Markets Open Higher on Better than Expected Weekly Jobless Claims Report

December 18, 2008 – The markets are set to open higher this morning as the Street breathes a sigh of relief on the Labor Department’s weekly jobless claims report which showed that claims fell to 554,000, down from 575,000 last week. Expectations were for the number to come in at 558,000. The four week moving average increased to 543,750 claims, which is the highest since 1982 while continuing claims declined slightly to 4.38 million from 4.43 million last week. To put this week’s number in perspective, last December, claims were 349,000. Expectations are still widely that unemployment is going to increase in the U.S. through the first half of 2009, and perhaps into 2010, which could lead to an unemployment rate approaching double digits. But at least for this morning, traders are focusing on the fact that the number was better than expected.

Also adding to a modestly optimistic mood this morning on the Street is further speculation that Obama’s stimulus plan may reach as much as $850 billion – impressing on everyone that while the Fed may have run out of bullets in terms of interest rate cuts, the government is willing to print as much money to throw at the economy as necessary to jumpstart it again, never mind the potential unwanted consequences of adding all of this debt.

Against this backdrop, it is hardly a surprise to see the dollar continuing its slide this morning against the euro, which is getting 1.4543, up 0.85%. The euro was less than 1.30 a couple weeks ago, but the Fed’s rate cut, further erosion in the U.S. labor market and expectations for hundreds of billions, if not trillions of new ‘stimulus’ debt is buckling it. Our outlook for the dollar remains bearish. We have commented recently we expect the euro to tip back over 1.50 by the second quarter in 2009. At the current rate, it is going to get there by the end of this year.

With the dollar sliding, gold is predictably on the rise, up $5.30 this morning to $873 and more than $100 in the past month. The one surprise for us with the dollar softening so much lately, is that it hasn’t buoyed oil prices further. Even OPEC’s production cut announced this week hasn’t helped. Oil is basically flat this morning at $40.07. This is a signal of just how pessimistic traders have gotten about the global economy in 2009, and just how low they expect demand for oil to get. We don’t concur with the depth of their pessimism and think oil prices are wildly oversold at current levels. If we are right, British Petroleum (NYSE:BP) and Petrobras (NYSE:PBR) look pretty attractive at current levels.

A welcome announcement this morning is that the government is adopting rules today for the ridiculously unregulated credit card industry which will protect consumers from usurious increases in rates on existing balances. The bad news is that the rules won’t take effect until July 2010 so expect your credit companies to take their pound of flesh before that point. Also, they will still be able to raise rates on new cards and future purchases. Maybe the news isn’t that great. The credit industry, as far as we are concerned are the biggest crack dealers in the country doling out credit to unqualified consumers and pressing them, with the government’s blessing to squeeze the needle.

In international markets, Norway’s unemployment for December reached 2%, up from 1.8% in November.  

On the corporate front,

·         Fed Ex (NYSE:FDX) reported Q2 revenue of $9.87 billion, up 1% Y/Y, with earnings of $493 million, or $1.58 per share, compared with earnings of $479 million, or $1.54 last year. Management announced costs cutting measures including pay cuts for executives;

·         Rite Aid (NYSE:RAD) reported Q3 revenue of $6.47 billion from $6.5 billion last year with a loss of $248.7 million, or $0.30 per share, an increase from a loss of $93 million, or $0.12 per share last year;

·         Lennar (NYSE:LEN) reported Q4 revenue of $1.28 billion, down 41% Y/Y, with a loss of $811 million, or $5.12 per share, compared to a loss of $1.25 billion, or $7.92 per share last year.

·         In the auto sector, Chrysler is closing its North American facilities for at least a month while it waits to hear whether it is getting help from Washington;

In terms of what we expect in today’s session, we think that at some point, stocks will test negative territory and then it is up in the air whether traders will back off and let stocks continue to slide ahead of the weekend and next week’s final revised GDP report for the Q3, or whether they will be able to keep their focus on this morning’s catalyst – the better than expected weekly jobless claims report and use that as fodder for the notion that the markets have put in their bottoms. In either case, we expect volume to taper into the holidays which will exacerbate choppiness. The good news is that we don’t have any further economic data on tap this week to potentially depress the Street. The bad news is that the focus will turn further to corporate earnings and guidance which is all pretty downbeat. We are taking this morning’s strength as a further opportunity to hedge our portfolio against downside risk.