Markets Closed Today - Martin Luther King Holiday

January 19, 2009 – The markets are closed this morning for Martin Luther King’s day, and ahead of a a busy week of corporate earnings where expectations are for more lackluster performance and downward guidance. Of the 42 companies in the S&P Index that have reported results for the October-December quarter, 25 have missed Wall Street’s already reduced forecasts. Traders had expected the Q4 numbers to look dismal, but the mood is being further depressed by corporate outlooks.

News continues to get worse in the labor market. A forecast released this weekend by the U.S. Conference of Mayors said that only five metropolitan areas in the U.S. will escape job losses this year. Unemployment is expected to top 10% in 70 areas.

The dollar is slightly stronger against the euro this morning, which is getting 1.3193. Oil prices are down $1.39 to $35.12, while gold is down $2.90 to $837. Further weakness and announced bailouts in the euro zone has been helping the dollar avoid losing ground against the euro. But we continue to expect the dollar to slide this year as the debt in the U.S. continues to pile higher – don’t forget we still have the $35 trillion Medicare liability to deal with.

In international markets, Britain unveiled a second bailout plan for its financial sector, offering to insure banks against defaults on bad loans in exchange for loosening up its credit, and setting aside 50 billion pounds (about $74 billion) to create a special fund for the Bank of England to buy high quality loans and other assets directly from banks. The European Union approved a €200 million ($265 million) rescue loan for Austrian Airlines. South Korea’s president replaced his finance minister and other officials this morning. Denmark announced a $18 billion bailout package for banks and mortgage lenders. Saudi Arabia’s central bank cut two key interest rates, the repo rate to 2% (from 2.5%) and the reverse repo rate to 0.75% (from 1.5%).

This Morning’s Misery Index for the Week Ended January 23, 2009 (as of Monday morning at 6:13am)

·         Of the 42 companies in the S&P Index that have reported results for the October-December quarter, 25 have missed Wall Street’s already reduced forecasts.  

·         Profit warnings – BASF, ECB, Varian, Estee Lauder, Elizabeth Arden, Belden, AZZ, Inc.,  ·         Warren Buffet told the press over the weekend that the U.S. is engaged in an “economic Pearl Harbor”  

·         A forecast released this weekend by the U.S. Conference of Mayors said that only five metropolitan areas in the U.S. will escape job losses this year. Unemployment is expected to top 10% in 70 areas.  

·         Ratings – Moody’s lowered Bank of America ratings; Moody’s lowered Merrill Lynch ratings; S&P affirmed negative outlook on Bank of America; Fitch revised HSBC Holdings outlook to negative; Fitch placed Deutsche Bank on rating watch negative;  

·         Labor Market – Hertz Global (more than 4,000 jobs cut); WellPoint (about 1,500 jobs cut);

In terms of what we expect in this week’s session, corporate earnings and warnings will be a continued negative thread which could bring the DJIA back to the 8,000 level. The positive, however, that we would take out of last week’s session is that volume picked up on Thursday and Friday, both “up” days for the DJIA. That being said, momentum  failed to build with volume off more than 1.1 billion shares on Friday over the day before. This week’s economic data is light, which is a definite positive in light of the fact that the economic flow has continued to be decisively negative and indicative of the fact that this recession is nowhere near having run its course.

We think stocks at 8,281 on the DJIA are closer to being oversold than overbought, so accumulation on weakness makes sense at current levels. We would pick entrance points carefully however, and are inclined only to buy into weakness as opposed to chasing into strength. We continue to advocate selling puts as an effective and smart way to average into stocks in this market.

Wit, Wisdom Fools and Folly

David Bowers of Absolute Strategy Research said on Bloomberg this morning that the government needs to acknowledge that we are facing a corporate liquidity crisis, causing them to cut dividends, jobs and output. So the government needs to help create the right institutional structure that can get corporate liquidity back on track. In terms of Obama’s strategy to focus on businesses and consumers instead of banks, he thinks the focus should be on businesses. There isn’t any quick fix for banks.

He said restoring confidence back to the consumer is also important. It isn’t realistic to think consumer spending is going to come back in the short term. In terms of advice for investments Bowers said to focus on how companies are funding themselves. They need to look for companies with strong cash flow generation because they will be better positioned. He likes the tech sector. The biggest risk for corporations is lack to risk capital.

Asked about alternative energy and clean tech he said the political economy will work well around that theme. He said it is one of the few things people are agreeing on at this moment. The focus on climate change is the one theme people haven’t stopped to question yet.