Markets Getting Lift from Better Than Expected Q3 GDP Data

October 29, 2009 – The markets are opening higher on the heels of this morning’s GDP report which beat forecasts and amidst another busy day of earnings.

On the economic front, this morning’s Q3 GDP report was that the economy expanded by 3.5% - ‘officially out of recession’. Expectations were that the economy expanded at a rate of 3.3%. The fact is that debt (‘stimulus’) spending was the only reason the economy was able to post growth and that will come with its own set of unwanted repercussions that we are yet to deal with – namely inflationary pressures brought about by a weaker dollar.

The weekly jobless claims came in at 530,000 (expectations were for 521,000) while continuing claims declined by 148,000 to 5.797 million – which was the lowest reading since March. The forecast for continuing claims was 5.9 million. The markets are taking this morning’s key economic data as further signals that the economy is stabilizing. We would agree that the news is ‘less bad’ but as noted above, we remain guarded in our assessment and concerned that the key underlying problems that helped undo this economy – leverage/debt – remain firmly entrenched in this country’s economic psychology.

The dollar is slightly softer against the euro this morning, which is trading at $1.4784. The dollar index remains above $76 at $76.20. We continue to think the dollar will continue its downward trend with the dollar index moving to the $72-$73 levels by this time next year.

Gold is up $6.60 to $1,037.10, helped by weakness in the dollar. Look for gold to continue to trade conversely against the dollar for the foreseeable future. Gold is up 17% this year and heading for a ninth consecutive annual increase. The dollar has declined 5.3% in 2009 against the euro.

Oil prices are up $0.87 to $78.33, buoyed by this morning’s economic data which is a positive indicator for demand. The Energy Department reported yesterday that U.S. inventories rose by 1.62 million barrels – more than expected. On the corporate front,

·         Banking – Deutsche Bank (NYSE:DB) reported 64% Y/Y growth in revenue to €7.2 billion and net profit of €1.4 billion, compared with profit of €414 million for the same period last year. Expectations were for €6.7 billion in revenue and €836 million in net profit.

·         Insurance – Aetna (NYSE:AET) reported 9% Y/Y revenue growth to $8.7 billion for Q3 and earnings of $326.2 million, or $0.73 per share, compared with earnings of $277.3 million for the same period last year. The results beat expectations of $8.68 billion in revenue and earnings of $0.73 per share.

·         Oil – Royal Dutch Shell (NYSE:RDS.A) reported a 43% Y/Y decline in Q3 revenue to $75 billion, and net profit of $3.25 billion, down from a profit of $8.45 billion for the same period last year. ·         Personal Products – Procter & Gamble (NYSE:PG) reported a 6% Y/Y decline in Q3 revenue to $19.8 billion, and a 1% Y/Y decline in profit to $3.35 billion, or $1.06 per share. Expectations were for $19.83 billion in revenue and $0.99 per share earnings.

·         Wireless Handsets – Motorola (NYSE:MOT) reported a 27% Y/Y decline in Q3 sales to $5.4 billion (expectations were for $5.5 billion) and earnings of $12 million, or $0.01 per share, compared with a loss of $397 million of the same period last year. Sprint Nextel (NYSE:S) reported a 9% Y/Y decline in Q3 revenue to $8.04 billion, and a loss of $478 million, or $0.17 per share, compared with a loss of $326 million for the same period last year.

In international markets, the European Commission reported that business and consumer confidence rose to the highest level in a year in October. The economic sentiment indicator rose to 86.2 points in the eurozone from 82.8 in September. Across the entire 27-nation EU, it rose to 86 from 82.6 a month ago. In Germany, unemployment declined in October to 7.7% from 8% in September. The IMF raised its growth forecast for Asia to 2.75% in 2009 and 5.75% in 2010 – still below the average of 6.7% over the last ten years, but still very strong. In Japan, industrial production rose by 1.4% from August.

In terms of what we expect in today’s session, stocks are set to move higher on the heels of the GDP data which is the latest drink of Kool-Aid to accompany the current bubble-gum rally that we are in. We are long plenty of stocks, so are happy to take the gains but we will use any strength at current levels to continue to hedge against what we see as systemic downside risk to the markets.