Futures Indicate Higher Opening on Lower Oil Prices, Promise of Fed Bailout

July 23, 2008 – The futures are indicating higher openings this morning for the broader markets as oil is pulling back to the $125 level. Congress is getting ready to vote on a bail-out plan for Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) which would give the administration, and Treasury Secretary a blank-check of taxpayer money as a backstop. The trade-off on the bail-out plan, or the stated objective as Treasury Secretary Paulsen puts it, is to instill confidence in the financial markets.

The only thing that we are confident of at this point, is that the administration and the Fed are pretty efficient when it comes to executing policies that put more pressure on the dollar and exacerbating inflation. Adding more to the nation’s debt in terms of a bail-out plan here will be more of the same, but then, consumers tend to be an afterthought it seems when these policies get rationalized on Capitol Hill.

In the housing market, the Mortgage Bankers Association reported that application volume for mortgages declined 6.2% from the previous week. While the dollar is trading at a 4-week high against the yen, and higher against the euro while gold is pulling back to the $934 level this morning. The dollar’s strength against the euro is due in large part to a larger-than-expected decline in industrial orders in the euro-zone. Also adding to relative strength in the dollar is more attention the issue of inflation is getting, with an increasing awareness that the Fed is going to need to raise rates. Paulsen hs acknowledged that the Fed is going to have to cut sooner than later.

But the problem is, as we see it, that the Fed just doesn’t have the stomach for raising rates as long as the economic outlook remains as gloomy as it is. Moreover, and more problematic, is that in order to really buttress the dollar at this point, the Fed is going to have to raise several times in a row because the primary underlying reason the dollar has slid over the past six years is due to the fact that we have an out-of-control national debt and this just keeps growing. The fact is that the dollar was weakening well before the Fed embarked on its seven-cut spree. The rate cuts just accelerated the dollar’s slide.

On the corporate front,

·         McDonalds (NYSE:MCD) reported earnings of $1.19 billion, or $1.04 per share, compared with a loss of $711.7 million or $(0.60) per share for the same period last year. Revenue for the Q2 rose 4 percent to $6.08 billion, up from $5.84 billion Y/Y. Expectations for the Q2 were for earnings of $0.86 per share on revenue of $5.92 billion. ·         Boeing (NYSE:BA) reported earnings of $852 million, or $1.16 per share, down 16% Y/Y , on revenue which was pretty flat on a Y/Y basis at $17 billion.

·         AT&T (NYSE:T) reported Q2 profit of $3.77 billion, or $0.63 per share, up 30% on a Y/Y basis, on revenue of $30.9 billion. Earnings matched expectations. AT&T reported adding 1.3 million wireless subscribers while losing 1.56 million wired phone lines.

·         Costco (Nasdaq:COST) warned this morning that it will miss expectations for its Q4, and that it will expand its buyback program. The company is pointing to inflationary pressures including higher energy prices as the main culprit hurting profit. The company still is outperforming most of its peers, reporting same-store sales of 8% , while the industry average is about 2.4%.

In terms of what we expect in today’s session, the transportation sector will likely get a lift on the decline in oil prices, and the financial sector should get buoyed by the pending vote in Congress for a bail-out program for Fannie and Freddie. So the broader markets, while there isn’t much of an argument that we can make for a protracted rally, should uptick today. But the broader fundamentals remain really bad, in our opinion, and we would use any moves to the upside as an opportunity to hedge portfolios against downside risk.