Morgan Stanley rallies, analysts defend on France

Morgan Stanley rallies, analysts defend on France

Stock Market Predictions

(Global Markets) - Morgan Stanley (MS.N) shares rallied on Friday, despite continued weakness in global markets, as analysts said that fears about its exposure to French banks were overblown and that the bank was prepared to manage risk.

At midday the stock had given up some early gains but was still up 3.7 percent, far outstripping the broader market. In the previous five trading sessions, the bank lost more than 21 percent of its value, reducing its market capitalization by more than $6.8 billion.

Other financial stocks also rose, after days of being slammed by the weak financial outlook and market malaise.

The KBW Bank Index .BKX rose 1.5 percent, led by a nearly 3.8 percent gain for Bank of America Corp (BAC.N). Most members of the broker-dealer index .XBD also rallied, led by Morgan Stanley and by a 4.3 percent gain for Jefferies Group Inc (JEF.N).

But even with the rally, there were signs the market was still not fully confident in Morgan Stanley's strength.

The cost to insure Morgan Stanley's debt in the credit default swap market jumped on Friday even as swaps on other U.S. banks came off their highs, with the cost to insure the company's bonds rising above that of Bank of America bonds for the first time since late August.

CDS costs to insure Morgan Stanley's bonds for five years were last up 39 basis points to 438 basis points, the highest level since March 2009, according to Markit. That means it would cost $438,000 per year to insure $10 million in debt for five years.

FRENCH FEARS

Like many other banks, Morgan Stanley has been hurt by fears of weak third-quarter performance, a gloomy economic outlook and a Federal Reserve plan to lower long-term interest rates that could compress margins.

The pressure increased Thursday with a post on the well-known finance blog "Zero Hedge" that said Morgan Stanley was at serious risk because of its exposure to French banks.

The blog said Morgan Stanley's French exposure was greater than its market capitalization and about two-thirds of its entire book value. French banks are some of the biggest victims of the panic in recent weeks about Greek debt and the effect a default would have on Europe.

Wall Street analysts were quick to rush to Morgan Stanley's defense. Bernstein Research's Brad Hintz -- himself a former treasurer of the company -- said Friday that Morgan Stanley's total exposure to France was probably less than $2 billion.

"We believe Morgan Stanley's risk management staff and its trading units are fully aware of the highly publicized risks emanating from Europe and warnings about the firm's potential exposure to a European Sovereign crisis," Hintz said in a note. "There is solid evidence that shows Morgan Stanley has been taking action to limit risk in preparation for potentially difficult market conditions ahead."

The Wall Street Journal reported that Credit Suisse also defended Morgan Stanley's French position in a note late Thursday, saying any risk to the bank in the euro zone was not a surprise and would be manageable.

The market also shrugged off an estimate change on Morgan Stanley. JMP Securities analyst David Trone cut his third-quarter profit forecast by 10 percent on expected losses in the bank's bond portfolio.

(Reporting by Ben Berkowitz in New York, additional reporting by Karen Brettell; Editing by Gerald E. McCormick and John Wallace)

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Gulf airline expansion to roll on despite European turbulence

Gulf airline expansion to roll on despite European turbulence

Stock Market Predictions

Dubai (Global Markets) - Gulf airlines and lessors could splash out more than $20 billion on Airbus (EAD.PA) and Boeing (BA.N) jets at next week's Dubai air show, underscoring the region's role as the industry's chief paymaster amid Europe's worsening sovereign debt crisis.

Emirates is in talks for a hefty order of at least 30 and possibly as many as 50 Boeing 777 long-range aircraft worth $8.5 billion to $14.5 billion and Qatar Airways is expected to place a $6.5-billion order for 50 fuel-saving A320neo jets and five A380s from Airbus, industry sources said.

Heightened worry about Iran's nuclear intent after a U.N. agency said it had worked to design nuclear bombs could spur defense orders at the show. Arms makers from the United States, Europe and Russia will be displaying their latest weapons.

The last air show two years ago was muted by Dubai's own crisis, but the city state is recovering after a bailout from neighboring Abu Dhabi. Burned by its reliance on property and the financial sector, Dubai is now focusing on becoming a transport and logistics hub.

"We absolutely expect the Gulf airlines to continue on the expansion trail -- they are very into having a young fleet and are determined to be superconnectors who try and hoover up traffic flows on a global basis," said Stephen Furlong, transport analyst at Davy Research in Dublin.

"While in other parts of the world you have things like the EU emission scheme and night-time flying bans, in the Gulf, the governments and the airlines are joined at the hip -- the governments are totally in line with the growth plans."

Orders are likely to include dozens of new sales for Airbus's revamped A320neo short-haul jet, which has enabled the European planemaker to pass Boeing in the order race this year.

But the EADS subsidiary will also be under pressure to explain delays in the A350 passenger jet directly to Gulf customers whose support is crucial for Europe's answer to Boeing's carbon-composite 787 Dreamliner to succeed.

Chief among those is Qatar Airways Chief Executive Akbar Al Baker who regularly blasts Airbus and Boeing over design decisions and delays and has abruptly canceled air show deals.

EURO ZONE THREAT?

Emirates and Qatar Airways have some 370 planes on order to be delivered over the next few years but the euro zone debt crisis could mean some orders being canceled or put on hold.

Financing is increasingly an issue as the industry's traditional backers -- European lenders and particularly French banks -- have become more risk averse and are shying away from new deals. Emirates CEO Tim Clark told Global Markets recently the airline was looking at the Islamic finance market to fund aircraft deliveries.

That said, the shake-out in Europe may bring advantages of cost for Gulf carriers.

Daniel Broby, chief investment officer at Silk Invest, said Gulf airlines could snap up bargain deals as the world waits for Europe to resolve its debt crisis and ease doubts over growth.

"The advantage of buying at the air show at this stage in the cycle is that they are bound to secure good prices, because there will be little demand from Europe or the United States."

Airlines placed around $14 billion in orders at the last biennial show in 2009, sharply down from $155 billion in 2007.

IRAN TENSIONS

The show, its tarmac bristling with the latest warplanes, missiles and defences, will also serve as a pressure gauge for regional tensions as the European Union considers new sanctions against Iran following an IAEA report which suggested Iran is seeking nuclear weapons.

The United States and Israel have refused to rule out any option to prevent Iran from acquiring a nuclear arsenal.

Iran denies trying to build atom bombs and its Supreme Leader Ayatollah Ali Khamenei said any U.S. or Israeli attack on its sites would be met with "iron fists.

"The fear of Iran is the main driver of armament in the region," said Riad Kahwaji, analyst at Institute for Near East and Gulf Military Analysis.

Although U.S. fighter jets are traditionally an important part of the show and its aerial displays, the business end of the show is likely to feature a publicity battle between the Eurofighter Typhoon (EAD.PA) and the Rafale (AVMD.PA) as they face off in a $11 billion contest for 127 aircraft in India.

The show is the first industry gathering since the Libyan conflict ended and both manufacturers will be keen to play up the performance of their combat jets in the NATO operation.

Analysts will be also be listening for any news about talks between the UAE and France over the purchase of 60 Rafale jets, estimated at $10 billion.

Others to watch are UAE early warning system orders -- with Boeing, Northrop Grumman (NOC.N) and Swedish aerospace group Saab (SAABb.ST) likely to be in competition -- and purchases by Qatar, which is modernizing its air force.

(Additional reporting by Tim Hepher in Paris, Mahmoud Habboush in Dubai and Kyle Peterson; Editing by Sophie Walker)

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Low prices help McDonald's beat profit expectations

Low prices help McDonald's beat profit expectations

Stock Market Predictions

LOS ANGELES (Global Markets) - McDonald's Corp (MCD.N) reported a higher-than-expected quarterly profit on Friday as low prices brought in strong sales in Europe and the United States. The company's share price rose 3.1 percent.

June sales at restaurants open at least 13 months were far stronger than analysts expected. During the month, same-restaurant sales were up 6.9 percent in the United States, 9.1 percent in Europe and 4.8 percent in the Asia/Pacific, Middle East and Africa unit.

Analysts were expecting June same-restaurant sales to rise 2 percent in the United States, 3 percent in Europe and 2 percent in the Asia/Pacific, Middle East and Africa unit.

Europe is McDonald's largest market for sales, contributing about 40 percent of revenue. The United States is a close second.

"It's the consistency of the everyday value message that has helped them a lot," said Lazard Capital Markets analyst Matthew DiFrisco, who added that McDonald's is good at adjusting its marketing to keep customers coming in.

McDonald's has been taking market share from its fast food peers for many months. It has benefited from improving food quality, adding Dollar Menu items and introducing high-margin beverages such as coffee and fruit smoothies to broaden its appeal beyond the young men who account for the biggest share of sales at most other fast-food chains.

It is also renovating restaurants in Europe and the United States.

Europe's top performers were France, Britain and Russia.

"Broadly speaking, there was just a little bit of a lift in people's willingness to spend in Europe," said Bernstein Research analyst Sara Senatore.

McDonald's global same-restaurant sales rose 5.6 percent in the second quarter. It forecast July results that are up 4 percent to 5 percent overall.

Janney Capital Markets analyst Mark Kalinowski, who correctly signaled that the June U.S. result would be significantly above what many analysts were targeting, said some key competitors are floundering.

In particular, he said, Carrols Restaurant Group (TAST.O) -- one of privately held Burger King's biggest franchisees -- saw same-restaurant sales at its Burger King BKCBK.UL restaurants fell 3.6 percent in the second quarter.

Rival Yum Brands Inc (YUM.N) recently reported another quarter of strong earnings based on growth in China, but its U.S. Taco Bell business is hurting from a dismissed lawsuit over the quality of its ground beef.

Shares in Yum, also the parent of the KFC and Pizza Hut chains, were up 0.4 percent. Stock in burger chain Wendy's (WEN.N) was up 1.3 percent.

Shares of McDonald's, which has 32,000 restaurants, were up $2.69 to $89.22 on the New York Stock Exchange in the middle of the trading day. The shares closed at an all-time high of $86.54 on Thursday.

HOLDING THE LINE ON PRICES?

Second-quarter net income rose 15 percent to $1.41 billion, or $1.35 per share, topping the average analyst forecast of $1.28 per share, according to Thomson Global Markets I/B/E/S.

Foreign currency translation boosted earnings by 10 cents per share in the second quarter.

Revenue rose to $6.91 billion from $5.95 billion.

Analysts said the strong results showed that McDonald's has pricing power.

"We will continue to consider future price increases," McDonald's Chief Financial Officer Peter Bensen said on a conference call with analysts.

McDonald's has raised prices on some premium products to help offset higher food costs. The company still expects those costs to rise 4 percent to 4.5 percent in the United States and Europe this year.

McDonald's wants customers to keep coming through its doors, so Bensen said it would be "judicious" with additional price hikes.

"You can bet their competitors wish they would take pricing," said Victory Capital Management analyst Dave Kolpak. "You can't do it if McDonald's doesn't. They're putting the heat on the competition."

(Editing by Gerald E. McCormick and Lisa Von Ahn and Matthew Lewis)

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Alibaba.com posts slowest quarterly growth in almost 2 years

Alibaba.com posts slowest quarterly growth in almost 2 years

Stock Market Predictions

SHANGHAI (Global Markets) - Alibaba.com, China's largest e-commerce firm, posted an 11.9 percent rise in quarterly net profit, its slowest growth in nearly two years, with the company raising concerns due to a weak trade outlook stemming from debt woes in Europe and the United States.

The third-quarter results missed analyst forecasts and were attributed to a weak macroeconomic climate that led to a slower pace of customer additions.

"They are focusing on the quality of suppliers and also improving the overall quality of products that they are offering, such as some of the newer services to help buyers to check the quality of products before they are shipped," said Dick Wei, an analyst with JPMorgan.

"If you look at customer growth, there are no new initiatives and growth is not that top priority at this point," Wei said. "Revenue will pick up again later in 2012 or 2013."

Alibaba Group, parent of Alibaba.com, has seen a series of protests and dissatisfaction from its clients and suppliers.

Earlier this year, a significant increase in fraudulent transactions had caused a management reshuffle in Alibaba.com and prompted the e-commerce firm, one of the best known Chinese internet names, to step up supervision of suppliers.

This week, hundreds of sellers from Taobao -- which focuses mainly on consumer-to-consumer transactions -- protested outside the firm's Hangzhou offices, calling for the abolition of the website's feedback system, local media said.

Alibaba.com operates an e-commerce website that links Chinese businesses looking to sell their goods to overseas buyers. Alibaba Group, founded by billionaire Jack Ma, is 40 percent owned by Yahoo Inc.

Alibaba.com's exposure to international markets makes its turnover sensitive to the performance of the world's major economies such as the United States and Europe.

"The third quarter of 2011 presented a picture filled with challenges arising from the weaknesses in the U.S. economy and the debt troubles in the euro zone, which have threatened to spin out of control," Alibaba.com said in a statement.

"We are more cautious about the global economic outlook and believe that it may have a prolonged impact on China's export sector," the group said.

Growth in China's factory output is likely to fall slightly to between 12 and 13 percent in 2012 due to weakening global demand, the industry ministry said on Thursday, but that level probably still implies a comfortable GDP growth rate of 8 to 9 percent next year.

Fears that China may be set for a sharp slowdown flared again on Wednesday after HSBC's flash PMI survey showed the factory sector shrank the most in 32 months in November on signs of domestic economic weakness.

"Despite the stress posed by the external environment, we will stay focused on upgrading our business model and building quality, trustworthy e-commerce platforms," Alibaba.com Chief Executive Jonathan Lu said in a statement.

SLOWING PACE

Net profit for July-September rose to 409.7 million yuan ($63 million) from 366.1 million a year earlier, below an average forecast of 432.23 million from three analysts polled by Thomson Global Markets I/B/E/S.

Revenue grew 10.6 percent to 1.6 billion yuan and revenue from its international marketplace rose 11.8 percent to 947.5 million.

Revenue from its China Gold Supplier membership package was up 11.5 percent at 918.6 million yuan, contributing 57.3 percent to total revenue. Value-added services formed 30 percent of China Gold Supplier revenue in the quarter.

The number of paying members rose 4.9 percent to 787,653 compared with the same period last year. Subscribers for its China Gold Supplier and Global Gold Supplier packages fell 1.3 percent and 24.8 percent, respectively.

The firm said the slowing pace of customer additions and renewals was expected because of Alibaba.com's recent initiatives to beef up the quality of its membership base and a price hike in the beginning of the year.

Alibaba.com said pressure on membership renewal may continue in the fourth quarter as a special one-time offer granted to existing members to renew at an old lower price expires.

Alibaba.com, which competes with Global Sources Ltd, said in September it may spin off and publicly list its internet application services provider HiChina.

Alibaba.com shares were up 2 percent before the results. They have lost about 36 percent this year, compared with a 22 percent fall in the broader Hang Seng Index.

($1 = 6.3590 Chinese yuan)

(Additional reporting by Twinnie Siu and Lee Chyen Yee in Hong Kong; Editing by Vinu Pilakkott and David Holmes)

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Higher costs, stronger dollar dent Mattel's margins

Higher costs, stronger dollar dent Mattel's margins

Stock Market Predictions

(Global Markets) - Mattel Inc (MAT.O), the world's largest toy company, reported a bigger-than-expected fall in gross margins, hurt by a stronger dollar and higher costs, taking the gloss off a record jump in sales of its iconic Barbie dolls heading into the critical holiday season.

Toymakers are fighting to shield their margins from a rise in the cost of raw materials like plastics and paper, and higher wages demanded by laborers in China, where a lot of U.S. companies make their toys.

Additionally, Mattel -- which gets roughly half its sales from international markets -- said a rise in the U.S. dollar against foreign currencies like the euro in September pulled down gross margins by about 180 basis points.

A stronger dollar, which brings down the value of exported goods by U.S. companies, is also likely to affect Hasbro Inc (HAS.O) when it reports results on Monday -- though the company is less dependent on international sales.

"The only issue we see with the company's results is the gross margin, which was below expectations and did not see the typical seasonal uplift from Q2 levels," MKM Partners analyst Eric Handler said.

Gross margins in the quarter fell to 47.8 percent from 51.1 percent in the year-ago period.

"If the dollar stays at current levels against the euro, it's likely to be a headwind in the fourth quarter as well," Handler said.

While margins fell, the strong sales performance bodes well for Mattel as it heads into the crucial holiday season at a time of growing economic uncertainty.

Mattel's closely awaited toys this holiday season include "Angry Birds Knock On Wood," a tabletop version of the highly popular game app for mobile phones, and the "Monster High Dead Tired" doll line that features offspring of famous monster characters themed on a pajama party.

Wedbush Securities analyst Edward Woo cautioned that the weak economic condition in Europe -- which until now have not really been reflected in toymakers' results -- could hurt sales of toys during the holidays.

"Just because the (European) economy hasn't hurt results, does not mean that it won't in the future as well ... right now, we don't know one way or the other," Woo said.

Q3 SALES BEAT

Third-quarter net income was $300.8 million, or 86 cents a share, compared with $283.3 million, or 77 cents a share, a year ago.

Net sales rose 9 percent to $2.0 billion. Barbie sales were up 17 percent in the quarter -- their highest percentage rise in more than a decade. Sales of Other Girls Brands, which include the Monster High and Disney Princess doll lines, were up 32 percent.

Analysts, on average, had expected earnings of 86 cents a share, before special items, on revenue of $1.97 billion, according to Thomson Global Markets I/B/E/S.

The company also increased its stock repurchase program by $500 million.

Mattel's shares, which have risen 9 percent this year in contrast to a 27 percent fall in rival Hasbro, were down 1 percent at $27.52 on Friday on Nasdaq.

(Reporting by Mihir Dalal in Bangalore; Editing by Sriraj Kalluvila and Saumyadeb Chakrabarty)

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Morgan Stanley falls hard on concerns about Europe

Morgan Stanley falls hard on concerns about Europe

Stock Market Predictions

NEW YORK (Global Markets) - Morgan Stanley (MS.N) shares fell 10.5 percent on Friday, far more than comparable financial stocks, on concerns about its exposure to European banks.

The shares of the second-largest U.S. investment bank closed at $13.50, a penny above its intraday low.

Other large bank and brokerage stocks also fell, but not nearly as much. Chief rival Goldman Sachs Group Inc (GS.N) dropped 5.3 percent to $94.55, with larger U.S. banks down 3.5 percent to 4.8 percent. The NYSE Arca Securities Broker/Dealer Index, which includes Morgan Stanley, fell 4.7 percent.

"Investors are still worried about Morgan Stanley's exposure to Europe and that's going to weigh on the stock," said Derek Pilecki, founder of Tampa, Florida-based Gator Capital Management, which operates long-short equity strategies in financial stocks. "I think this will pass, but it may take some time."

Morgan Stanley shares hit their lowest since December 2008 last week after finance blog Zero Hedge reported the bank was at risk because of its exposure to French banks.

Morgan Stanley has zero net exposure to France, including French sovereign debt and French banks, a source familiar with the matter said on Friday.

Nonetheless, investors appeared to be reacting to fears in the credit markets related to Morgan Stanley.

The cost of insuring $10 million worth of the bank's five-year bonds against default spiked to $470,000 on Friday, almost three times what it was on June 30.

Morgan Stanley credit default swaps were more expensive than Italian banks Monte dei Peschi and Unicredit SpA CRDIN.UL, as well as French banks Credit Agricole CAGRCO.UL and BNP Paribas SA (BNPP.PA), said Otis Casey, director of credit research at Markit. Its swaps were also pricier than Bank of America Corp (BAC.N), the largest U.S. bank, which has been plagued by investor concerns about its legal liabilities.

"Morgan Stanley CDS are among the widest of its U.S. peers in CDS trading and significantly wider than French banks," said Casey. "In part, it's hurt by perception because the markets are jittery."

A higher swap price indicates the market perceives a higher risk.

Credit default swaps are very thinly traded compared to equities, but many stock investors still view the product as an important measure of risk because they portended problems leading up to the financial crisis.

Walter Todd, a portfolio manager at Greenwood Capital whose fund holds 106,000 shares of Morgan Stanley, expressed frustration at the impact that credit default swaps appeared to have on Morgan Stanley shares.

There was no specific information to cause the stock to fall so sharply on Friday, he said, noting investors who do not own Morgan Stanley bonds can make speculative bets by buying credit default swaps, while also shorting its equity.

"It's like seeing an overweight person walking down the street, buying a life insurance policy on him, then buying a gun and shooting him," said Todd.

Morgan Stanley's stock was down on Friday on heavy volume, with 51.3 million shares changing hands, 76 percent more than its 50-day average of 29.2 million shares. It was the fifth most actively traded stock on the New York Stock Exchange.

Morgan Stanley is likely to offer detailed information about its European exposure when it reports third-quarter results next month, analysts said, but other factors have also been weighing on large bank stocks.

Wall Street has cut its earnings expectations for large U.S. banks sharply through 2012 due to declining asset values, low interest rates and a weak business environment.

Analysts now expect Morgan Stanley to report third-quarter earnings per share of 36 cents, on average, according to Thomson Global Markets I/B/E/S, down from 47 cents a month ago. They also cut estimates for the fourth quarter and for 2012 by 16 percent and 10 percent, respectively. Goldman has received even sharper estimate cuts.

(Reporting by Lauren Tara LaCapra; editing by Robert MacMillan and Andre Grenon)

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Chrysler set to outshine Fiat as weak Europe weighs

Chrysler set to outshine Fiat as weak Europe weighs

Stock Market Predictions

MILAN (Global Markets) - Strong U.S. sales for Chrysler and growth in Brazil will help offset a weak European car market for Fiat SpA (FIA.MI), which is tightening its grip on the U.S. automaker.

Fiat will report second-quarter results on Tuesday, incorporating Chrysler for the first time after raising its stake in the company past the 50 percent mark last month.

Fiat had taken an initial 20 percent of Chrysler two years ago under a bailout deal with the U.S. government.

Fiat CEO Sergio Marchionne, who also runs Chrysler, is expected to announce a unified management structure of 25 top executives for both companies, paving the way for a merger while making a Chrysler initial public offering less likely.

"In his mind, Marchionne already thinks of the two companies as a single entity," said a source close to the situation.

Marchionne, who has made Fiat one of Europe's top turnaround stories, wants to elevate the Italian carmaker to a global player through a revamped Chrysler. A merger would reduce costs and improve integration, helping to achieve a target of around 100 billion euros ($143.8 billion) in combined revenue by 2014.

"With the business strategies of Fiat and Chrysler irrevocably linked, we believe a merger is a logical next step," said Goldman Sachs in a research note this week, reinstating Fiat as a "conviction buy" with a price target of 12.9 euros.

Second-quarter results consolidating Chrysler from May 24 are expected to show a trading profit of 485 million euros, according to an survey of analyst expectations distributed by Fiat.

MORE GROWTH

Excluding Fiat's luxury brands Ferrari and Maserati, Fiat will contribute 175 million euros of that total for the three months to June, compared with 155 million euros for Chrysler in the month of June alone.

Fiat is known for its relatively low-cost small cars, where profit margins are narrower, while Chrysler earns more money per unit from its sedans and SUVs.

"Chrysler will generate a lot more cashflow and growth than Fiat very soon," said Bruno Lapierre, an analyst with brokerage Cheuvreux, explaining why Marchionne would want to take over all of the U.S.-based group.

Chrysler's U.S. sales rose 21 percent in the first half of 2011, while Fiat's European sales fell 12.7 percent in the same period.

Fiat is doing much better in Brazil, where it is the leader of a market that hit record sales in the first half of 2011 and is a key target for auto makers struggling with stagnating European sales.

The decision to hold Tuesday's board meeting there highlights the growing importance of the area for Fiat.

Marchionne boosted Fiat's stake in Chrysler cheaply and more quickly than expected. It has 53.5 percent after buying the U.S. Treasury's and Canadian government's stakes. [ID:nN1E76K14Y]

By the end of this year its holding will have risen to 58.5 percent -- an increase linked to Chrysler developing a car that gets 40 miles per gallon of gasoline.

But he needs to decide what to do with the 41.5 percent of Chrysler that is owned by VEBA, the United Auto Workers' healthcare trust.

After initially planning an IPO that would allow VEBA to cash in on its stake, Marchionne now seems to be aiming to buy it -- although he says he is not in talks with VEBA yet.

If he goes for a full takeover of Chrysler, Marchionne will need to convince ratings agencies Moody's and Fitch -- which have already warned they may downgrade Fiat's debt -- that Fiat's finances are solid enough.

That has led to speculation Fiat may float Ferrari, although Ferrari's chairman said this week there was no plan to do so.

(Additional reporting by Gianni Montani in Turin; Editing by David Holmes)

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Esprit shares tumble 20 percent after dismal earnings

Esprit shares tumble 20 percent after dismal earnings

Stock Market Predictions

HONG KONG (Global Markets) - Shares of Europe-focused fashion retailer Esprit Holdings Ltd (0330.HK) plunged for the second day in a row on Friday, falling more than 20 percent after the company reported a worse-than-expected fall in full-year profit.

A 98-percent decline in profit announced at midday on Thursday led to 17 percent decline then and to a spate of downgrades by securities houses.

Traders voiced concerns about the company's medium-term business outlook despite Esprit's plans to restructure its business and reinvigorate its brand, brokers said.

Shares of Esprit were trading at HK$12.02 on Friday morning, down more than 19 percent after sinking to HK$12, the lowest since October 2002. It was the worst performer on the benchmark Hang Seng Index .HSI on Friday, which was up more than 2 percent.

"There is definitely some liquidation of long positions, particularly from the major funds," said Jackson Wong, vice president for equity sales at Tanrich Securities. "This stock has been on a lot of people's sell list even before the results yesterday."

Esprit is also the biggest loser among Hang Seng Index components for the year, down nearly 70 percent. The losses on Thursday and Friday marked its worst two-day drop since October 1997.

CLSA said in a research note that it had cut its earning estimates for Esprit by 52-83 percent for the next two years and slashed its price target by 47 percent to HK$12.50 from HK$23.50. It downgraded the stock to sell from underperform.

TURNAROUND PLAN RISKY

Esprit on Thursday said it planned to sell its North American operations after reporting a massive slide its full-year profit.

Esprit, whose competitors include Swedish clothing retailer Hennes & Mauritz AB (HMb.ST), U.S. group GAP Inc (GPS.N) and Spain's Inditex (ITX.MC), said the business outlook for the next six months was challenging, citing weak consumer sentiment in Europe, which is embroiled in a worsening debt crisis.

Europe generated about HK$26.7 billion ($3.4 billion) in sales, or 79.1 percent of Esprit's total, for the year to June 2011, down from 83.1 percent a year ago.

"Since the restructuring and transformation needs three to four years to complete, there is still a long, tough way to go, a lot of uncertainty ahead," said UOB Kay Hian director Steven Leung, adding that the stock would come under more selling pressure.

Esprit, which also competes with Japan's Fast Retailing (9983.T) in Asia, said on Thursday it would invest more than HK$18 billion in the company until its year ending 2015.

Analysts said the plan was fraught with risks.

"Management announced a HK$18.5 billion investment plan for the next four fiscal years to rejuvenate the brand, which in our view is risky," Credit Suisse said in a research note.

"The additional operating cost will affect Esprit's near to medium-term profitability and the large investment will further burden Esprit's cash flow," it said.

Credit Suisse also downgraded Esprit to underperform from neutral and cut its share price target to HK$9.65 from HK$25.15.

Some analysts are more upbeat about the firm's future.

"We view Esprit's decision to invest in its brand as the right decision. The real question boils down to whether the brand is impaired to a level where it cannot be turned around," Gary Pinge, a Macquarie Equities Research analyst, said in a research note.

"We think that Esprit has a good brand which can be turned around," he said. He reiterated he had an outperform rating on the stock, but cut his target price by 42 percent to HK$19.50.

Esprit said on Thursday it is ramping up investment in its brand. It is investing an extra HK$1.7 billion a year over the next four years to promote its brand, with marketing spending expected to reach 6-8 percent of revenue in the new fiscal year. The ratio will drop to 4-5 percent from financial year 2014/15, it said.

($1=7.791 HK dollars)

(Additional reporting by Clement Tan; Editing by Charlie Zhu and Matt Driskill)

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Analysis: Stock-picking makes a comeback as macro tides fade

Analysis: Stock-picking makes a comeback as macro tides fade

Stock Market Predictions

NEW YORK (Global Markets) - Stock-picking once again matters on Wall Street.

After a year in which stocks moved in near-lockstep regardless of individual merit, the herd mentality is crumbling away.

The move away from a frenzied rush in and then back out of the market is a welcome sign for stressed-out fund managers and lay investors alike.

"If I think something looks cheap I'm more prepared to own it because I think that will matter. Before, I would throw up my hands and say, 'So what? If it's perceived as a higher risk asset then it's going to crater with any nasty news out of Europe,'" said Art Steinmetz, chief investment officer at OppenheimerFunds in New York.

The change reaffirms the diversification strategies that underpin trillions of dollars worth of savings meant for college tuition and retirement. When just about everything is moving in the same direction, investors have fewer ways to cushion market swoons.

In 2011, daily activity in individual stocks was less dependent on company reports than on action in European government debt markets, and the equity, currency and commodities markets traded in tandem.

Now that stocks are going their own way, it's been good for so-called active fund managers, those who decide what individual stocks are best to hold rather than follow an index.

In January, about 70 percent of active managers outperformed the S&P 500, compared with just 23 percent in 2011, according to Bank of America/Merrill Lynch data.

"Our traders have had their best month since 2009 because of the fall-off in correlation," said Don Bright, a director and trader at Bright Trading in Chicago. "We're doing a lot of homework on earnings since fundamentals are driving individual stocks again."

BREAKING AWAY

Correlations, a measure of how tight a relationship individual securities or entire markets have with each other, have fallen sharply since the volatile trading days of last summer, according to Marko Kolanovic, head of equity derivatives at JPMorgan Chase & Co.

"We are currently witnessing the largest drop in realized correlation in the recent history of the U.S. stock market," he wrote in a recent note to clients. The rolling 10-day correlation of S&P 500 stocks had reached 80 percent in the fourth quarter of 2011, and fell to around 10 percent in early January, according to the bank.

Rob McIver, co-portfolio manager for the $3.8 billion Jensen Quality Growth fund (JENSX), said he grew increasingly frustrated over the second half of last year as he watched the companies in his portfolio increase earnings and yet suffer with the broad stock market.

McIver finished the year with a loss of 1 percent after dividends, compared with a 2 percent gain for the S&P 500.

One of his holdings was Emerson Electric (EMR.N), which sagged throughout the spring and summer as the euro zone crisis worsened. Strong second-quarter results didn't interrupt the trend.

"Emerson was almost like the canary in the coal mine," he said. The stock lost 18 percent in 2011; it is up more than 12 percent so far this year.

ALL IN VS. ALL OUT

For their part, individual investors aren't yet convinced. Despite a 4.3 percent increase in the S&P 500 in January - the second-best month since the end of 2010 - trading volume is down 15 percent from a year ago.

Volatile, correlated trading amplifies the post-flash crash suspicions of many retail investors who see markets as the playthings of big money with the resources to hire legions of PhDs and use expensive technology to keep up with high-speed trading.

Cliff Downing, 53, a small business owner in Wilburton, Oklahoma and a stock picker since the age of 10, has sold most of his stocks and closed out his brokerage accounts since 2008.

"On top of working in the major markets I used to like the (over-the-counter) Pink Sheets but I don't do any of it anymore. I've liquidated everything and moved things to other places," he said.

Since the financial crisis began to get a grip at the start of 2008, investors have pulled more than $400 billion from U.S. equity funds, and the figure keeps growing, with $7 billion withdrawn so far this year, according to the Investment Company Institute.

"Prior to the financial crisis, it was easy to have the view that you could focus more on the micro and individual companies and be fine," said John Roth, the manager of the $6.5 billion Fidelity Mid-Cap Stock fund (FMCSX) and the $1.8 billion Fidelity New Millennium Fund (FMILX). "But the last four years have shook the system."

For now, those worries have abated, and stockpickers are in a position to thrive if Europe's debt talks proceed and U.S. economic figures continue to improve.

"The market is starting to trade stocks based on underlying fundamentals," said Sudhir Nanda, portfolio manager of the $189 million T. Rowe Price Diversified Small Cap Growth fund (PRDSX).

"Autos and the auto sector were improving all the time last year, but the stocks were getting punished because people were so worried about risk," said Nanda. His fund has positions in auto suppliers TRW Automotive (TRW.N) and Tenneco (TEN.N), which were both hit hard in 2011 on global economic concerns.

So far, 2012 has been better for them. TRW and Tenneco are both up 24 percent after losing 38 percent and 27 percent in 2011.

STILL UNRESOLVED

Some analysts caution that the return to profitable stock-picking could be short-lived.

"The sense of real panic about some kind of meltdown in Europe has abated," said Jonathan Golub, chief U.S. equity strategist at UBS. "But I think at the end of the day that this is going to be another year where the macro is going to matter."

Fund managers looking to distinguish themselves from others now have to contend with this quarter's earnings trends, which show a lot of companies suffering declining revenue and a reduced number of companies beating earnings forecasts.

Derivatives strategists at JPMorgan Chase note that implied correlation - expectations for how tight the relationships between stocks will be in coming months - has only declined modestly.

That suggests investors are still hedging against a flare-up of troubles, likely from Europe.

"The European crisis, which is by no means resolved, is a pot that is at least not boiling at this point. It's a pot that's simmering," said OppenheimerFunds' Steinmetz. "That fear of transmission through the banks was what was keeping risky markets highly correlated. Now we can get back to fundamentals."

(Reporting By David Randall, Edward Krudy and Ryan Vlastelica; Additional reporting by Doris Frankel in Chicago; Editing by Martin Howell)

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Quicksilver shares jump as domestic sales rise

Quicksilver shares jump as domestic sales rise

Stock Market Predictions

(Global Markets) - Shares of Quiksilver Inc (ZQK.N) rose more than 12 percent on Friday, a day after the clothes retailer posted results that beat Wall Street expectations, buoyed by strong domestic sales.

The Huntington Beach, California-based company was the third-biggest gainer on the New York Stock Exchange on Friday, even as the bigger S&P Retail Index .RLX was down 2 percent in morning trade.

Quiksilver, which makes clothes inspired by surfing and other action sports, had seen sales weaken in the U.S. and Europe, its two key markets. But a turnaround has made analysts positive about its prospects.

"Perhaps the most encouraging data point was an accelerating 23 percent U.S. comparable sales growth against tougher sequential comparisons," Jefferies analyst TaposhBari wrote in a note.

The analyst, who holds a "buy" rating on the stock, said sales at the company is likely at an inflection point, which could trigger an upgrade cycle on the stock.

"Going forward, we are modeling gross margins to be down in the second half of the year, but see an improving European business, favorable FX currents and continued retail outperformance providing an upward bias to gross margins," analyst Bari said.

Quiksilver shares were trading at $4.94 around midday on the New York Stock Exchange.

(Reporting by Nivedita Bhattacharjee in Bangalore; Editing by Joyjeet Das)

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Autoliv, TRW drop on downgrade, earnings warning

Autoliv, TRW drop on downgrade, earnings warning

Stock Market Predictions

DETROIT (Global Markets) - U.S.-listed shares of Autoliv (ALV.N) dropped more than 10 percent on Friday after the world's largest airbag maker said probes from U.S. and European regulators could hurt its earnings.

The news prompted Buckingham Research Group to downgrade the stock to neutral, with analyst Joseph Amaturo citing too much "uncertainty" stemming from the investigation by the U.S. Department of Justice and European Commission.

"We are unable to accurately quantify the financial impact of this investigation, as there is limited knowledge regarding the scope of revenue and products involved," Amaturo wrote.

He added: "Consequently, we believe this issue, which is unquantifiable at this juncture, will limit the upside in the stock even with expected improved near-term fundamentals."

Autoliv shares were down 10.4 percent to $71.45 on the New York Stock Exchange. Autoliv shares were also down in Europe.

The European Commission said last month that it was investigating some auto parts suppliers for possible anti-competitive behavior, but did not name the companies.

At that time, Autoliv said European regulators visited two Autoliv facilities in Germany. The company added it was cooperating with European regulators.

Auto parts supplier TRW Automotive (TRW.N) also said in June that it received requests for information from both U.S. and European regulators.

About half of TRW's revenue last year was from Europe. Shares of TRW fell 6.6 percent to $55.58.

"(TRW) is probably down in sympathy with Autoliv due to the potential uncertainties regarding trade and collaboration among safety product manufacturers in the European market," Morningstar analyst Richard Hilgert said.

(Reporting by Deepa Seetharaman, editing by Bernard Orr)

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LyondellBasell results miss Street; shares slump

LyondellBasell results miss Street; shares slump

Stock Market Predictions

(Global Markets) - Chemical maker LyondellBasell Industries NV's (LYB.N) quarterly operating profit fell far short of Wall Street's expectations as refining margins dropped and customers conserved cash.

Many European customers chose to draw down stockpiles rather than make new purchases amid the sovereign debt crisis. Many of the same issues affected rival Dow Chemical (DOW.N) during the fourth quarter.

"We expect overall first-quarter economic activity to remain slow in Europe and Asia for certain of our businesses," LyondellBasell Chief Executive Jim Gallogly said in a statement.

Operating profit dropped in all four of the company's operating segments, and was most pronounced in its refining and oxyfuels unit, which makes gasoline. The benchmark crude oil margin the company used slipped 41 percent.

The company's European chemical plants, also known as crackers, use pricey crude oil-derived naphtha to produce chemicals, a process that is much more expensive than in the United States where cheap natural gas can be used to make the same products.

In Europe the company sold 5 percent less polyethylene and 10 percent polypropylene, both essential chemicals for plastics production.

The price of ethylene did rise 15 percent in North and South America, though sales of polyethylene in the region were flat and polypropylene sales edged up only slightly.

LyondellBasell reported a net loss of $218 million, or 38 cents per share, for the fourth quarter, compared with net profit of $766 million, or $1.34 per share, in the year-ago period.

Excluding one-time items, such as early debt repayment and the mothballing of a French refinery, LyondellBasell earned 41 cents per share. By that measure, analysts on average expected 76 cents per share, according to Thomson Global Markets I/B/E/S.

Revenue rose 8 percent to $11.44 billion. Analysts expected $12.04 billion.

During the quarter LyondellBasell, which is technically headquartered in the Netherlands but run out of Houston, doubled its dividend and said it would pay a separate special dividend.

The company, which emerged from bankruptcy protection in 2010, also said it would buy back nearly $2.8 billion of debt, substantially improving its balance sheet. LyondellBasell recorded a $431 million charge in the fourth quarter for the move.

Last fall LyondelBasell shut its Berre, France, refinery, which employs 370 workers. The decision sparked a strike at the plant. The company ultimately decided to put the refinery in cocoon mode, meaning it will be stopped, cleaned, and given another twos years for a potential acquirer to buy it.

Shares of LyondellBasell were down 36 cents at $44.22 on the New York Stock Exchange.

Elsewhere on Friday, Apollo Global Management LLC (APO.N), which owns a stake in LyondellBasell, reported a drop in fourth-quarter earnings due to changes in the accounting value of some assets.

(Reporting by Ernest Scheyder in New York and Swetha Gopinath in Bangalore; Editing by Don Sebastian, John Wallace and Derek Caney)

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Esprit falls to 3-week low after profit warning

Esprit falls to 3-week low after profit warning

Stock Market Predictions

HONG KONG (Global Markets) - Shares of Esprit Holdings (0330.HK) fell 8.6 percent to its lowest in about three weeks after the Europe-focused clothing retailer warned of a sharp drop in yearly profit due to one-off restructuring costs.

The stock fell to as low as HK$19.96 before steadying at HK$20.15 as at 0200 GMT, still down 7.8 percent. That compared with a 0.76 fall in the benchmark Hang Seng Index .HSI.

Esprit said late on Thursday that it was set to post a sharp drop in 2010/11 profit as a result of one-off costs related to restructuring. Esprit, whose results are due on September 15, said its board had approved a strategic plan to restructure store operations.

Esprit, which competes with Swedish clothing retailer Hennes & Mauritz AB (HMb.ST), U.S. group GAP Inc (GPS.N) and Spain's Inditex SA (ITX.MC), had said earlier this year that its sales in Europe fell 3.6 percent in local currency terms for nine months ended in March, while Asia-Pacific sales rose 26.3 percent. Sales in Europe accounted for 79.1 percent of total turnover during the period.

(Reporting by Donny Kwok; Editing by Ken Wills)

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Interpublic profit shines amid slowing ad spending

Interpublic profit shines amid slowing ad spending

Stock Market Predictions

(Global Markets) - Interpublic Group of Companies (IPG.N) posted market-beating results and stood by its full-year outlook despite global peers warning of slowing ad spend, sending shares of the second-biggest U.S. advertising and marketing group up 18 percent.

Most ad groups across the world have been under increasing pressure in recent months due to uncertainty over Europe's sovereign debt crisis and sluggish growth elsewhere.

Earlier on Friday, WPP Plc (WPP.L), the world's largest advertising company, cut its 2011 outlook on slowing growth in the United States and the euro zone debt crisis.

In contrast, Interpublic said it will meet or surpass its organic revenue growth forecast of 4-5 percent and operating margin outlook of 9.5 percent, despite macro uncertainties.

"We have seen little in the way of pullbacks among clients, despite the economic climate," Chief Executive Michael Roth told analysts on a call.

The performance of the most economically sensitive sectors -- automobiles, financial services and retail -- remained solid in the third quarter, Roth said.

He added that in 2012, Interpublic would be vigilant on costs, though it was too early to comment, given the uncertain macroeconomic environment.

Results from Interpublic and its larger U.S. peer Omnicom (OMC.N) bode well for smaller U.S. advertising companies such as Lamar Advertising (LAMR.O) and Focus Media Holding Ltd.

Earlier this month, Omnicom Group Inc (OMC.N) posted estimate-beating results as its international sales surged.

For the third quarter, Interpublic's net income jumped to $208.1 million, or 40 cents per share, from $45.3 million, or 8 cents per share, a year ago.

Excluding a benefit from the sale of about half of its holdings in Facebook, the company earned 16 cents per share.

In August, the company sold half of its 0.4 percent stake in Facebook for $133 million, recording a related pre-tax gain of $132.2 million.

Analysts expected third-quarter net income of 10 cents a share on $1.65 billion in revenue, according to Thomson Global Markets I/B/E/S.

Shares of New York-based Interpublic were trading up 14 percent at $10.16 on Thursday on the New York Stock Exchange after touching a high of $10.50 earlier in the session. (Reporting by Sruthi Ramakrishnan in Bangalore; Editing by Gopakumar Warrier, Saumyadeb Chakrabarty)

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Newell beats; outlook not as bad as feared

Newell beats; outlook not as bad as feared

Stock Market Predictions

NEW YORK (Global Markets) - Newell Rubbermaid Inc (NWL.N) beat Wall Street's lowered quarterly profit and sales expectations as strength in Latin America and Asia Pacific offset weak demand in United States and Europe, sending its shares up almost 9 percent.

The results echoed those from other consumer products makers. Big gains in Latin America covered up U.S. declines at Colgate-Palmolive (CL.N) and Avon Products (AVP.N) as well.

Newell, the maker of Sharpie markers and Rubbermaid storage containers, had already lowered the bar for its new chief executive officer -- former Unilever (ULVR.L) executive Michael Polk. In early June, it predicted a weak second quarter and slashed its 2011 forecast, prompting a 12 percent slide in its shares.

On Friday, investors overlooked the consumer product maker's second profit warning in two months, pushing the stock up 8 percent to $15.51. The stock is still trading below where it was before the June 3 warning.

"The revised guidance is not a surprise in the current economic environment," BMO Capital Markets analyst Connie Maneaty said, adding that the new CEO would likely want to have achievable targets.

The company now expects to earn $1.55 to $1.62 a share this year, excluding items, down from the lowered forecast of $1.60 to $1.67 given just eight weeks ago.

The latest forecast is "slightly above" the $1.50 to $1.55 or so that many analysts were anticipating, said JPMorgan analyst John Faucher.

The average Wall Street forecast is $1.58 per share, according to Thomson Global Markets I/B/E/S.

SHOWTIME FOR NEW CEO

Polk, who joined Newell in mid-July, was not responsible for the second-quarter performance.

Now he is trying to set the company's future tone, including some price increases that Newell asserts are necessary even as shoppers contend with economic woes.

"The consumer environment remains very tough," Polk said. "The debt crisis in the U.S. and across many countries in Europe could further stress consumer confidence."

Despite the uncertain sales climate, the company -- which counts Target Corp (TGT.N), Staples Inc (SPLS.O) and Williams-Sonoma (WSM.N) as customers -- raised its prices again in July as it pays more for oil, resin and other necessities.

As prices have gone up, the company is seeing some consumers buy less, as it expected, Polk said.

The company is well-positioned for the back-to-school season, Polk said. However the "key uncertainty is whether the consumer will show up and spend."

TAKING DOWN SALES EXPECTATIONS

Oppenheimer analyst Joe Altobello was more skeptical about Newell's sales prospects for the rest of the year and concerned about rising commodity costs. He rated Newell's shares at "perform" despite what he called a "reasonable" valuation.

Newell forecast core sales growth of 1 percent to 3 percent, down from its previous forecast of 3 percent to 4 percent. Core sales exclude foreign currency impact.

Net income rose to $146.7 million, or 49 cents a share, in the second quarter, from $130.4 million, or 41 cents a share, a year earlier.

Excluding items, the company earned 46 cents a share, beating the analysts' average estimate of 42 cents, according to Thomson Global Markets I/B/E/S.

Net sales rose 5.1 percent to $1.57 billion, while analysts expected $1.55 billion.

(Reporting by Dhanya Skariachan; Editing by Lisa Von Ahn, Derek Caney and Gunna Dickson)

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Appliance makers cut jobs in face of slack demand

Appliance makers cut jobs in face of slack demand

Stock Market Predictions

(Global Markets) - The world's two top appliance makers are planning large rounds of cost-cutting, including thousands of job cuts, as recession-weary shoppers have held off on buying refrigerators, washing machines and other costly items.

Whirlpool Corp (WHR.N), which has weathered a long U.S. housing slump, said it would cut some 5,000 jobs -- a tenth of its workforce in North America and Europe -- closing a plant in Arkansas, moving another from Germany to Poland and reducing overall manufacturing capacity by about 6 million appliances.

Its main rival AB Electrolux (ELUXb.ST) said it would detail its cost-cutting measures by the middle of next month.

The ongoing U.S. housing slump, along with stubbornly high unemployment, is crimping demand for appliances, air conditioners and other home systems.

"They're playing a tough hand," Jeffrey Sprague, founder of Vertical Research, said. "The market continues to erode (and) the entire industry is in a tight squeeze here."

The trend hitting Whirlpool and Electrolux has played out in other pockets of the industrial sector. Air conditioner maker Ingersoll Rand Plc (IR.N) earlier this month reported a 63 percent drop in profit that it blamed on depressed housing.

3M Co (MMM.N) earlier in the week disappointed analysts by missing expectations due to continued malaise in television demand and troubles in Europe.

Both Whirlpool, the world's largest appliance maker, and No. 2 Electrolux reported weaker quarterly profits and cut their full-year forecasts, warning that demand in North America and Europe will be weaker than expected.

"Given the weaker demand environment in the U.S. and western Europe, we adjust capacity and our overhead costs," Electrolux Chief Executive Keith McLoughlin told Global Markets.

Not all industrial companies are feeling pain.

More diversified players, including United Technologies Corp (UTX.N), General Electric Co (GE.N) and Caterpillar Inc (CAT.N), reported healthy profit growth and optimistic forecasts. Their strength is due in part to strong demand from rapidly developing economies, including China, India, Russia and Brazil, and exposure to sectors that don't directly face consumers, such as mining and aerospace.

WEAKNESS SPREADING

Whirlpool and Electrolux have been cutting costs and shifting business to emerging markets, but Whirlpool now expects growth in Asia and Latin America to slow, too.

"Our results were negatively impacted by recessionary demand levels in developed countries, a slowdown in emerging markets and high levels of inflation in material costs," Whirlpool Chief Executive Jeff Fettig said in a statement.

Shares in Whirlpool, already down by more than a third this year, slumped 13.6 percent on the New York Stock Exchange.

Sprague, of Vertical Research said that "it's quite possible (Whirlpool's moves) are not enough." He said Whirlpool's margins, like those of the entire sector, will be under severe pressure until at least 2013, and even then the extent of recovery is uncertain.

Particularly troubling trends for Sprague include Whirlpool's difficulty generating cash flow, and the shifting market in Brazil, which represents a major chunk of Whirlpool's business. He said the Brazil market, where Whirlpool has enjoyed a secure position, is beginning to open to new competition that could spark a price war.

Electrolux shares, also down by around a third since January, gained 7 percent in Stockholm, amid some investor relief that the drop in quarterly earnings was not as bad as expected.

WEAK RESULTS

Whirlpool's third-quarter adjusted profit was $2.35 a share, below the average analyst forecast for $2.68 a share, according to Thomson Global Markets I/B/E/S.

It now expects full-year earnings per share of $4.75 to $5.25, down from its previous estimate of $7.25 to $8.25.

The company will take a restructuring charge of about $500 million from the next quarter through 2013 related to the cost-cutting moves, which will remove $400 million from annual costs by end-2013.

Two years ago, Whirlpool closed its manufacturing facility in Evansville, Indiana, with the loss of about 1,100 jobs.

Electrolux, whose brands also include Frigidaire and AEG, reported third-quarter adjusted operating profit of 1.10 billion Swedish crowns ($173 million) versus a 1.06 billion crown mean forecast in a Global Markets poll and 1.98 billion crowns a year before.

Sales dipped to 25.7 billion crowns from 26.3 billion crowns in the same 2010 period.

(Reporting by Scott Malone in New York, Mihir Dalal in Bangalore and Helena Soderpalm, Johannes Hellstrom and Patrick Lannin in Stockholm, Editing by Gerald E. McCormick and John D. Stoll)

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Investors brace for European hit on earnings

Investors brace for European hit on earnings

Stock Market Predictions

NEW YORK (Global Markets) - Investors are about to find out if the economic woes in Europe are going to deliver a deep wound to U.S. company earnings instead of the mere scratch that many expect.

The fourth-quarter reporting period kicks off next week, and all eyes will be on erosion in sales in Europe, where the debt crisis has propelled the region toward a recession. This could dent positive sentiment just as investors start to focus on strong U.S. growth.

Analysts believe that low U.S. stock market valuations already factor in weakness from Europe for the fourth quarter, but there are concerns that earnings forecasts for 2012 have yet to account for deeper fallout.

"There's some unhealthy optimism that thinks somehow the U.S. can decouple from the rest of the world," said Shawn Hackett, president at Hackett Financial Advisors in Boynton Beach, Florida. "That is highly unlikely."

Companies including tech heavyweights Texas Instruments and Hewlett Packard and others like insurer MetLife have already cited fallout from Europe for reduced expectations. Analyst forecasts for fourth- and even first-quarter earnings have tumbled since the summer despite steady improvement in U.S. economic demand.

While all 10 S&P 500 sectors have seen profit estimates cut,

materials and financials have been the hardest hit. Other sectors that could get dragged down by Europe's problems include the industrial, consumer and technology sectors.

The overall S&P 500 forecast for fourth-quarter earnings growth has already been slashed, down to growth of 7.9 percent from 17.6 percent previously.

EUROPE'S STRUGGLE

Some 14 percent of all Standard & Poor's 500 company sales come from Europe, which would have a sure impact on results, said Standard & Poor's earnings analyst Howard Silverblatt.

"In earnings, when you're talking about pennies beating it or not, 14 percent of the number makes a difference."

The euro zone debt crisis has engulfed much of the continent as major institutions have found themselves exposed to debts in struggling nations such as Greece, Portugal, Italy and Spain. The latter two are the third- and fourth-largest economies in the euro zone and are struggling to reduce debt through severe spending cuts and higher taxes.

These problems are affecting economic growth. Italy grew just 0.2 percent in the third quarter from the previous year. Economists in a December Global Markets poll forecast the euro zone will contract by 0.3 percent in the fourth quarter, followed by a further 0.2 percent contraction in January-March, before a meager recovery in subsequent quarters.

Global companies with more than 50 percent of their sales in Europe and with a market cap greater than $5 billion underperformed other major averages in 2011, according to Thomson Global Markets data.

An index of 161 names meeting that criteria lost 13 percent in 2011, compared with a 5 percent drop for the MSCI World Index. Cisco Systems, which gets 56 percent of sales from Europe, is the largest U.S. name in this group.

Many other U.S. companies have less exposure to Europe than Cisco, but still generate a substantial portion of their sales - 20 to 30 percent - there. In these cases, it would take a more severe recession to hurt their revenues.

In a report on Thursday examining a number of industrial equipment companies, Morgan Stanley analysts pointed out that many executives were "cautiously optimistic" with expectations for a mild recession in Europe. Companies in that industry are expecting 4 to 6 percent revenue growth in 2012, but Morgan Stanley said "short-term trends" suggest estimates could fall short of that if world growth slows.

Companies including Dover Corp and Illinois Tool Works would be hurt, they wrote. Dow component 3M would also be hit in a "deep recession" in Europe.

"If we're dealing with organic revenue growth, you're going to be seeing earnings declines," said Hackett.

"In some cases, in the more cyclical businesses, it could be very severe, and I do not believe the stock market has priced in what the likely reality is."

Google's stock on Thursday was downgraded by brokerage Benchmark Co, whose analysts expect Google to suffer a decline in European advertising revenue.

PROFITS EYED FOR REBOUND

A drumbeat of negative preannouncements is also raising some concerns.

The ratio of negative to positive preannouncements over the last four weeks is at 3.3, and it hit a 10-year high late in December. The long-term average is 2.3, according to Thomson Global Markets data.

"The number of companies issuing negative guidance during the fourth quarter has increased, and this perhaps has flown a little under the radar screen over the last few weeks in our judgment," Morgan Stanley analysts wrote in a 2012 outlook. The firm expects the S&P 500 to end 2012 at 1,167, which would be an 8.8 percent decline from the current level.

The euro zone's weakness has another detrimental effect. Strength in the dollar against the euro will increase headwinds for earnings, because it makes U.S. goods more expensive in Europe.

"Each 1 percent appreciation in the U.S. dollar corresponds to an expected 0.97 percent decline in aggregate earnings," Morgan Stanley wrote.

Still, many stock strategists are hoping healthy sales from the United States, where the economy is slowly improving, will more than offset the negative impact of Europe.

"Europe is clearly the caboose on the train...(but) I don't think the caboose is as bad as most people think it is," said Ken Fisher, a billionaire investor whose money management firm oversees $40 billion in assets.

"At a time when people have been fearful of a weak Europe, the economy in America has been consistently stronger than people have though it would be," he added.

Several blue-chip companies with heavy exposure to Europe performed well in 2011. McDonald's, for instance, derives 42 percent of its sales from Europe, and it was the Dow's best performer last year, rising 31 percent.

Kraft Foods generates 32 percent of sales in Europe, and its stock rose 19 percent in 2011. And Apple gets 26 percent, according to Thomson Global Markets data, and its stock was up 25.6 percent.

Those gains would be in danger if Europe's fundamentals worsen.

Big-cap multinationals have "become a bit of a darling here in the last couple of months...they're probably more vulnerable to disappointments," said James Dailey, portfolio manager of TEAM Asset Strategy Fund in Harrisburg, Pennsylvania.

(Reporting By Caroline Valetkevitch; Editing by Leslie Adler)

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U.S. bank shares fall on Europe, stress test concerns

U.S. bank shares fall on Europe, stress test concerns

Stock Market Predictions

(Global Markets) - Bank stocks took a nose-dive on Wednesday on concerns about the European debt crisis and rigorous stress tests unveiled by the Federal Reserve on Tuesday, analysts said.

Bank of America Corp (BAC.N) shares fell 4.3 percent to $5.14, near a 52-week low of $5.13 touched in early October. It was the lowest closing price for the bank since March 2009.

Other banks whose shares declined were Citigroup (C.N), down 3.8 percent, and Morgan Stanley (MS.N), down 3.6 percent.

Among regional banks, Regions Financial Corp (RF.N) shares slumped more than 5 percent. The KBW Bank Index .BKX closed down 3.4 percent, a steeper decline than the broader market.

The stress tests announced by the Fed are more rigorous than those a year ago, said Jefferson Harralson, an analyst with Keefe, Bruyette & Woods Inc.

"Investors are worried that we won't see a normal resumption of dividends and share buybacks at healthier banks, and for more stressed banks, this could force them to raise capital," Harralson said.

Despite some signs of improvement in the economy and in the health of banks, investors remain worried about factors outside the United States such as the European debt crisis, said Frank Barkocy, director of research at Mendon Capital Advisors.

"There are signs that fundamentals look better, but we have to get these external clouds of concern to dissipate," Barkocy said. "That may take some time."

The cost to insure U.S. bank debt with credit default swaps jumped on Wednesday after a weak German bond sale added to fears that contagion from Europe's debt crisis could spread globally.

Bank of America's CDS costs rose the most, jumping 34 basis points to 471 basis points, or $471,000 per year to insure $10 million in debt, according to data by Markit.

In the stress tests, Bank of America and five other large banks will be measured for their ability to withstand further deterioration in the European debt crisis.

Banks will also be examined for their exposure to investor requests to buy back soured mortgage loans, Harralson noted.

"Obviously, Bank of America is the bank that stands out there," he said.

Bank of America Chief Executive Brian Moynihan has taken steps in recent months to settle claims related to mortgage-backed securities, although his most significant initiative, an $8.5 billion agreement with major institutional investors, still needs court approval.

In nearly two years as CEO, Moynihan has worked to shed assets, streamline operations and build capital to cover mortgage losses and meet new international standards. He has also suffered a number of setbacks, including the Fed's rejection of a dividend increase in March and a backlash this fall over a now-canceled debit card fee.

"I think Brian's trying to get things done and is making good progress," Barkocy said. "Sometimes he says things when he's not on firm ground, and it comes back to bite him in the behind, so to speak."

Mike Mayo, an analyst with CLSA, said the bank's management needs to improve confidence in the company after past miscues. The bank should consider shedding more assets to make it easier to manage, he said, without offering any specific examples.

"There should be no sacred cows in the analysis," Mayo said.

(Reporting by Rick Rothacker and Joe Rauch in Charlotte, N.C.; Additional reporting by Karen Brettell in New York; Editing by Maureen Bavdek, Steve Orlofsky, Gary Hill)

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Mead Johnson profit beats Street; shares rise

Mead Johnson profit beats Street; shares rise

Stock Market Predictions

(Global Markets) - Mead Johnson Nutrition Co (MJN.N), the maker of Enfamil baby formula, posted a slightly higher-than-expected quarterly profit but said a contamination scare could mean lower market share at least through the 2012 first half.

In December, Wal-Mart Stores Inc (WMT.N) and other retailers pulled certain packages of Enfamil off store shelves following the death of an infant who drank the formula.

A government investigation found no trace of contamination in sealed Enfamil packages and no reason for a recall. That took Mead Johnson out of the line of fire, but not before damaging its brand.

"While it is still early days ... that issue is going to have a meaningful downward impact on our business in the United States," Mead Johnson Chief Executive Steve Golsby said on Thursday. "While there was no noticeable impact on our fourth-quarter sales, given the late December timing, we expect to see lower market share potentially into the third quarter of this year."

The company said it was spending heavily on an advertising campaign meant to restore trust in its brand.

It forecast 2012 earnings below Wall Street estimates, but many investors were prepared for a weak outlook, said RBC Capital Markets analyst Edward Aaron.

"The range provided is consistent with our assessment of buy-side expectations heading into earnings," Aaron said in a research note.

Mead Johnson said it expects a profit of $3.00 to $3.10 per share this year. Analysts' average estimate is $3.18, according to Thomson Global Markets I/B/E/S. The forecast assumes higher commodity and packaging costs and net sales growth of 7 percent to 9 percent.

For the fourth quarter, net sales rose 13.4 percent to $911.3 million, above the $895.8 million analysts had expected. Sales in Asia and Latin America jumped 17 percent, while sales in North America and Europe rose 3 percent.

Net income for the quarter was $85.6 million, or 42 cents per share, down from $99.6 million, or 48 cents, a year earlier.

Excluding certain items, earnings came to 52 cents per share. Analysts on average were expecting 51 cents, according to Thomson Global Markets I/B/E/S.

Mead Johnson shares were up $1.19, or 1.6 percent, at $73.79 in midday trading on the New York Stock Exchange.

(Reporting By Martinne Geller and Phil Wahba; editing by Mark Porter and John Wallace)

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ThyssenKrupp $14 billion sale plan flags consolidation

ThyssenKrupp $14 billion sale plan flags consolidation

Stock Market Predictions

FRANKFURT (Global Markets) - ThyssenKrupp (TKAG.DE) shares jumped on Friday after the German steelmaker unveiled a 10 billion euro ($14 billion) divestment plan that could spur consolidation in Europe's overcrowded stainless steel sector.

The restructuring will include a spin-off of the company's stainless steel division and aims to help ThyssenKrupp pay down debt and focus on its engineering business.

Analysts had expected a shake-up since the company's new Chief Executive Heinrich Hiesinger took over early this year.

But the scope of the revamp was more far-reaching than anticipated by the market.

"More surprising is the considered spin-off of Stainless Global, opening up strategic partnerships with former ArcelorMittal stainless unit Aperam or Finland-based Outokumpu," Equinet analyst Stefan Freudenreich said.

ThyssenKrupp shares jumped 7.1 percent to 31.955 euros by 0908 GMT, outpacing a 0.5 percent gain by Germany's DAX index .GDAXI.

ThyssenKrupp's stainless business is Europe's biggest with almost 3 million tonnes of output and annual sales of 5.9 billion euros. The company will examine all options for continuing the business outside the group.

"The main target is clearly to bring down debt levels," DZ Bank analyst Dirk Schlamp said.

Analysts have previously called for divestments at ThyssenKrupp, a lumbering giant that has piled up debts of 5.8 billion euros related to mammoth plants it has built in the United States and Brazil.

Analysts expect Hiesinger -- the company's first CEO who has no steel background -- to strengthen the non-steel sectors, including elevators and other technology-related activities, whose strong performance has offset start-up losses at its Steel Americas division.

Analysts estimate that the non-steel activities, which they see contributing around 70 percent to group's total value, were main growth drivers in the fiscal second quarter to end-March, along with European carbon steel operations and the global stainless business.

ThyssenKrupp is due to report quarterly results on May 13 and is expected to show its second-quarter earnings were boosted by higher steel prices and a booming German automotive industry.

OVERCAPACITY IN STAINLESS

Europe's stainless steel sector has long suffered from overcapacity and volatility. ThyssenKrupp and its rivals sounded out possible consolidation in the sector in 2009, but Germany's biggest steelmaker opted for a stand-alone strategy.

It then launched a restructuring that included a shutdown of one of its German stainless factories last year and brought forward production plans of a new stainless plant in Alabama.

Analysts have said a natural partner for ThyssenKrupp could be Outokumpu (OUT1V.HE) because the Finnish rival has a strong presence in northern Europe and the German firm is absent there.

They also have said the German company would have a clash of culture with ArcelorMittal, while No.1 stainless steel producer Acerinox (ACX.MC) is not keen to acquire assets in Europe.

This year, global steel market leader ArcelorMittal (ISPA.AS) spun off its stainless steel division, Aperam (APAM.AS) and listed it on the stock exchange, prompting speculation about possible consolidation.

Aperam will kick off a raft of steel-industry earnings next week, reporting quarterly results on Tuesday. ArcelorMittal itself follows on Wednesday, Germany's second-biggest steelmaker Salzgitter (SZGG.DE) on Thursday and ThyssenKrupp on Friday.

(Editing by Dan Lalor and Jane Merriman)

($1=0.7158 euros)

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