U.S. Morning Call for Monday, June 23, 2008

Overnight Global News

* The European stock market is trading mildly higher this morning with the European DJ Stoxx 50 up +0.55%. However, European automakers and airlines are trading generally lower this morning on higher oil prices. Daimler and Renault are each down -1.6% this morning. British Airways is down -1.3%. HBOS is down -3.1% this morning as the market continues to worry about the prospects for the UK's largest mortgage lender. Asia-Pacific stocks today closed moderately lower across the board: Japan -0.61%, Hong Kong -0.13%, China -2.10%, Taiwan -0.33%, Australia -0.09%, Singapore -0.75%, South Korea -0.93%, Bombay -1.91%.

* German June business confidence fell -2.2 points to a 2-1/2 year low low of 101.3 due to record oil prices and rising European interest rates.

* The markets this week will focus on (1) crude oil prices following weekend events which included a Nigerian rebel attack on a Chevron pipeline and the producer-consumer meeting in Saudi Arabia on Sunday (crude oil prices last week closed at $135.36, just below the recent record high of $138.80), (2) the banking crisis and any fresh news of write-downs or downgrades, and (3) anticipation of this week's FOMC meeting, which is expected to produce an unchanged funds rate target of 2.00%.

* On the US economic calendar, Tuesday brings the April S&P/CaseSchiller home price index (expected 16.0% y/y vs 14.4% in March), June US consumer confidence (expected 0.5 to 56.7), the June Richmond Fed manufacturing index (expected 3 to -6), the April house price index (expected 0.5%), the $30 billion 2-year T-note auction, and the beginning of the 2-day FOMC meeting. Wednesday brings May durable goods orders (expected unchanged overall and �0.9% ex-transportation), May new home sales (expected �2.7%), and the outcome of the 2-day FOMC meeting. Thursday brings weekly initial unemployment claims (expected 6,000), the final revision of Q1 GDP (expected +1.0% vs +0.9%), May existing home sales (expected +1.2%), and the $20 billion 5-year T-note auction. Friday brings May personal income (expected +0.4%) and spending (expected +0.6%), May core PCE deflator (expected unch from April at +2.1% y/y), and the final-June US consumer confidence index (expected +0.1 to 56.8).

* Fed policy? The market last week substantially curbed expectations for Fed tightening next year by about 30 bp. High crude oil prices and continued banking problems caused market participants to be less worried that the Fed will tighten quickly in response to the alarming inflation picture. The market is discounting a slight 10% chance of a 25 bp rate hike to 2.25% at the FOMC's meeting this week on Tuesday and Wednesday. The market is fully expecting that 25 bp rate hike by the September 16 FOMC meeting. The market is fully discounting a 50 bp rate hike to 2.50% by December 2008, a 75 bp rate hike to 2.75% by February 2009, a 100 bp rate hike to 3.00% by May 2009, a 125 bp rate hike to 3.25% by July 2009, and a 150 bp rate hike to 3.50% by September 2009.

Overnight U.S. Stock News

* June S&Ps this morning are trading +5.50 points on some short-covering after last week's sell-off. The US stock market last Friday sold off throughout the day and closed sharply lower (Dow -1.83%, S&P 500 -1.85%, Nasdaq Composite -2.27%). The S&P 500 fell -3.1% for the week.

* Bearish factors for stock prices last Friday included (1) the sell-off in the US automakers as GM fell -8.1% to its lowest price since 1982 and Ford slid -8.1% after Standard & Poor's placed both automakers credit ratings along with Chrysler's on CreditWatch with negative implications citing "financial damage" resulting from soaring fuel prices, (2) the -9.7% plunge in SanDisk which dragged down the tech sector after a Citigroup analyst lowered the company's rating to "hold" from "buy," citing slowing demand in Asia and Europe, (3) the -4.8% drop in Fannie Mae and -7.7% decline in Freddie Mac after Lehman Brothers said the two biggest US mortgage companies will continue to lose money as the housing market deteriorates, (4) the -4.3% loss in Citigroup after UBS said the biggest US bank will post more writedowns from subprime-infected investments and cut its Q2 earnings estimate for Citigroup to a loss of 40 cents from a previous prediction of a 37 cent profit, and (5) the sell-off in regional bank stocks after Merrill Lynch cut their EPS estimates for "large cap regional" US banks by 22% for 2008 and 19% for 2009 saying bank stocks now appear to be in "capitulation" mode.

* Bullish factors for stock prices last Friday included (1) +30% surge in Huntington Bancshares as the Ohio-based regional bank, which had already lost 60% of its market value this year, said Q2 uncollectible loans will be within its forecast, and (2) the +8.4% gain in Western Union as the world's largest money-transfer business raised its long-term profit forecast saying earnings per share will rise as much as 18% in the next three to five years and also authorized an additional $1 billion stock buyback.

* Corn Products is up +12% this morning on news of a buyout offer from Bunge for $4.2 billion in stock.

* US Steel is trading +1.1% in European trading this morning after Goldman Sachs put the stock on its "conviction buy" list.

* ConocoPhillips (COP) is up +0.4% and Exxon Mobil (XOM) is up +0.5% in European trading this morning on higher oil prices.

* MBIA (MBI) fell 4% in after-hours trading last Friday said it will probably have to make $7.4 billion in payments because of the 5-level downgrade by Moody's. MBIA said it has $15.2 billion in assets available to make these payments.

Today's U.S. Market Focus

* September 10-year T-notes this morning are trading -6 ticks due to the higher trade in S&Ps. September T-notes last Friday traded higher throughout the day and closed up +20 ticks. Bullish factors for T-note prices last Friday include (1) the action by Moody's Investors Service to cut the credit ratings on the two largest bond insurers, MBIA and Ambac, raising concern that credit market losses will continue, (2) flight-to-safety as the S&P 500 fell to a 2-1/2 month low after Merrill Lynch said regional bank stocks are in "capitulation mode" and after Lehman Brothers forecasted that Fannie Mae and Freddie Mac, the two largest US home financiers, may lose more money in Q2 as the housing market continues to deteriorate, and (3) geo-political concerns after a NYT article reported an Israeli military exercise earlier this month could have been a rehearsal for an attack on Iran's nuclear facilities.

* The dollar is trading lower this morning with the dollar/yen up +0.38 yen and the euro/dollar down -0.85 cents. The dollar index last Friday moved lower and closed at a 1-1/2 week low. Bearish factors for the dollar last Friday included (1) the larger-than-expected jump in May German producer prices, which sent the euro to a 1-1/2 week high, and (2) continued US financial concerns after Lehman Brothers said losses at the two largest US mortgage finance companies, Fannie Mae and Freddie Mac, may increase as the housing market continues to deteriorate, which would put a question mark on the Fed's ability to raise interest rates. Bullish factors for the dollar last Friday included (1) Insee's forecast for +1.6% growth rate for France this year, the slowest pace in five years as rising prices slow consumer spending and the housing market slumps, and (2) the IMF's statement that the US economic slump has been shallower than expected and that the Fed may have to raise interest rates "quickly" to contain inflation.

* August crude oil prices this morning are trading +81 cents a barrel and August gasoline is trading +1.58 cents a gallon. Saudi Arabia at the weekend producer-consumer conference announced a production increase of +200,000 bpd for July, although that was basically built into the market. The market remains concerned about recent supply disruptions in Nigeria and the North Sea. August crude oil prices last Friday rallied and closed up +$2.76 a barrel and August gasoline closed +8.21 cents a gallon. Bullish factors for crude oil prices last Friday include (1) a NYT report that Israel held a rehersal for a potential bombing attack on nuclear targets in Iran to which Iran, OPEC's second-biggest oil producer, said they would respond to an Israeli attack with a "heavy blow," (2) the slumping dollar, (3) the declaration of force majeure by Royal Dutch Shell on exports of Bonga crude for the remainder of June and July because militant attacks halted production on the Bonga offshore field (75 miles) off the coast of Nigeria, and (4) the planned strike today by Chevron oil workers in Nigeria which will cut production of about 350,000 bbl of oil a day. The main bearish factor for crude oil prices last Friday was speculation of a Saudi crude oil production increase of between 200,000 and 500,000 bbl a day after the conclusion of the weekend producer-consumer summit in Saudi Arabia

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): WAG-Walgreen (BEST earnings consensus $0.59 per share)
Global Financial Calendar
Monday 6/23/2008


United States
1300 ET Weekly 3-mo and 6-mo T-Bill auctions.
France
0300 ET Jun French PMI manufacturing expected 0.5 to 51.0, May +0.4 to 51.5.
0300 ET Jun French PMI services expected +0.3 to 50.8, May 2.3 to 50.5.
Germany
0330 ET Jun German PMI manufacturing expected 0.4 to 53.2, May unchanged at 53.6.
0330 ET Jun German PMI services expected 0.7 to 53.1, May 0.9 to 53.8.
0400 ET Jun German IFO business climate expected 1.0 to 102.5, May +1.1 to 103.5. Jun IFO current assessment expected 1.1 to 109.0, May +1.7 to 110.1. Jun IFO expectations expected 1.0 to 96.3, May +0.5 to 97.3.
Euro-Zone
0400 ET Jun Euro-Zone PMI manufacturing expected 0.3 to 50.2, May 0.1 to 50.6.
0400 ET Jun Euro-Zone PMI services expected 0.1 to 50.5, May 1.4 to 50.6.
0400 ET Jun Euro-Zone PMI composite expected 0.4 to 50.7, May 0.8 to 51.1.

...thanks for the trust you've shown in me and my business.

by Larry Swing