Markets Getting a Lift on Upbeat Comments From Wells Fargo and Less Worse than Expected Job Data

April 9, 2009 – The futures are indicating  a higher opening this morning in the broader markets as the Street reacts to Wells Fargo’s comments that it will report record Q1 profit of $3 billion. Better than expected weekly jobless claims should also help the bulls today.

The weekly jobless claims report came in down 25,000 to 654,000. The jobless claims came in lighter than forecast (about 660,000). This news will likely be taken as an indication of improvement. The insured employment rate is up to 4.4%. The US Trade Balance report showed a decline to $26 billion. The import price number came in down 14.9% on a Y/Y, and up 0.5% on the month. Exports rose 1.6% in February, but this is after falling 6% three months in a row.  

The dollar is slightly stronger against the euro this morning, helped be less-bad-than-expected data on the economic front, and the comments from Wells Fargo. The euro is getting $1.3278 against the dollar. Meanwhile, gold is off $3.40 to $882 .50, and will likely see some weakness in today’s session as investors move their focus back to equities. Oil prices are moving back over $51 as traders adjust back to expectations that the outlook for the economy is getting better.

This shift in perspective is a daily event, but for now, the most recent reports from the retail sector are being taken as evidence that consumers are starting to spend again. Generally speaking, retail sales came fell, but not as much as expected. Yesterday’s crude inventory report showed that supplies increased by 1.7 million barrels to 361.1 million barrels, up 15.2% over the same period last year. Expectations were for an increase of 2.3 million barrels.

On the corporate front,

·         Alternative Energy – Solar Sector – Pacific Crest’s Mark Bachman increased revenue and EPS targets on First Solar (Nasdaq:FSLR), as well as his price target from $209 to $227. The stock closed in yesterday’s session at $135.69.

·         Financial Sector – Financial stocks should be getting a boost on the comments from Wells Fargo.

·         Retail Sector – March Same Store Sales - Wal-Mart (NYSE:WMT) increased 1.4% (below expectations); Macy’s (NYSE:M) fell 9.2% (better than expected); Children’s Place (Nasdaq:PLCE) fell 2% (below expectations); Limited (NYSE:LTD) fell 9% (better than expected); Costco (Nasdaq:COST) fell 5% (below expectations)

In international markets, the Bank of England kept its interest rates at 0.5%, noting, however, that further quantitative easing may be on tap. In Germany, industrial production fell 2.9% in February over January, where it fell 6.1%. On a Y/Y basis, industrial production fell 23.2% in February.

In terms of what we expect in today’s session, we think stocks are set to move higher as pundits suggest today’s economic data supports the view that the economy is stabilizing. We think that will be the conventionally accepted view du jour, and hope they are right. It is interesting to note that the retail sales data was pretty bad, but is being interpreted in an upbeat manner because it wasn’t as bad as it could have been. The same is really true in the weekly jobless claims data.

We wouldn’t recommend chasing stocks higher, as we still think it is prudent to remain defensive. Our recommendation is, rather, to look for opportunities with strength in the market to hedge against downside risk, which we believe is still significant.

As we have noted in recent commentary our hedge strategies include:

·         Buying Short Dow30 ProShares (NYSE:DOG) above 8,000 on the DJIA – keep in mind this is a hedge strategy not a primary strategy to drive portfolio profits.

·         Writing out of the money covered calls against long positions which are either close to being in-the-money are that are in-the-money. Our rationale here is that, above 8,000 on the DJIA, the chances of stocks running too much further to the upside is nominal, in our opinion. We think retracements and some consolidation is in order, in a best case scenario and this provides an opportunity to bring extra cash/premium into the portfolio in the meanwhile. We would look at calls about 2-3 months out.

We also remain bullish on gold and think that the catalyst for growth here is going to be the state of the dollar, much more so than whether investors are flowing back into equities in a big way. Just look a the first legs of the bull market in gold, which were tracked almost exactly by a bull market in stocks (through October 2007).  Over this period, the dollar weakened substantially as traders worried about the massive US debt being built. Well, since March, 2008, when gold peaked, and the dollar was bottoming, we have seen almost another $2 trillion, close to 20% in debt added to the national balance sheet. And we still haven’t dealt with social security and medicare liabilities.

Look at the recent weakness in gold as a buying opportunity.

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