Markets Get Lift At Open From More Fed Support

November 25, 2008 – The futures are indicating higher openings this morning after the markets managed to post gains in two consecutive sessions on yesterday and Friday, the first time in November. In October, the story was the same as well, with only one instance of two consecutive positive sessions – an indication of how miserable conditions have been. The catalyst for the strength in the past two sessions has been more commitments from the government to bail out the financial sector and moves by the incoming Obama administration to provide assurances that we are finally going to get a competent economic team in place to help map the way out of the financial crisis. But the S&P having rallied about 13% or so since last Thursday (the biggest 2-day rally since 1987), the question is whether the markets will be able to maintain momentum today in the face the Q3 GDP numbers which reinforce the realities that the U.S. economy is recessing.

This morning the revised Q3 GDP showed the economy shrank  by 0.5%. Expectations were for a decline of 0.5% so the futures didn’t react to much to the news. This is also in line with the OECD’s recent forecasts (see below) and it is forecasting a contraction of 2.8% for U.S. GDP in the Q4. Meanwhile, consumer confidence for November is expected to decline to 37.9, from 38 last month, setting a new all-time low. Last year at this time, consumer confidence was 87.8.

The Treasury Department will be announcing a program today to help companies that issue credit cards, make student loans and finance car purchases, using a “modest share” of the $700 billion allocated already by Congress for the bailout program. That the credit providers need help shouldn’t be surprising at this point, but then again, like crack dealers, for the past eight years they have preyed on the weak and addicted (to spending) resulting in an American population with record credit debt and negative personal savings. We would like to see Congress do the right thing and insist some terms and conditions be placed on those credit agencies at the economic bread line which result in some additional protection for consumers from usary debt.

This morning U.S. interbank lending rates are up for the third day in  a row, to 2.20%, which is indicative of the fact that banks continue to be worried about conditions in their peer group. It is interesting the rates moved up despite the bailout yesterday for Citigroup. Before the financial crunch became official, rates were about 0.5%. The dollar is stronger against the euro this morning, which is getting 1.2861. We expect to see the dollar weaken substantially in the next 12-months as we inflate the national debt. Meanwhile, oil prices are down $2.69 this morning to $51.69 on further expectations of declining demand, while gold prices are down $11.10 to $809.30.

In international markets, the Organization for Economic Cooperation and Development (OECD) said the financial crisis will probably result in the worst recession since the early 1980s for developed countries – hardly an epiphany. The OECDD expects economic output to shrink by 0.4% in 2009 for its 30 member countries, down from 1.4% growth forecast for 2008. It further expects unemployment for its member countries to grow to 8 million through 2010. It has forecast the U.S. to contract by 0.0% next year. It expects China’s growth to shrink below 10% next year, to 8% growth. Israel announced a plan to buoy its economy with 6 billion shekels ($1.5 billion) in guarantees to its central banks, 5 billion shekels ($1.25 billion) to buoy corporate bonds, and 21.7 billion shekels ($5.4 billion) in an economic stimulus plan which includes infrastructure investments. Inflation in Vietnam declined to 24.2% in November, from 26.7% in October.

On the corporate front,

·         BHP Billiton (NYSE:BBL) is halting its acquisition of Rio Tinto (NYSE:RTP) citing the global economic environment;

In terms of what we expect in today’s session, we don’t have any confidence that stocks will be able to stay in positive territory. This is still very much a “sell into strength” environment, where expectations are extremely downbeat for the near-to-mid-term. This morning’s revised GDP for the Q3 was bad, but the number for the Q4 GDP is expected to be dismal, with expectations running as high as a 5% contraction. Meanwhile, expectations for the labor market are for further deterioration, and our the implications of all of the government bailouts and the resulting debt on the national balance sheet for the dollar are ominous. But the markets are fickle with a short attention span.

So to the extent that pundits and traders focus in on all of this negativity and headwinds ahead, stocks will trend lower. To the extent that pundits and traders ponder the potential for the Obama administration to get the economy back on track, stocks will stabilize. And to the extent that we get more visibility on the timing of when the economy will get back on track, stocks will move higher. We think that right now, it is just too difficult to focus on the negativity and headwinds ahead. In which case, we are sticking to our story, and recommending our readers DO NOT chase stocks when the DJIA trades over 8,500. When it does, we would recommend our readers find ways to hedge against downside risk (protective puts and out-of-the-money covered calls).

Fast Facts

·         The national debt is up to $10.68 trillion this morning.