Markets Get a Relief Rally at the Open - But Can it Last the Whole Day?

November 21, 2008 – The futures are indicating that the markets are going to move higher at the opening, after another day of selloffs yesterday affirming that this is the worst year of performance ever for the S&P.  Goldman Sachs increased its recession estimates for the U.S. economy forecasting GDP to decline at a 5% annual rate in the current quarter, dropping 3% and 1% in the next two quarters with unemployment reaching 9% by Q4 of 2009.

As the dismal economic news and poor corporate performance with deteriorating outlooks seems to come on a daily basis, Congress has sent Bush legislation to extend jobless benefits to ensure that unemployment checks don’t stall over the holidays. Without the extension about 1.2 million people’s unemployment benefits run out at year-end. The legislation is estimated to cost about $5.7 billion, a small price relative to other recent outlays of cash from Washington to try and stem the bloodletting being caused by the economic meltdown.

The dollar is stronger against the yen this morning, but slightly weaker against the euro this morning. The euro is getting 1.2586, still way off its 1.49 levels hit back in July. Meanwhile, gold is trading up $8.70 this morning to $757.40. It has been having a hard time getting back to the $8 level, having lost its ‘safe haven’ status in the near-term to the dollar. But we expect that to reverse soon enough as Congress readies to levy another massive stimulus package once Obama gets into office – and perhaps sooner.

In international markets, Greece’s economy is projected to slow to 2.7% growth next year, revised down from 3%. The forecast for 2008 is for 3.2% growth, down from 4% in 2007. Germany expects to borrow an additional €8 billion ($10 billion) next year, raising its debt level next year to an expected €18.5 billion, from €10.5 billion earlier forecast. Singapore has slid into a recession for the first time since 2001, saying it may contract by up to 1% next year. The central bank of Japan kept its interest rates in place today, after having cut its rates to 0.3% from 0.5% last month.

On the corporate front,

·         Dell (Nasdaq:DELL) reported Q3 revenues of $15.2 billion, down 3% Y/Y and earnings of $727 million, or $0.37 cents. Profit was down from $766 million for the same period last year, but earnings beat estimates .

·         The auto industry is dismal all over, not just in Michigan – Honda said it is cutting production in Japan and Europe by 61,000 vehicles, reducing annual production by more than 140,000 vehicles worldwide. ·         JP Morgan is cutting 10% of its workforce; Bank of New York Mellon is cutting 4% of its workforce, or about 1,800 jobs.

·         Canadian Solar (Nasdaq:CSIQ) reported Q3 revenues of $252.4 million, up 160% Y/Y and up 18.7% Q/Q with gross margin of 15.5% Net income was $11.1 million, or $0.31 per diluted share compared to $0.5 million, or $0.02 per diluted share last year. Management guidance for FY08 is in a range of $650 to $750 million in revenue, and it is guiding down Q4 expectations for shipments, margins and earnings. It expects Q4 shipments of about 20 to 25MW which will result in revenues of about $70 to $85 million. It conditionally re-iterated 2009 shipment and margin guidance of 500 to 550MW with margins of 13% to 15%. It said it expects delays in capacity expansion pending more visibility on the economic environment.

In terms of what we expect in today’s session, it looks like we will get a lift at the open, but the markets are so battered we doubt there is enough in the tank to create any real momentum heading into the weekend. This week has just been a mess. We think, however, that so many companies are now trading close enough to book value that the markets are generally oversold. It has been interesting to watch analysts generally sitting on the sidelines, afraid to come back in and pound the tables on companies they were touting at much higher levels just 60 days ago.

There is a total lack of conviction in the markets, which is understandable in light of the fact that stocks have been sold so indiscriminately and without any regard to traditionally accepted valuation metrics. In light of the fact that economics are much more closely akin to psychology than to physics, we completely blame this administration for being so inept at handling the crisis and instilling any sense that they have a plan. There is truly a crisis of confidence and credibility in Washington. And while we are pointing fingers, we will go ahead and blame the administration for selecting debt and leverage as the cog to keep GDP growth steaming ahead for the past eight years.

We have complained for a couple years now in our commentary that this was a bad idea and would lead to a bloodbath in the economy. Here we are. For those out there that would argue that debt is relatively benign as a percentage of GDP, we reject that argument altogether in light of the fact that our GDP has itself been completely inflated by debt. Back out the percentage of GDP that didn’t rely on overextension of Wall Street, Washington and the American consumer and then you will probably come up with a much more alarming ratio.

Fast Facts

·         Yesterday’s weekly jobless claims showed 542,000, the highest level since 1992.

·         Unemployment at 6.5% marks a 14 year high.

·         The Conference Board reported that the annual rate for economic activity over the past seven months has declined by 4.7%, the fastest since 2001.