Markets Facing More Headwinds at the Open - Paulson and Bernanke Head to Capitol Hill

November 18,2008 – The futures are indicating another lower opening this morning for the broader markets after the DJIA sold off 223 to start of this week’s session. The dour news hitting this morning’s headlines includes a 52,000 job cut at Citigroup (NYSE:C), pension fund erosion and more negative outlook in the corporate earnings environment. Meanwhile, a headline that caught our attention is that an investigation revealed waste in government contracts in Iraq to the tune of about $600 million. Not a huge number when considering the hundreds of billions being spent on various bailouts but it does make the $12 billion per month number sting a little more when thinking about the ‘investment’ our government has been making in the Iraq and Afghanistan campaigns. And the debate as to whether provide the big there automakers with a $25 billion bailout continues to rage on.

Bernanke and Paulson are testifying before Congress this morning, no doubt to explain their shift in bailout strategies. Paulson’s shift away from buying mortgages probably has to do with the logistical nightmare in terms of figuring out how to really do it, but the underlying theme in the shift is also that the Fed and the Treasury continue to demonstrate they are in control – at least that is the impression we get. Clearly the markets’ reaction since Paulson made the announcement hasn’t been any indication of confidence. As it stands, the Treasury has spent $290 billion of the $700 billion so far, and it has $60 billion left to spend before it has to go back to Congress to ask permission to access the other $350 billion.

Oil prices are dipping further this morning, down slightly by $0.17 to $54.78 as traders continue to adjust expectations for demand based on news on the global economy which continues to get worse with every day. We have heard some pundits on Bloomberg lately suggesting that $30 prices may come again. We don’t think so for two reasons. First, China, while slowing, is still demanding more oil and its current drawdown on global production is 6% of the aggregate, while the U.S. takes 25%. In China about 5 out of every 100 people own a car. In the U.S. about 70 out of every people (eligible) own a car. China’s growth is slowing, but it is still growing at 9%. Without a doubt, in our opinion, China’s growth and increasing demand for oil will more than compensate for the slowing demand in other countries.

Second, we think the dollar is going to begin softening by the end of the first quarter in calendar 2009. We believe this because all of the trillions in debt we have added to our national tab and because the Fed is expected to cut rates again. Ultimately all of the rate cuts and debt will take their toll, and the dollar has been benefiting more lately based on the relative weakness in other global economies. We don’t expect this dynamic to persist. On the international front, Russia is negotiating a $25 billion loan for its energy industry from China in return for long-term crude oil deliveries. France didn’t get the global regulation for the financial markets it wanted at the G-20 meeting, so it looks like it is planning a world summit of its own to discuss the financial crisis. The next planned G-20 meeting is in April, about 100 days after Obama gets into office. Inflation in the UK has declined to 4.5% in October, the first decline in more than a year.

On the corporate front,

·         Yahoo’s (Nasdaq:YHOO) CEO Jerry Yang has revealed he doesn’t think is the right person for the job.

·         Home Depot (NYSE:HD) reported Q3 revenues fell 6% on a Y/Y basis to $17.78 billion, and net income fell 31% to $756 million, or $0.45;

·         Yesterday we reported that GM (NYSE:GM) was cutting its Suzuki stake to raise capital and this morning Ford (NYSE:F) is announcing it is selling a 20% stake in Mazda to raise capital;

·         Job losses continue to mount. We noted above that Citigroup is cutting 52,000 jobs, and HSBC (NYSE:HC)  is cutting 500 jobs in Asia.

In terms of what we expect in today’s session, it looks like more downward pressure is on tap, and we may see a test of 8,000 on the DJIA today. As we have been saying day after day, there just aren’t any catalysts to ease the pressure and lift stocks. Arguments that stocks are oversold get sympathy but not conviction. We are in NYC this week at Imperial Capital’s Global Opportunities Conference and have been talking with several fund managers while in town, and the widespread feedback is (a) there is no sense when the markets are going to stabilize and (b) while many stocks certainly look cheap, there is no urgency to jump in and start buying – stocks can, and likely will get cheaper. Against this backdrop, it is no surprise that the markets are as choppy as they are.

Our guidance for our readers has been to remain disciplined and hold until the DJIA gets into the 8,000 to 8,500 range before accumulation. Well, we broke through 8,500 in yesterday’s session, so, while stocks are certainly set to decline further at the open, we think the risk is fairly mitigated at current levels. We remain bullish on renewable energy and clean tech stocks. We would stay away from discretionary, retail, finance, housing and industrials. Healthcare looks interesting, though we don’t know which companies will be the benefactors of an Obama presidency and Senator Kennedy’s conviction.

Fast Facts

·         The national debt has hit $10.64 trillion this morning