Markets Looking for Direction Ahead of Consumer Confidence Report and More Earnings Data
October 27, 2009 – The futures are indicating mixed opens this morning as traders look for conviction.
In terms of key economic data on tap today, the Conference Board is set to report on consumer confidence for September. The report is expected to read 53.1, up from 25.3 in February, but still well off levels which are considered to be healthy. The Case Shiller Home Price Index came in better than forecast, showing an 11.3% decline (forecasts were for an 11.9% decline). The media is pleased with the data suggesting that it is a further signal that the economy has bottomed. In our opinion, this is just another case of ‘less bad news’ but the news is still bad.
The dollar is slightly softer against the euro this morning after rallying yesterday. The euro is back below $1.50 to $1.4878. Traders and the media are debating whether this is a good time to start buying the greenback again. We don’t think so, given the fact that the underlying fundamentals remain negative. Our primary data point here is the mounting U.S. deficit.
Gold prices are down $1.09 to $1,040.90 after weakening yesterday in reaction to the dollar’s rally. We remain bullish on gold based on our bearish thesis on the dollar.
Oil prices are up $0.20 to $78.88. Oil prices have backed off in the past week as traders comment that prices have recovered faster than demand. The Energy Department is expected to report tomorrow that U.S. inventories of crude rose 1.5 million barrels last week, which should add to relative softness in oil prices.
On the corporate front,
· Alternative Energy – Solar – PG&E said it is going to purchase 500MW of solar from subsidiaries of NextEra Energy Resources and Abengoa. Next Era’s Genesis Solar Energy project will come online with 125MW in 2013 and 125MW in 2014. Abengoa’s 250MW Mojave Solar project is expected to come online by late 2013.
· Control Systems – Johnson Controls (NYSE:JCI) reported a 16% Y/Y decline in Q3 revenu9es to $7.87 billion (though better than the $7.83 billion expected) and profit of $300 million, or $0.47 per share, compared with $16 million for the same period last year.
In terms of what we expect in today’s session, the DJIA is trading off the bottom of its 5-day trend-line and the next relative level of support is at 9,725. Resistance overhead is at 10,081. The 100-day moving average is at 9,281. The Nasdaq is also trading off the bottom of its 5-day trend-line and the next relative level of support is at 2,068. Resistance overhead is at 2,150. The 100-day moving average is at 1,981.
With the DJIA and Nasdaq trading at 9,867 and 2,141, respectively, we continue to think there is more risk to the downside than potential for upside in valuations. While there continue to be undeniable signals that the economic data is getting ‘less bad’ we still acknowledge that it is bad. There remain significant concerns we have about the underlying fundamentals of the economy, which is still being driven by leverage. This week at the Treasury’s auctions we are floating a record amount of debt – again.
Consumers are still faced with rising unemployment and we don’t see that dynamic turning around any time soon. Our rationale here is largely driven by the fact that businesses are still preserving cash and haven’t bought in to a long-term sustainable recovery – yet. Until they do so, they won’t begin hiring again. In addition, work hours are relatively low, so before employers begin hiring they will increase the average workweek of existing employees.
If we are right about this, corporate performance – especially top line – will continue to face headwinds and there is only so much more cost cutting that businesses can undertake to show ‘relative strength’ on the bottom line. So we will wait for stocks to pull back to reflect more of this underlying risk in the system before we begin accumulating again. In the meanwhile, we will continue to look for opportunities to hedge against downside risk.
