U.S. Morning Call for Friday, July 25, 2008

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• The European DJ Stoxx 50 this morning is trading -0.82%. Asia-Pacific stocks today closed sharply lower across the board: Japan -1.97%, Hong Kong -1.50%, China -1.28%, Taiwan -1.82%, Australia -3.37%, Singapore -1.85%, South Korea -1.95%, Bombay -3.40%. European and Asian stocks were led lower today by the financial sector after the plunge yesterday in US banks, which was based on the weak home sales data and expectations that the US housing crisis will drag on into 2009 and perhaps beyond. National Australia Bank plunged 13% today after announcing an $800 million write-down reserve to cover mortgage securities losses. Munich Re plunged 12% today after the reinsurer warned of "substantial" write-downs on its stock holdings and reduced its 2008 earnings guidance. UBS today fell 7.5% after yesterday's news that the Swiss bank was sued by NY Attorney General Andrew Cuomo over marketing of auction-rate securities. Many investors are now trapped in auction-rate securities after the market collapsed when brokerage firms refused to continue to support the auctions.
• Durable goods orders Today’s June durable goods orders report is expected to show a decline of 0.3% and a 0.2% decline excluding transportation. That would follow May’s report of unchanged m/m and 0.8% ex-transportation. While US consumer spending has picked up in the past several months due to the federal stimulus checks, businesses are well aware that the spending boost will be temporary. Businesses are certainly in no hurry to start ordering new capital equipment to expand production and in fact are cutting back on their labor forces. Thus, orders into the manufacturing sector are likely to remain generally weak through year-end. Yet, the US manufacturing sector is in dire need of some new orders as it struggles to keep its head above water. Next Friday’s July ISM manufacturing index is expected to fall 1.0 to 49.2, falling back below the expansion-contraction level of 50 after a 1-month excursion above 50. The ISM manufacturing index was below 50 from February through May and not looks set to return to the below-50 level.
• US consumer confidence Today’s final-July U.S. consumer confidence index from the University of Michigan is expected to show a 0.2 point decline to 56.4, reversing the early-July increase of +0.2 to 56.6 and leaving the index unchanged from June’s level of 56.4. The June level of 56.4 was a 28-year low and was only moderately above the record low of 51.7 posted in 1980. US consumer confidence has dropped like a rock this year due to the housing crisis, high gasoline prices, and the fading US economy and labor market.
• New home sales Today’s June new home sales report is expected to show a 1.8% decline to 503,000, adding to the 2.5% decline seen in May to 512,000. The series is just above the 17-year low of 501,000 posted in March. New home sales continue to be severely depressed by (1) concern that home prices might continue to fall, (2) poor consumer confidence, and (3) the much tighter restrictions on mortgages. Yesterday’s June existing home sales report of 2.6% to a 10-year low of 4.86 million units was weaker than market expectations for a 1.0% decline to 4.94 million units, boding poorly for today’s new home sales report.

Overnight U.S. Stock News

• September S&Ps this morning are trading slightly higher by +0.50 points as the market consolidates following yesterday's sharp losses. The US stock market yesterday sold off sharply (S&P 500 -2.43%, S&P 500 -2.31%, Nasdaq Composite -1.97%).
• Bearish factors yesterday included (1) yesterday's 10-year low in June existing home sales which caused fresh concern about the US housing crisis and caused a record 12% drop in the S&P homebuilders index, (2) a 6.7% plunge in the S&P 500 Financials sub-index, which was the largest decline in 8 years, as concern grew that the US housing crisis will drag on and cause more bank losses, and (3) a 15% plunge in Ford which reported a loss ex-items of $1.4 billion. The only bullish factor yesterday was the sharp rally in T-notes, but that only occurred because of weakness in stocks.
• Western Digital (WDC) is down 10% in European trading this morning after the hard-drive manufacturer issued Q3 EPS guidance of 81-89 cents, below the analyst consensus of 98 cents.
• Juniper Networks (JUN) is up 9% in European trading this morning after the networking equipment manufacturer reported stronger-than-expected earnings and raised its 2008 guidance due to strong spending by telecom companies.
• Crocs (CROX) plunged 44% after the company reduced its 2008 sales and earnings guidance due to consumer spending cutbacks.
• Interactive Brokers (IBKR) fell 15% after the brokerage firm reported smaller-than-expected Q2 earnings

Today's U.S. Market Focus

• September 10-year T-notes this morning are trading +6.5 ticks on continued upside momentum from yesterday and on from sharply lower stocks overaseas. Sep T-note prices yesterday rallied sharply and closed up more than 1 full point. Bullish factors included (1) the -2.6% drop in June existing home sales to a new 10-year low of 4.86 mln units, which suggested that the US housing crisis will drag on, (2) the sharp rise in initial unemployment claims by +34,000 to 406,000, and (3) the sharp sell-off in stocks.
• The dollar this morning is trading lower with the dollar/yen down -0.14 cents and the euro/dollar up +0.68 cents. The euro was supported by today's comment from ECB Council member Klaus Liebscher that the ECB still has room to raise interest rates. He said he wasn't surprised by weak economic data and said "We expected a weak second and maybe third quarter." The dollar index yesterday extended this week's rally and closed moderately higher after posting a 3-week high. The dollar continued higher despite the sharp sell-off in the US stock market mainly because of the weak German Ifo June business confidence index, which fell -3.7 points to a 3-year low of 97.5, the largest drop since the Sep 11 terrorist attacks.
• Sep crude oil prices this morning are trading +71 cents and Sep gasoline is up +1.57 cents. The market today is seeing some continued upside momentum from short-covering ahead of the weekend. Sep crude oil prices yesterday posted a 1-1/2 month low, but then recovered to close +$1.05 on the day. Oil prices yesterday rallied mainly on short-covering after the steep sell-off seen in the past two weeks. In addition, Israel's top military commander, visting Washington, told Vice President Cheney and Pentagon officials that Iran faces "all options" on its nuclear program. He said "there is no doubt diplomacy must be given priority," but he also said that "We all realize, both the Americans and us, that all options must be prepared."

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): TROW-T Rowe Price (BEST earnings consensus $0.60 per share), ITT-ITT Corp (1.11), FO-Fortune Brands (1.22), MLNM-Millennium Pharm (0.05), ACI-Arch Coal (0.63), RSG-Republic Services (0.46), LM-Legg Mason (0.20), CCO-Clear Channel (0.19), CVH-Coventry Health (0.55)

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