2009 at an abysmal pace for the whole auto industry as lower sales to fleet buyers like rental car companies weighed down the results. Toyota's sales dropped 32 percent for the month, and Honda's sales fell 28 percent, putting the overall industry on track for its fourth straight month in which domestic sales were down 30 percent or more.

 

For January, auto sales fell to near an annualized low water mark of 9.8 million units, including heavy work trucks, GM estimated. That would put our domestic market below China's in sales volume for the first time on a monthly basis. In January, GM sold 128,198 light vehicles, while Ford's sales 93,060 units. Toyota sold 117,287 cars and trucks.

 

On a full-year basis, sales for 2009 are expected to drop to near 10.5 million vehicles, the lowest level since 1982. But even that understates the depth of the downturn since our. population has increased about a third since.

 

Ford's belief that it can survive the downturn on its own hinges on its view that the market will improve in the second half as an expected fiscal stimulus package takes hold and consumer confidence recovers.

 

Ford said there were some encouraging signs in January sales results: showroom sales appear to have stabilized even though sales to rental agencies were down sharply. Also, used car prices have stopped falling.

 

Although the domestic auto industry is entering its fourth year of declining sales, the deepening slowdown hit European and Asian markets hard in the final months of 2008. New car sales in Germany, Western Europe's largest auto market, contracted in January at double-digit rates as German consumers tightened their belts in anticipation of the worst recession since World War II

 

In Asia, Japan's biggest auto parts maker Denso Corp forecast its first-ever annual loss and said it would halve spending on facilities in a bid to return to profit. Toyota, which is due to report third-quarter results on Friday, is expected to miss its target because of falling demand.