Markets Open Lower Again Ahead of Tomorrow’s Nonfarm Payrolls Report

November 6, 2008 – The futures are indicating lower openings this morning on the heels of yesterday’s selloff. The Street continues to recalibrate expectations and valuations of companies based on the onslaught of economic data which continues to surface indicating conditions in the economy are still deteriorating. One of the key areas of concern is the labor market. Yesterday’s ADP report for payrolls was significantly worse than expected, this morning expectations are subdued for weekly jobless claims and expectations are also downbeat for tomorrow’s report.  Also dragging stocks down this morning is a series of downbeat earnings reports with lowered guidance, and expectations for a slowdown in sales across the retail sector as businesses reported same-store sales data.

Weekly jobless claims came in this morning at 481,000, slightly more than the 480,000 which had been expected. We think this number has already been priced into the markets, and traders are also preparing for a worse-than-expected nonfarm payrolls report tomorrow. The deterioration in the labor market is, in our opinion, the key indicator that this economy is getting sucked deeper into the recession.

Oil prices are moving later this morning, as traders react to the negative economic and sales data, down $1.88 to $63.42. The softer dollar is also help ease oil prices. Meanwhile, gold prices are down $2.30 to $740.10. Our outlook for the dollar remains bearish over the long-term, although in the near term we expect to continue to see it benefit from weakness in global markets. This morning’s rate cuts overseas should help buoy the dollar in the near term as well.

Overseas, markets sold off on as traders refocus on the negative economic outlook. The European Central Bank cut its rates by a half a basis point to 3.25% and the Bank of England cut its rate by one hundred and fifty basis points to 3%. The Czech Republic Central Bank cut its key interest rate by seventy-five basis points to 2.75%. Hungary’s government is providing banks up to 600 billion forints ($3 billion) to stabilize its banking sector, as part of a $25.1 billion standby loan for the country from the IMF the EU and the World Bank. France cut its growth forecast next year to GDP growth between 0.2% to 0.5%, down from a previous forecast of 1% growth.

On the corporate front,

·         Cisco Systems (Nasdaq:CSCO) reported yesterday, forecasting its first sales decline in five years;

·         Echelon (Nasdaq:ELON) reported Q3 revenues of $29.5 million, compared to $24.7 million for the same period last year, and a net loss of $5.4 million, or $0.13 per share compared to a net loss of $5.7 million, or $0.14 per share last year. Gross margin improved for the quarter to 44.7% from 40.4% on a Y/Y basis. Management guided revenue for the Q4  in a range of $36 to $38 million, with Non-GAAP gross margin in a range of 39% to 40%. Non-GAAP loss per share is expected to be in a range of $0.06 to $0.08 per share.

·         The auto industry continues to struggle – Toyota (NYSE:TM) reported that its July-Sept. net profit fell 69% to 139.8 billion yen ($1.4 billion). Management attributed exchange rates and the global credit crunch as the culprits in the poor results. Toyota cut its net profit forecast for FY2009 to 550 billion yen ($5.5 billion), which is about half of its previous guidance of 1.25 trillion yen, and down about 30% from FY2008 net profit of 1.72 trillion yen. Sales for the quarter were down 8% to 5.98 trillion yen ($60 billion). Its revised sales forecast for FY2009 is 23 trillion yen ($232 billion), down 12.5% from the previous year, and down from the previous guidance of 25 trillion yen ($253 billion).

·         Retailers are reporting negative October results and outlooks – the only bright spot has been Wal-Mart (NYSE:WMT) which reported a 2.4% gain in same-store sales. Costco (Nasdaq:COST) reported a 1% decline. Limited brands reported a 9% decline.  

In terms of what we expect in today’s session, we think downward pressure ahead of tomorrow’s nonfarm payrolls report is on tap. The DJIA will break back through the 9,000 today, and, as we have been guiding our readers, we are accumulating stocks anywhere south of 8,500, which is a level that we think could be hit in tomorrow’s session.