CPI Drops - More Concerns About Corporate Outlook Weigh on Stocks

November 19, 2008 – The futures are indicating lower openings this morning on the second day of testimony before Congress for the Big Three automakers who are making an appeal for $25 billion from the allocated $700 billion bailout packages, and amidst more negative guidance from the corporate sector. The ray of good news for the consumer, if there is any, is that prices have been coming down. We have seen it at the pump, underpinned by the decline of oil prices from $147 to the low $50 range, and this morning it is reflected in the CPI data, which declined more than expected in October, by 1%. The CPI number will probably be interpreted as a negative signal for retailers.

Oil prices are down $0.45 this morning to $53.94 as expectations about global demand for oil remain tempered in the face of so much global economic uncertainty and reports on a daily basis of economies around the world slipping into a recession. This morning Australia is being said to have been the latest to enter a recession. We continue to think that despite the undeniable impact of slowing economies on demand, oil prices have been oversold at current levels – primarily due to the facts that no new oil fields have come online lately and China, which currently pulls only 6% of global supply is inevitably going to continue taking down a larger proportion. We think this will more than compensate for tapering demand in the U.S. and the EU.

That being said, we are hearing reports this morning that Chinese automakers are appealing to the Chinese government for help in response to the slowdown they are experiencing.  But we doubt that China is going to feel the slowdown to the extent that the west has. Auto sales have still managed to post an 8.4% gain in October, and rose 11% in the first 10 months this year, with a forecast of an 8% gain for the full year. Granted, this is slower than the 18.5% increase last year, but still impressive.

The euro is trading up this morning to 1.2628 this morning, and the other key European currencies are also trading stronger, as is the yen, against the dollar. This is also helping gold prices out, which are up $4 to $736.70. Adding to weakness in the dollar are concerns about the handling of the proposed automotive bailout, and expectations for another Fed rate cut. We think the recent strength in the dollar will prove to be short to mid-term, but won’t hold over the longer-term in the face of literally trillions of dollars in debt having been to our national balance sheet. If we are right, this should bode well longer-term for gold.

In foreign markets, the Bank of England approved a rate by 1.5% cut to 3% - the lowest level in 53 years. Kazakhstan is getting kudos this morning from the IMF for its handling of the credit crisis.

On the corporate front,

·         LDK Solar (NYSE:LDK) reported Q3 revenues of $541.8 million, an increase of 241.4% Y/Y and net income of $88.4 million, or $0.77 per diluted ADS - $0.06 better than estimates. Management issued upside guidance for Q4 of revenues in a range of $555 to $565 million and upside guidance for FY09 of revenues of $2.9 to $3.1 billion with improving gross margin. 

·         SolarWorld (SWV.DE) said that it is going to offer GM €250 million ($350 million) in cash and €750 million ($945 million) in credit lines for four production facilities and Opel’s Ruesselsheim development center and headquarters. It intends to make enter the “green” auto industry. The deal is contingent on GM completely exiting.  

In terms of what we expect in today’s session – more choppiness and downward pressure. Although yesterday’s rally to close out the session was certainly welcome. As we noted above, the positive lining of the global economic meltdown, if there is any, and at least for the near term, is that prices have come down and this is obviously a welcome signal for consumers, who are strapped with negative personal savings and record credit debt. But that is about as good as it gets. Consumer spending will likely, and should, continue to contract while the corporate outlook for the Q4 and first half of 2009 looks pretty dismal. The markets, by their nature, are forward-looking by about six months, but in our opinion, deterioration is on tap for at least that long so we don’t expect any sustained rallies any time soon. We continue to urge our readers practice discipline, and don’t chase stocks  when the DJIA rallies above 8,500.