Zacks Stock Market Morning Drive for 05/25/2011
We have started seeing the word 'default' and 'Greek debt' being used in the same sentence for the first time. And this has to count as an improvement in the overall discourse on the European debt problem. The debate is hardly settled, but this is exactly what should constitute the core of the debate.
The markets are already pricing some measure of Greek default if we look at the yields on Greek government bonds. And the political elites in Europe appear to be coming around to that view as well, though the European Central Bank (ECB) is standing in the way. We also have one of the rating agencies come out this morning and claim that a Greek default will have a cascading effect on the other bailed out states (Ireland & Portugal).
Default is never painless and the Greek version wouldn't be either. But the alternative of long and painful austerity measures, not to mention forced sales of public assets, may not cut it in the end.
But why would U.S. stocks get spooked the way they did on Monday by this unfolding Greek drama? My feeling is that it is the backdrop of the 'growth debate' that makes the resumption of the European debt issue more unsettling for stocks. We will likely see some of those losses get reversed today, but the fear is far from over.
The market has been fixated lately on the near-term growth momentum of the U.S. economy following the first quarter's sub-par growth pace. A spate of recent data on the manufacturing, consumer, and housing ends of the economy has added to fears that the first quarter's modest growth momentum may have carried into the current quarter as well.
Today's new home sales numbers and Wednesday's Durable Goods report will be key data points in this ongoing debate, but are unlikely to definitively settle it one or the other. The growth debate also encompasses China, where the authorities are battling inflationary pressures through a combination of monetary tightening and administrative measures. The recent turmoil in the commodity markets reflects these China growth jitters.
Of the handful of earnings reports this morning, we had solid earnings and revenue beats from AutoZone (AZO), the nation's largest auto dealer and footwear retailer DSW (DSW). In other news, American International Group (AIG) is expected to raise about $9 billion through the sale of 300 million shares. Roughly two thirds of the sale proceeds will go to the U.S. Treasury, which is trying to unwind its massive stake in the insurer.
We should likely brace ourselves for turbulent summer months as the domestic as well as international backdrop will remain unsettling for stocks. The long-term outlook, beyond the summer months, however, remains favorable.
New Home Sales are scheduled for release today at 10:00 AM EST and are expected to remain virtually unchanged after rising by 11% in March.
Global events weighed on investor sentiment to drag US indices lower on Monday. While rising concerns about the euro-zone debt situation significantly dampened benchmarks, disappointing manufacturing data from China stepped in to further pressurize the indices amidst the lack of any domestic data.
All of the 30 components that make up the Dow Jones Industrial Average (DJIA), except one, were in the red and the index declined 1.1% to close at 12,381.26. Only McDonald's Corp. (NYSE:MCD) was able to climb up among the 30 components in the Dow, moving up 0.2%. The Standard & Poor 500 (S&P 500) shed 1.2% to finish the day at 1,317.37 and was also below its 50-day moving average since April 19. The index was also at its lowest level since April 19th. The tech-laden Nasdaq Composite Index plunged 1.6% to 2,758.90. The fear-gauge CBOE Volatility Index (VIX) gained 2.6% to settle at 17.88. On the New York Stock Exchange, Amex and Nasdaq, consolidated volumes were at 6.44 billion shares compared with last year's estimated daily average of 8.47 billion shares. On the NYSE, for every four declining stocks, only one stock managed to edge up.
The benchmarks were dragged lower as euro-zone debt worries gained strength and it is feared that debt concerns might not be restricted to Greece alone. Late on Friday, credit rating agency Fitch had lowered its sovereign debt rating on Greece by three notches to B+ from BB plus, citing the country's inability to resolve the crisis in its public finances. Earlier last week, European Union officials had suggested there were chances of a "soft restructuring" of Greek debt. With this latest development, these fears have gained strength with Greece likely having to restructure its debt and concerns over Spain and Italy adding to euro-debt woes.
Fresh concerns were likely to arise about the country's debt situation after the completion of elections in the nation. Analysts opined that after the possible defeat of the Socialists, the Popular Party might focus even more on elevated debt levels than what was expected earlier. As the elections conclude, the results indicate voters are against additional austerity measures and the Socialists have suffered a heavy defeat. Subsequently, as these fears come true, this will automatically add to lingering euro-debt worries and subsequently US markets are most likely to feel the burden.
Italy, a country which had been relatively unaffected by euro-zone debt concerns, has now joined the league of troubled economies to fuel fears and add to the pressure on markets. Standard & Poor's Ratings Services downgraded its outlook for Italy's A+ sovereign credit rating to 'negative' from 'stable' citing a potential 'political gridlock'. Gary Jenkins, head of fixed income at Evolution Securities, commented: "Any concern that Italy's large debt burden is not on a downward trajectory would be of concern not only for Italy, but for the euro area as a whole as in a worst-case scenario Italy could probably be characterized as too big to bail". Meanwhile, Italian Treasury denied any political gridlock and said it would "intensify" reforms. Led by Italian Prime Minister, Silvio Berlusconi, the government is said to have been taking revenue-raising measures and other steps to balance its budget by 2014.
Shifting the focus from Europe, the other global event that dampened the mood of domestic investors was the sharp decline in China's manufacturing index. According to a survey conducted by HSBC, the China Manufacturing Purchasing Managers' Index declined to a 10-month low of 51.1 this month, compared with 51.8 in April. US listed Chinese shares took a beating as the index tracking U.S.-traded Chinese companies shed 2.2%. Among shares, China Eastern Airlines Corp. Ltd. (NYSE:CEA), China Southern Airlines Co. Ltd. (NYSE:ZNH), China Mobile Limited (NYSE:CHL), Guangshen Railway Co. Ltd. (NYSE:GSH), Sinopec Shanghai Petrochemical Co. Ltd. (NYSE:SHI), Yanzhou Coal Mining Co. Ltd. (NYSE:YZC) dipped 2.0%, 2.0%, 1.9%, 0.7%, 1.5% and 4.0%, respectively.
Crude oil prices declined once again as light, sweet crude futures for June delivery dropped $2.40 to close at $97.77 per barrel on the New York Mercantile Exchange. Among energy shares, Chevron Corp. (NYSE:CVX), Exxon Mobil Corporation (NYSE:XOM), ConocoPhillips (NYSE:COP), Marathon Oil Corporation (NYSE:MRO) and Transocean Ltd. (NYSE:RIG) dropped 1.2%, 1.1%, 1.8%, 1.4% and 3.3%, respectively.
- After a security researcher reported that social networking site LINKEDIN CORP (NYSE:LNKD) has serious security serious flaws which makes its user accounts susceptible to hackers, share prices of the social networking site dropped 5.15% to close at $88.30
- Shares of Sony (NYSE:SNE) slid 1.7% to $26.59 after the electronics maker reported it would incur a loss of 260 billion yen ($3.19 billion) because of the impact of the tsunami and earthquake which had hit Japan on March 11
- Analysts at Goldman Sachs (NYSE:GS) downgraded Buckle Inc (NYSE:BKE) to a "Sell" rating from a "Neutral" rating with a target price of $35.00
- Shares of DemandTec, Inc. (NASDAQ:DMAN) were downgraded by analysts of JMP Securities to a "Market perform" rating from an "Outperform" rating
- Citing the move as a valuation call, analysts of Bank of America Merrill Lynch downgraded shares of Consolidated Edison, Inc. (NYSE:ED) to an "Underperform" rating from a "Neutral" rating.
- Analysts at Goldman Sachs (NYSE:GS) downgraded ON Semiconductor Corp.(NASDAQ:ONNN) to a "Neutral" rating from a "Buy" rating with a target price of $12.00
- Analysts at Jefferies downgraded PG&E Corporation (NYSE:PCG) to a "Hold" rating from a "Buy" rating with a target price of $48.50
- Shares of PAREXEL International Corporation (NASDAQ:PRXL) were downgraded by Goldman Sachs (NYSE:GS) to a "Sell" rating from a "Neutral" rating with a target price of $20.00
- Shares of UIL Holdings Corporation (NYSE:UIL) were downgraded by Bank of America Merrill Lynch to an "Underperform" rating from a "Neutral" rating with a target price of $33.00
