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July 2, 2009

Stocks opened higher yesterday and moved still higher after the release of the ISM Index that at 44.8 was two index points better than last month although the reading was marginally below expectations. 

The ADP Employment Survey could have been a major negative as it showed a loss of 473,000 private sector jobs last month, but the report only had a very small negative influence on pre-opening futures.  Construction spending fell 0.9 percent, but this report largely was ignored.

To some extent yesterday the market benefited from new cash that typically comes into the equity markets from deferred compensation plans at the start of a new month.

Pending home sales were slightly better than expected. June auto sales remained below the 10 million level but showed signs of improvement. Oil pared back early morning gains after the Energy Information Agency reported a build in inventories, which was the first increase since May 22.

Markets rallied over 1% at the start of trading. Despite low volume ahead of the long weekend, indices still managed to finish higher. After being up more than 100, the Dow ended with a gain of 57 points and the NASDAQ was up about 10 ½.  Market breadth was positive.  Volume was light.

The employment report is today’s key item with the focus being on the non-farm payrolls.   A report on factory orders also will get attention in what is expected to be very light volume ahead of the three day Independence Day break.

With weak foreign markets and worries about the pending employment report futures were lower very early today.  They moved much lower after the release of the employment data.

Non-farm payrolls fell 467,000, which was a sharp contrast to the expected 367,000 job decline.  The unemployment rate edged up to 9.5 percent. Wages were flat.

Dow futures rapidly slipped and suggested a more than 100-point opening decline.  By 10 AM today the Dow was down 168 points. The reported 1.2 percent rise in factory orders, which was better than expected, was not enough to blunt the initial selling.

The report on initial unemployment claims was modestly better than expected.  Initial claims were 614,000. 

Fed official Janet Yellin got plenty of attention today after she said that she would not be surprised if the Fed fund rate remained near zero for several more years. She, however, added that the recession would end near the end of the year.

In our wrap up of the first half yesterday we reiterated our thinking that GDP growth would rebound to a positive number near the end of the year.  We also, however, noted that after what could be a surprisingly strong initial rebound longer-term GDP growth would be below trend for an extended period.  This thinking may be the reason Yellin made her comments.  Consumer spending seems poised to be subdued for a long time as personal balance sheets are rebuilt and debt is reduced.  Jobs are a critical part of this process.  Until employment trends improve, expecting spending to improve significantly is unrealistic. 

This, of course, has market implications, but on an intermediate-term basis an initial GDP rebound should be sufficient to bring sidelined cash back to the market in sufficient quantity to take the S&P 500 to a new recovery high possibly as much as 100 to 200 points above where it is now.  What happens after that will be critical in determining what returns to expect long-term.  We think that investors need to adjust to the probability that long-term returns could be lower than they have been for many years, but as long as competitive rates stay low and inflation remains subdued lower equity returns on a relative basis still will compete favorably with alternatives.

Today’s volume is likely to be very light as traders prepare for the long weekend.  Next week, however, Alcoa’s (AA) traditional kickoff to earnings season as well as some economic reports quickly should bring activity levels back to normal for a mid-year period.

Next week’s calendar of economic releases includes the following:
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Today’s early drop will bring into focus a pattern for the S&P 500 that suggests to some technicians that the next move in the S&P will be lower for a time.  How this evolves today and early next week could have a bearing on trading for the next few weeks.

Have an enjoyable and safe Independence Day celebration.

Additional Items from Yesterday
Constellation Brands (STZ, $12.68) helped boost consumer staples by reporting a slight beat and in-line guidance, sending shares 7.33% higher. Despite the tough economic environment for the wine and spirits business, STZ said its focus on costs and brand strategy led to the better than expected results.
General Mills (GIS, $56.02) also helped lift consumer staples, advancing 3.80% as it reported an earnings beat and provided strong guidance. Sales for the quarter increased 5%, due to increased demand for cereal, baking products and Yoplait. Looking forward, GIS expects sales growth for the year will be driven by volume rather than price increases and it also expects lower input cost inflation.
Oshkosh Corporation (OSK, $14.54) rallied 26.34% as it was awarded a $1.05B contract with the U.S. pentagon for roadside-bomb-resistant vehicles. The contract calls for 2,244 M-ATVs but the DOD indicated the number could reach 10,000, so the value of the contract could potentially reach $4-$5B. Today's contract, however, does not provide any read through for the OSK's JLTV program (Joint Light Tactical Vehicle) program which was announced last year.
Myriad Genetics, Inc. (MYGN, $35.65) sank 27.01% upon lowering its 2009 revenue forecast. MYGN announced that revenue from its molecular diagnostics division would be around $326M, falling short of its previous forecast of $330M. The company attributed the decline in revenue to increased unemployment which is forcing patients to delay/cancel procedures. MYGN reports Aug. 25.
Ball Corporation (BLL, $45.16) gained 6.02% as it agreed to buy four can-making plants from Anheuser-Busch InBev (ABI.BR, Eu 25.74,) for $577M in cash. As part of the deal, BLL will supply ABI.BR with metal cans and lids from these divested plants. BLL expects the deal will be accretive to earnings and cash flow in 2010 and the deal is expected to close at the end of the year or in early Q1 2010.

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Gregory M. Drahuschak
Janney Montgomery Scott, LLC
412-561-0497
412-565-3227