Markets Get Modest Lift at Open on Washington’s Auto Bailout
December 19, 2008 – GM’s shares are moving higher this morning. The futures are off their lows. General Motors/Chrysler will get $13.4 billion in short term loans with the possibility of an additional $4 billion in February. The structure is comparable to what was on the table in the Senate. The firms must use the funds to become financially viable. If they haven’t achieved this by the end of March, 2009, the loan will be called. A firm will only be deemed viable with a positive net present value. They have to accept limits on executive compensation. They will have to open their books for government examination, comply with fuel efficiency standards, issue no dividends, reduce debt, get government approval for any decisions more than $100 million, etc.
In international markets, Japan’s central bank cut its key interest rate to 0.1% this morning after its government lowered its economic forecast for the current fiscal year to negative 0.8% from positive 1.3%. The World Bank is saying that Russia may need help if oil prices fall further, and that “if oil prices in 2009 and 2010 average $30 a barrel, that would be a nightmare for a global economy” (World Bank Chief Economist Zeljko Bogetic). The Philippines central bank cut its key interest rate by a half point to 5.5% and its lending rate to 7.5%. The IMF and EU are planning a €5 billion ($7.3 billion) bailout package for Latvia. We haven’t seen a winning session for crude since last Thursday. Just five years ago oil prices were at $137.
This morning oil prices are down $1.69 to $34.53. This is remarkable. This week OPEC said it will cut production by 2 million barrels per day, but this isn’t enough. Production is being cut, but demand is slipping at a faster pace. JP Morgan said this morning it is expecting a $43 average price for oil next year. We continue to think that traders are overestimating the slowdown in demand for oil.
The dollar is slightly stronger against the euro this morning, which is getting 1.3949, down 2.10%. But we see the trend of a weaker dollar continuing for the foreseeable future as plans begin to crystallize for another $700 to $800 billion stimulus package forthcoming from the incoming Obama administration. And gold is trading lower by $24.90 to $835.70 on near term profit taking, but we see the trend to higher levels for gold well in place.
On the corporate front,
· Panasonic (NYSE:PC) is buying Sanyo (NYSE:SC) for 800 billion yen ($9 billion);
· More bad news in the auto sector – Toyota is reportedly going to post its first operational loss ever this year, with overall sales having fallen to the lowest level in more than 26 years;
· More job cuts – Texas Instruments (NYSE:TI) is cutting 400 jobs at its Philippines; Cummins Emissions (NYSE:CMI) is laying off 100 workers at a Wisconsin factory;
· Yingli Green Energy (NYSE:YGE) signed sales agreements with PV integrators, supplying 20MW of PV modules to City Solar Kraftwerke AG and 30MW of PV modules to Wirsol Deutschland GmbH, all scheduled for 2008 and 2009. City Solar has an option for an additional 30MW of modules.
In terms of what we expect in today’s session, we think the markets will be buoyed a bit with the relief package coming to Detroit. That being said, we still expect the markets to be choppy with downward pressure. As anticipated, volume was down yesterday ahead of the weekend and a light week ahead. We think volume will be light again today, which will further exacerbate choppiness. Keep in mind that the final Q3 GDP number will be released on Tuesday, and that this number is going to be ugly.
Traders will be positioning their portfolios ahead of this number, which will likely mean another catalyst is in place for downward pressure on stocks. And keep in mind that the Q4 number is expected to be far worse than the Q3 number, and this topic of discussion will likely pervade the financial media on Tuesday. So, that being said, we think the trend is going to be lower for stocks in the next couple days so we would recommend to position accordingly.
Wit, Wisdom, Fools and Folly
On Bloomberg this morning, Gregory Peters at Morgan Stanley thinks the credit markets will begin to relax in 2009. He said the credit markets continue to struggle but it is a steady progression to better levels. The funding markets have improved, the investment grade market is opening its doors. He thinks the improvement is the important aspect. He acknowledged the credit markets will likely never return to pre-crisis levels. He thinks over 2009 and beyond is continued repair, but that it is a slow steady process, over several years.
When asked about what to do with the next allotment of TARP in 2009, he said you still have to attack the problem – the assets. At the end of the day, there are too many bad assets on the books and TARP is the mechanism to get those assets moving again. This is the challenge of 2009. Right now there is no bid in the market for problem assets. This has to be the target in 2009, and until it gets moving again it will constrain spending.
He said the best way to play credit is in the corporate credit market. He said investment grade companies are in relatively good shape. In terms of the biggest risk, he said a big hedge fund going under would be a problem and that the economic data continues to wind down and get worse.
And Mark Mobius, Executive Chairman at Templeton Asset Management, who we have called out on several other occasions as being an economic pinhead, and myopic at best, spoke to Bloomberg as well. Asked if he is worried about the emerging markets, he said he is having a wonderful time buying tremendous bargains.
He said to remember we have been through this before. Since 1987 we have had nine bull and bear periods, and the bull markets last longer. He said he is optimistic about 2009. He said he expects to see emerging markets rebound first, because they have the best macroeconomic environment. Russia and China, he said are all sitting on huge reserves. They have booming economies and there is no reason why going forward they shouldn’t be the first to rebound. He thinks the next bull phase will begin in 2009 because the amount of money going into the system has to find a home.
We agree with Mobius on certain points – that certain emerging markets will rebound and that here are, in certain places, bargains out there. That being said, we disagree with Mobius that Russia is in any position to rebound as quickly as China. China does have strong reserves, and it is still posting relatively strong growth. Russia, on the other hand, is getting blistered by falling oil prices, and at current levels, if sustained, it could be facing a meltdown of its own. So we would avoid Russia. We also think that Mobius has been historically way off base in his forecasts, and have documented it here at the Small Cap Pulse.
We may sound a bit harsh here, but these guys that get all of the spotlight in the financial media should be held more accountable for things they say.
