05 February, 2008

Service sector reports Contraction, Ignites Recession fears

Markets around North America tumbled Tuesday as an unexpected hit in the Services sector drove stocks to a large sell-off. The Dow, Nasdaq and S&P were all off about 3% while the Canadian TSX slid over 2.5%. Investors re-kindled recession fears on the news of a contracting indicator of service sector strength, and on that basis sold off stocks broadly.

The research metric for the service sector, which includes various business types, from retail to banking to dining, is measured by an index from the Institute for Supply Management. It read below 50, signifying a contraction. For the Bulls out there, contraction is a scary word in this scenario as it means No-Growth, and No-Growth is what sells off stocks these days.

The full effects of the Federal Reserve's rate cuts have not yet been seen in these metrics so economists are hopeful for a return to growth reading next month. Until then, the Recession word will be on more minds once again.

NYSE Euronext (NYX) was under immense selling pressure today, falling 14% on its quarterly earnings report. The exchange reported $0.59/share in earnings versus $0.29/share a year ago. These numbers including now the combination of Euronext's European trading operations were roughly in line with expectations. The company said its on track to secure more cost savings over the next 2 years as more synergies with Euronext are realized. This would equate to as much as $250Million by 2010. With full year profits for 2007 hitting over $600Million, you can see these cost savings will be significant drivers of profit growth in the future.

There is concern that NYX is losing share of its own market trading to Nasdaq and that it must drive deeply into the ever expanding, and more lucrative futures and options trading markets. Priority number 1 for the company these days is multi-faceted. It must stem the tide of market share loss, even though it is producing record trading volume levels of its own, while also looking for strategic investments. With Nymex (NMX) being the target of a Chicago Mercantile Exchange (CME) offer of $11Billion, the pressure is on for NYSE to look to consolidate more worldwide trading houses.

Disclosure: Author is long NYX

No comments: