Markets Open Higher on Expectations of Rate Cut
December 16, 2008 – The futures are indicating higher openings this morning for the broader markets at the Street anticipates another rate cut from the Fed. Expectations at this point are for the Fed to cut rates to 0.5%. The futures also reacted positively to this morning’s economic data. The CPI was expected to fall 1.3%, but came in down 1.7%. Core CPI was unchanged. Housing starts fell 18.9%, at 625,000 much less than expected. Building permits also came in less than expected. The decline in CPI is due in large part to relative strength in the dollar, energy and oil prices.
But don’t look for the CPI numbers to soften too much further, and we expect a reversal, as the dollar weakens on further rate cuts and adjusts to the trillions of debt that Washington is adding to our balance sheet. In addition, OPEC is expected to cut oil production later this week, which has been buoying oil prices and pushing them higher of late from recent lows in around $40. This morning oil prices are up $0.78 to $45.29.
The euro continues to strengthen against the dollar, up 0.38% this morning to 1.3741. Our outlook for the dollar remains bearish, and we expect the euro to rally back to the 1.5 level by mid-2009. Meanwhile, as the dollar has been softening, gold has been strengthening, although down $2.40 this morning to $834.10.
In international markets, Poland’s auto industry is seeking help from the government. A preliminary estimate from the purchasing managers index (PMI) in the euro zone shows is that its services and manufacturing sectors continued to contract in December – not a surprise. The services index fell to 42 from 42.5 in November, while manufacturing fell to 34.5 from 35.6 – the lowest in the survey’s 11 –year history. The composite reading declined to 38.3 from 38.9.
In California, Republicans are seeking $22 billion in spending cuts to address the state’s huge $144.5 billion budget shortfall, while the Democrats are calling for about $9 billion in cuts. The GOP wants to cut education alone by more than $10 billion. They are also proposing that poor families enrolled in the state’s welfare-to-work program accept a 10% reduction. To be fair, they are proposing a 5% cut in their own salaries. The majority of Republicans have also signed no-tax pledges.
In Michigan, focus remains on the auto industry and Washington continues to assure it that it will come with some form of aid, which will be initially as much as $15 billion. Expectations are for GM to get $8 billion and Chrysler to get $7 billion. The dismal truth is that after Detroit takes down its $15 billion in aid, it will be back asking for more as early as April. Conventional wisdom is currently that the Big Three need about $90 billion or so.
On the corporate front,
· SanDisk (Nasdaq:SNDK) is lowering production at its Japanese plants to about 70% of current capacity;
· Ener1 (AMEX:HEV) has secured a commitment for a $30 million line of credit which will fully fund its business plan through 2009. It further confirmed it is on track to deliver advanced lithium-ion batteries to Think electric vehicle maker for installation in Think City vehicles for commercial sale scheduled to begin by late Q1, 2009.
· Goldman Sachs (NYSE:GS) reported a Q4 loss of $2.12 billion, or $4.97 per share, compared with net income of $3.22 billion, or $7.01 per share for the same period last year. Q4 revenue was negative $1.58 billion, compared with revenue of $10.7 billion for the same period last year. Revenue for the full year fell 52% to $22.2 billion. Moody’s cut Goldman’s rating credit to A1.
In terms of what we expect in today’s session, we think we will see buying on rumors (rate cut) and selling on news. To be sure, the markets have been much more resilient that we have expected them to be lately, which could be a signal that all of the bad news and negative outlook has been priced into stocks. This may be. We also think the markets have already factored in a 50 basis point cut from the Fed. We just can’t find any catalyst to stimulate more buying amidst all of the uncertainty. And the outlook just isn’t getting any better, creating more reasons, we think to be nervous about how deep this recession is going to get. That being said, there are definitely places that look attractive for us to invest, but we are remaining focused on buying on weakness as opposed to chasing stocks at the higher end of the current range. In particular, we remain bullish on alternative energy and clean tech sectors.
The catalysts driving growth here are impressive and long-term, ranging from state and federal legislation, to global climate change pressures (pace the EU’s recently announced 20 by 20 target), and national security issues. Regardless of the fact that oil prices have dipped lately to below $50, there remains a massive pressure for countries around the world to reduce dependence on Middle Eastern oil. And we think, with the softening dollar, increasing long-term demand and finite supplies, that oil will move back higher again. We also like gold and are sympathetic with commodities in general (pace Rogers below). Back to our outlook for this morning, we think stocks move up initially, but we don’t think they will be able to gain any steam, which could lead us back to test lows and even turn negative into the close.
Jim Rogers Speaks on Bloomberg
Rogers said this morning he is selling his dollar holdings on the heels of a big rally in the face of forced liquidation and covering which caused the ‘artificial rally.’ He said the dollar is a “terribly flawed currency”, and it may even be a doomed currency, going the way of the Pound and Sterling. When asked what he is buying, he said commodities, Chinese and Taiwan shares. He said you need to be buying things where the fundamentals are not impaired. He said the fundamentals are getting better. Prices have been down and this is a bullish opportunity.
Climate Related
France’s Sarkozy is urging the U.S. and other countries around the world to follow the EU’s lead on establishing a framework to reduce greenhouse gas emissions further. The EU has set a target to cut GHGs 20% by 2020.
A recent study from University of Colorado-Boulder geography professor Mark Williams shows that the long-term outlook for snow resorts in Aspen and Park City are not good. The resorts should continue to see snow similar to today’s snow pack for the next 25 years, but if carbon emissions increase, the average temperatures in Park City will rise by 10.4% by 2100 which could result in no snowpack. In Aspen, temperatures will be 8.6% warmer which will result in marginal snow levels. And with water shortages also expected in the future, don’t look for ski resorts to be able to rely on storing water for snowmaking.
