Stocks Opening Lower - Currency Concerns and Profit Taking in Focus

September 7, 2010 – The futures are indicating lower openings this morning for the broader markets.  The softness is largely being attributed to the currency markets, but profit taking is likely relevant in the discussion as well. Stocks jumped out to a pretty strong start for September, which is historically a sluggish month, last week.

The dollar is slightly stronger against the euro, though it is falling to a 15-year low against the yen (at about 83.86 per dollar). The primary catalyst for the dollar’s weakness against the yen is being attributed to expectations that Bernanke will continue with easing policy to buttress U.S. economy. The euro is softer on expectations that European banks may need to raise more capital. We remain bearish on the dollar as Washington continues to face a devil’s choice: the economy and jobs on one hand, or reducing the deficit and higher taxes on the other.

Whether these choices are mutually exclusive is a matter for debate, but for the time being that seems to be the gist. This week Obama proposed more spending – at least $50 billion to stimulate the country’s transportation infrastructure. U.S. publicly traded debt is well over $8 trillion at this point. Obama is also proposing more business tax breaks.

This makes for a bullish case for gold. Gold prices are up $6.50 to $1,257.60, and approaching record levels. We continue to think $1,300 will likely be tested this year and that  there is significant upside to gold prices from there. Oil prices are down $1.51 to $73.09 as traders adjust again for higher inventories and expectations that demand may contract amidst slower global economic growth.

On the corporate front,

·         Alternative Energy – Solar Sector – JA Solar (Nasdaq:JASO) provided updated form its analyst day event held last week. Key Takeaways: Business momentum remains strong, with improving visibility to 2011 based on customer orders; continues to see strong orders from new and existing customers, with customers' requirements exceeding current productive capacity; Q210 shipment of 311 MW was the highest in the company's history, due to market share increases from new and existing customers; year-end 2010 capacity of 1.8 GW with actual productive capacity of 1.4 GW at the end of Q210;  successfully launched its next-generation SECIUM solar cells, at 18.9% efficiency; raised its 2010 shipment guidance to 1.35 GW based on robust customer orders. Y

ingli Green Energy (NYSE:YGE) signed a 7.9 MW PV module sales agreement with Cegelec, noting that the modules supplied under this agreement are expected to be installed into ground-mounted systems located in the southwest of France.  

Ascent Solar (Nasdaq:ASTI) announced the launch of its new WaveSol™ series of five meter long modules to complement its current portfolio of building integrated (BIPV) and building applied (BAPV) photovoltaic product portfolio.

In terms of what we expect in today’s session, look for a choppy market with some downward pressure out of the gate.  This is a pretty light week in terms of economic data: tomorrow we get weekly crude inventories, the Fed’s Beige Book for September and Consumer Credit for July; on Thursday is the weekly jobless claims, the Trade Balance for July and more crude inventory data; and on Friday we will get the Wholesale Inventories for July.

Last week the markets rallied on a lot of ‘less bad’ economic data and we continue to think stocks are getting ahead of themselves against this backdrop. Unemployment levels remain the key, in our opinion, and until the economy starts adding back several hundred thousand jobs and shows that this is more than an anomaly, we just have a hard time buying into consensus estimates for S&P 500 corporate earnings. In this week’s S&P outlook, analyst Alec Young notes that the S&P 500 is currently trading at about 13.9 estimate 2010 EPS.

He, like us, is expecting significant slowing in earnings heading into Q4, and is using 12.8x as a target EPS multiple for earnings as well (ours is 11.2x – making adjustments for less economic visibility and greater headwinds). He expects the S&P 500 to be range bound between 1020 and 1130. We are a bit more bearish.