Markets Get Lift from China’s Bailout Package
November 10, 2008 – The futures are pointing towards higher openings on Wall Street this morning after markets rallied overnight on the heels of China’s $586 billion bailout plan. Last week we got a lot of dismal economic data which indicates the U.S. economy, and worldwide economies continue to deteriorate, and China’s move is certainly a response. In addition, finance ministers and central bank presidents from the Group of 20 met in Brazil over the weekend calling for increased government spending to bolster the economy. And Britain is expected to unveil a financial bailout package later this month. To be sure, the coordinated responses from central banks around the world have been impressive, and are necessary. The question is how effective they will be in stemming further erosion.
The dollar is trading lower against most of its peers this morning, with the euro at 1.2901. Our outlook for the dollar remains bearish on consensus expectations of another round of rate cuts and in light of the fact that we don’t think the massive infusions of debt from the U.S. government in the past months have even begun to weigh on the greenback. Oil prices are up 3.36 to $64.40, helped a bit by a weaker dollar and more so by China’s announcement over the weekend, as well as the takeaway from the G20 meeting the governments around the world are going to throw everything they have at their respective economies to get growth back on track. We still think that OPEC will be coming to the table sooner than later to cut production which should buoy prices further. Gold prices are up $18.70 to $752.90. We think there should be an opportunity to buy gold again closer to $700, and longer term, we remain bullish on gold, in large part because we are so bearish on the dollar.
This is going to be a fairly light week in terms of economic data – which is probably a good thing, in light of the fact that we are still in the midst of earnings season and negative guidance across the board. We will get the weekly initial claims report, the Trade Balance data for September, Export and Import Prices for October, Retail Sales data for October, Business Inventories for September and the preliminary consumer sentiment report from the University of Michigan. To put it lightly, expectations are subdued across the board.
On the international front, China’s economic growth has slowed to 9% in the Q3, the slowest pace in five years, and down from 11.9% on a Y/Y basis. Fitch lowered its ratings this morning on six developing countries to reflect risks from the current global economic environment. The outlooks on long-term foreign currency ratings for South Korea, Mexico, Russia and South Africa were revised to “negative” from “stable” and the outlooks for Chile and Malaysia were downgraded to “stable” from “positive.” Japan’s machinery orders increase 5.5% in September to 940.7 billion yen ($9.5 billion). Russia continues to take a critical role on the West’s approach to the global economic environment, calling the IMF “inadequate” as a crisis manager. We don’t totally disagree, but think that Russia is probably giving the IMF a little too much credit at this point.
On the corporate front,
· AIG reported a Q3 loss of $24.47 billion, or $9.05 per share, down from a profit of $3.09 billion, or $1.19 per share last year. It received an expanded bailout from the government valued at $150 billion. $40 billion will come in the form of a preferred equity purchase. This is the first money that has come from the government’s $700 billion bailout package that has gone to anyone other than a bank. Is it setting the stage for the auto industry?
· NRG (NYSE:NRG) rejected Exelon’s (NYSE:EXC) $6.1 billion takeover offer. NRG has ownership interests in 44 power generating facilities, primarily in the U.S. generating 24,000MW of power.
· SunPower (Nasdaq:SPWRA) signed a 130MW, four-year supply agreement with Ecoware, S.p.A.
· Ballard Power (Nasdaq:BLDP) reported Q3 revenue of $12.3 million, down 30.1% Y/Y and a net loss of $15.5 million, or $0.19 per share, compared to a net loss of $16 million, or $0.14 per share for the same period last year.
In terms of what we expect in today’s session, the stage is set for the markets to rally as traders once again recalibrate expectations based on China’s stimulus package, and a sense that world governments will generally continue to remain proactive, if not aggressive in terms of doing what they can to bolster their own respective economies. We don’t think the mood, however, should overshadow the fact that the news, especially here in the U.S. remains really bad and we think that economic conditions will get considerably worse – especially in the labor market – before they get better. If we are right, then we wouldn’t be chasing stocks into the rally. Rather, we are recommending a bit of discipline to hold off until selloffs, of which we will undoubtedly seem more.
