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  • U.S. trade deficit narrowed
  • Initial unemployment claims slightly higher than expected
  • Continuing claims rise
  • BP (BP)) to buy Devon Energy (DVN) assets
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March 11, 2010

Foreign markets were mixed overnight. Futures were modestly lower ahead of today’s economic reports. They took a small step lower after them.

Initial unemployment claims were 2,000 higher than estimated. Continuing claims were up also.

The U.S trade balance was not as bad as had been expected. A drop in imports was a notable part of the narrowed deficit due to oil and autos.

According to RealtyTrac, foreclosures up six percent rose at their slowest pace in four years. The report that inflation in China increased much more than previously reported was a modestly negative item this morning. Merger activity continued with the news that BP (BP) proposed a $7 billion acquisition of assets held by Devon Energy (DVN).

The market opened with a moderate loss. Forty-five minutes into the day nine of the ten S&P 500 sectors had losses. Only the telecom sector was not down and it was merely flat. Crude oil and gold were modestly lower early today. Copper prices, however, moved up after reports of a significant aftershock in Chile.

Retail sales data are due tomorrow. This report could have been a major release, but perhaps now the Michigan Sentiment Index report might be more important.

The Index is expected to be slightly higher than the most recently reported level, but even if the Index matches expectations it will be well below the long-term average for the Index.

On a very short-term basis, the market itself might be the most important element to consider.

As noted several times this week, the S&P 500 has been approaching a widely viewed technical level roughly equal to the most recent recovery peak around 1150.

Late yesterday Standard & Poor’s published a short technical comment that we think puts the market’s technical posture in the right perspective for now.

The note said, “The S&P 500 has pushed up toward its bull market closing high of 1,150. Many times an index will pullback when getting near a past high level. A minor retracement of the rally since February, and back toward the lower part of the bullish channel would equate to a minor decline to the 1,120 to 1,125 region. If we get this minor drop, we think it would set the overall market up for a move to new bull market highs. The NASDAQ has run up against long-term trendline resistance off the all-time high in 2000 and the cyclical bull market high in 2007. In addition, some sentiment gauges are showing extreme bullish readings that many times lead to some profit taking. The CBOE equity-only put/call (p/c) ratio fell to an extremely low reading of 0.43 on Tuesday, the lowest single level since August 21, 2009, and the third lowest reading in the last four years. In addition, the ISE equity-only call/put ratio rose to an extreme reading of 2.53 on 3/9.”

The section of this note we think is the most important to keep in mind was, “A minor retracement of the rally since February, and back toward the lower part of the bullish channel would equate to a minor decline to the 1,120 to 1,125 region. If we get this minor drop, we think it would set the overall market up for a move to new bull market highs.”

Clearly some short-term excesses have developed like the call-put ratio referred to in S&P’s comment. This excessive optimism often leads to a cooling off period. But focusing on the possibility of a short-term drop could prompt you to miss what happens after the decline, which as S&P noted, should be “minor”.

Earnings are the key to the market this year. As long as the estimated earnings level for the S&P 500 does not appear to be in jeopardy the market can work higher.

The biggest wildcard we see for the market is what could come from Washington D.C.. It appears that a concerted effort to pass some form of healthcare legislation is underway. Getting this through will require compromises. Although this is the normal way any legislation becomes law, the political aspects of healthcare create the potential that compromises could produce an ineffective bill. Once in place, unwinding healthcare reform could be very difficult to accomplish.

California was in the news frequently this morning due to the state’s ongoing fiscal problems. California’s situation might be the most significant due to the size of the budget deficit but similar issues face many other states and political subdivisions. Mandates to produce balanced budgets will require either large tax increases or sharp budget cuts. Either move will be a drag on the economy. As we have noted numerous times, deficits at all governmental levels are key concerns that must be monitored closely.

For the short and intermediate-term, however, we do not see the market situation as being worrisome.

Have a great day.

Additional items from Yesterday
Abbott Laboratories (ABT, $54.80) gained 0.42% as it agreed to acquire First Albany Companies, Inc. (FACT, $16.25) for about $450 million ($27/sh), in a move to add immunology and oncology products to its pipeline. The transaction price represents a 66.2% premium to yesterday's close. FACT jumped 66.65%.

American Eagle Outfitters, Inc. (AEO, $17.15) rallied 6.12% after reporting a solid quarter. AEO guided Q1 EPS to $0.15-0.17 (v. cons $0.15) and also announced that it would close all 28 of its Martin+Osa stores and the chain's online business after the concept failed to meet internal targets. The company expects this will be completed by the end of Q2 2010.

Navistar (NAV, $44.25) fell 5.29% as it reported a worse than expected quarter owing to a decline in sales to military customers. The company also reaffirmed 2010 EPS guidance of $1.75-2.25, below consensus of $2.73.

Intermune, Inc. (ITMN, $23.30) jumped 64.76% after an FDA panel recommended the approval of pirfenidone which is used in the treatment of certain lung conditions.

The Children's Place Retail Stores, Inc. (PLCE, $40.92) rose 5.03% as it reported an in-line quarter and guided 2010 EPS to $2.90-3.10, above the Street's estimate of $2.68. This forecast assumes low-single digit comps


Subject to the limited scope of its contents described above, The Janney Market View Daily does not constitute a research report as the term “research report” is defined in Securities and Exchange Commission (“SEC”) Regulation AC-Analyst Certification Rule 500, New York Stock Exchange (“NYSE”) Rule 472.10(2), or National Association of Securities Dealers (“NASD”) Rule 2711(a)(8). The author of The Janney Market View Daily is not a registered research analyst as the term “research analyst” is defined in SEC Regulation AC-Analyst Certification Rule 500, NYSE Rule 472.40, or NASD Rule 2711(a)(5).

The Janney Market View Daily may contain factual information taken from third party sources which we believe to be reliable but the accuracy or completeness of such information is not guaranteed by us. Supporting information will be available upon request. The market view expressed should only be used for information purposes. Nothing in The Janney Market View Daily shall be construed as an offer to sell, or a solicitation of an offer to buy, any securities.

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