Opening View: Japan Downgrade Sparks Jitters Ahead of Fed Speech

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Is it Friday yet? With a few days remaining until Fed Chairman Ben Bernanke's highly anticipated Jackson Hole speech, it seems that investors have grown weary of waiting. In fact, futures on all three major indexes are pointing lower, as traders look toward more pressing issues. On tap today is the report on durable goods orders for July, with analysts expecting a 2.5% rise in orders after a 1.9% decline in July. From a broader perspective, traders are also digesting news of a credit ratings downgrade in Japan. Moody's Investors Service cut Japan's rating to Aa3 from Aa2 with a "stable" outlook. The ratings firm said the downgrade reflected concerns about the country's large budget deficit and a build-up in government debt since 2009. Against this backdrop, futures on the Dow Jones Industrial Average (DJIA ) are hovering nearly 86 points below fair value.

Dow, S&P and Nasdaq futures

In earnings news, Pacific Sunwear of California (PSUN - 2.17) reported a slimmed-down second-quarter loss of $19.3 million, or 29 cents per share, as same-store sales rose 1%. Excluding items, the quarterly deficit narrowed to 18 cents per share, surpassing analysts' predictions for a per-share loss of 24 cents. Net sales slipped 1.6% to $214.9 million, but still exceeded Wall Street's forecast of $211.2 million. However, the retailer predicted a third-quarter loss of 10 cents to 18 cents per share, compared to the average analyst estimate for a loss of 6 cents per share. "We are now more cautious in our near-term outlook due to a combination of factors including macroeconomic pressure, along with a highly promotional start to the back-to-school season," said CEO Gary H. Schoenfeld.


Meanwhile, Toll Brothers, Inc. (TOL - 14.74) reported a profit of $42.1 million, or 25 cents per share, up from $27.3 million, or 16 cents per share, a year earlier. Revenue for the quarter declined 13% to $394.3 million, as the still-struggling economy has taken a toll on the home builder. Analysts polled by Thomson Reuters had expected earnings of 3 cents per share on $404 million in revenue. Meanwhile, gross margin slipped to 13.8% from 14.2% a year earlier. CEO Doug Yearley remained upbeat about the future, though, explaining, "We believe that historic low interest rates and the growing imbalance between housing production and demographics-driven demand bode well for the industry sooner or later: the key question, of course, is when."

Credit Suisse weighed in on Saks Incorporated (SKS - 8.74) this morning, with the brokerage firm upgrading the retailer to "neutral" from "underperform." Analyst Michael Exstein also doled out an $8 price target on the shares, saying the company's valuation has slipped as a result of weakness in the broader equities market. He also said the company's improved productivity and stronger balance sheet make SKS able to withstand a possible recession. Saks "is far more prepared for an economic downturn (should there be one) than it was in 2008," wrote Exstein in a note to clients.

Earnings Preview

Today's earnings docket will feature reports from American Eagle Outfitters ( AEO ), Applied Materials ( AMAT ), Collective Brands ( PSS ), Express ( EXPR ), and Guess ( GES ). Keep your browser at SchaeffersResearch.com for more news as it breaks.

Economic Calendar

Today's agenda features the regularly scheduled update on petroleum stockpiles, along with the aforementioned durable goods data. Thursday brings our usual weekly report on initial and continuing jobless claims. The economic calendar ends with a bang on Friday, with all eyes turning to Jackson Hole and Fed Chairman Ben Bernanke's highly anticipated speech on "Near- and Long-Term Prospects for the U.S. Economy." Also slated to hit the Street are the Commerce Department's revised estimate of second-quarter gross domestic product (GDP), and the final Thomson Reuters/University of Michigan consumer sentiment index for August.

Market Statistics

Equity option activity on the Chicago Board Options Exchange (CBOE) saw 1,142,588 call contracts traded on Tuesday, compared to 773,185 put contracts. The resultant single-session put/call ratio arrived at 0.68, while the 21-day moving average was 0.80.

NYSE and Nasdaq summary

Volatility indices

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Overseas Trading

Stocks in Asia ended in the red today, with a sovereign-debt downgrade weighing on investor sentiment. Moody's lowered its rating on Japan's government debt, citing "several factors [that] make it difficult for Japan to slow the growth of debt-to-GDP" as the impetus behind the downgrade. Elsewhere, a disappointing earnings report from China Life weighed on the insurance sector, while automaker BYD was pummeled after providing downbeat third-quarter guidance. By the close, Hong Kong's Hang Seng lost 2.1%, South Korea's Kospi slipped 1.2%, Japan's Nikkei declined 1.1%, and China's Shanghai Composite gave up 0.5%.

On the other hand, European markets are modestly higher at midday. Traders were cheered by a report showing that no banks borrowed funds from the European Central Bank this past week, which helped to ease simmering liquidity fears. Plus, as in the U.S., hopes are high for some kind of new stimulus announcement at this week's central bank summit in Jackson Hole, Wyo. At last check, the German DAX is up 1%, the French CAC 40 is 0.6% higher, and London's FTSE 100 has added 0.1%.

Overseas markets

Currencies and Commodities

Anxieties ahead of Bernanke's speech this Friday have weighed on the greenback, with the U.S. dollar index down 0.1 point, or 0.2%, in pre-market activity. Meanwhile, after enjoying a Libya-inspired lift on Tuesday, crude is hovering just on the negative side of breakeven, down fractionally ahead of the open. Finally, gold has continued to pull back from record-high levels, with the precious metal backpedaling 14.8 points, or 0.8%, this morning.

Currencies and commodities

Unusual Put and Call Activity:

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This article appears in: Investing , Options

Referenced Stocks: AEO , AMAT , EXPR , GES , PSS

Schaeffer's Investment Research

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