Futures All Over the Map This Morning, Looks Like Uptick At Open Amidst Heavy Job Loss Reports
January 26, 2009 – The futures were pointing to lower openings this morning for the broader markets as traders brace for more earnings reports, job cuts and some key economic data ahead in this week’s session. But McDonalds (NYSE:MCD) reported a strong earnings report (or at initial glance) and helped lighten the mood. The mood was short-lived and the futures pointed lower again as focus returned to the 900 or so companies reporting the U.S. this week with low expectations. Now, about 15 minutes ahead of the open, stocks are pointed higher. This despite the fact that we have seen 35,400 jobs cut from Sprint Nextel, Home Depot, Caterpillar and Deere.
The Fed is expected to keep interest rates at current levels this week, while the Street is going to be looking for insight as to what options are left on the table to stem further economic erosion. We have been weary about the implications of the current rate levels for the dollar in the long-term, but at least near term, the dollar has been buoyed by weakness amongst its peers.
China dismissed renewed rhetoric from Washington about China “manipulating” its currency. The media in the U.S. is remiss to the point of being harmful, in our opinion, on reporting this story over the past couple years. The facts are that China, as of November, was long about $681.9 billion in U.S. Treasuries. It is the largest foreign holder of U.S. debt, accounting for 22% of the $3 trillion or so outstanding T-Bills owned by other governments. Keep in mind that China has increased its debt holdings of T-Bills by 48.5% on a Y/Y basis as of November, and as a percentage of total foreign ownership of U.S. T-Bills, last November it stood at 19.6%. In the meanwhile, the U.S. continues to spend and pile on more debt, while lowering its rates, all of which create downward pressure on the dollar’s value.
In effect, we are printing money while selling debt to China, devaluing our own currency and asking China to let its own currency rise which would exacerbate the losses it would accumulate as the gap between the dollar’s value and China’s currency’s value widened. The fact is that China has let its currency rise by 21% over the past two years. The dollar’s performance has hardly kept up.
The dollar is slightly lower against the euro this morning, with the euro at 1.2983. It is still remarkably strong, we think, relative to current interest rate levels, mounting debt and eroding underlying fundamentals to the U.S. economy. Our outlook for the dollar against the euro remains bearish, and we expect the dollar to reach 1.50 later this year.
Oil prices gained 11% in the second half of last week, closing at $46.47 per barrel. The move was surprising in a way because traders had been so heavily discounting against projected demand and the economic data throughout last week was indicative that headwinds were only increasing. On the other hand, we have been saying for some time now that prices are way oversold and do not take into account demand from China and India which is still going to grow dramatically in coming years, regardless of the fact that the world is in the middle of an economic crisis. This morning oil is off by $0.30 but still remains over $46 at $46.17.
In international markets, Argentina’s economy is expected to have expanded 7.1% in 2008, the slowest pace since 2002, but respectable. The British Banker’s Association reported that consumer outstanding credit debt declined by 218 million pounds in December, while total outstanding borrowing dell by another 135 million pounds. Iceland’s prime minister is saying that his government is collapsing amid the deepening financial crisis.
On the corporate front,
· M&A - Pfizer (NYSE:PFE) is buying Wyeth (NYSE:WYE) for $68 billion, which will merge two of the largest drug developers.
· Chapter 11 – Smurfit-Stone (Nasdaq:SSCC) is seeking Chapter 11 protection;
· Defense - Halliburton (NYSE:HAL) reported lower Q4 profit by 32% Y/Y to $468 million, or $0.53 per share on revenue which was up 17% to $4.91 billion;
· Industrial – Caterpillar (NYSE:CAT) reported a 32% Y/Y decline in earnings to $875 million, or $1.08 per share on revenue which rose 6% to $12.92 billion;
· Restaurants – McDonald’s (NYSE:MCD) topped the Street’s expectations, but still reported lower Q4 profit Y/Y by 23% to $985.3 million, or $0.87 per share on revenue of $5.57 billion, down 3% Y/Y.
· Job Cuts – Caterpillar (NYSE:CAT) is cutting 20,000 jobs; Sprint Nextel (NYSE:S) is cutting 8,000 jobs; Deere (NYSE:DE) is cutting about 700 jobs; Home Depot (NYSE:HD) is cutting 7,000 jobs;
In terms of what we expect in today’s session, we think that there is just going to be too much downbeat news on the corporate earnings front in terms of lowered guidance and job cuts to keep stocks in positive territory. Company operators will be erring to the conservative side – why not – taking the current market environment as an opportunity to lower the bar and set expectations more modestly. The question is when traders will have gotten ahead of this strategy and will have priced all of this into stocks. At that point, we will have likely created a bottom – at least for now.
We think a test of 8,000 is on tap in the next day or so. Last week, in each session the DJIA breached the 8,000 mark. The good news is that each of the days, the DJIA managed to climb back over 8,000. We have been advocates of selected accumulation at current levels. We maintain that perspective, and point our readers in the direction of alternative energy, clean tech, energy, utilities and certain healthcare groups and away from discretionary, financial, retail, industrial and housing sectors. Our favorite groups are solar, wind, energy efficiency, transmission, oil E&P, and a theme that we think will continue to reward investors is China and its long-term growth potential.
Sector Watch
US VC investments in the US totaled $5.4 bln during Q4 2008, according to PriceWaterhouseCoopers, the National Venture Capital Association and Thomson Reuters. This compares to the $8.1 bln invested in Q4 2007 and is the lowest quarterly level of venture investments since Q1 2005. Fourth-quarter investments went to 818 companies, down from 1,051 in Q4 2007. Investments in software companies dropped to their lowest level in 10 years, as $1 bln was sunk into 194 companies. In Q4 2007, 245 software companies received $1.4 bln in investments.Global mobile phone market will shrink 9% in 2009, its first decline since 2001 and with the first half set to be especially grim, Strategy Analytics said.
