Markets Open Lower as Traders Focus Back on Dismal Economy

November 5, 2008 – The futures are indicating lower openings this morning as traders turn their attention back to the economy and the dismal fundamentals. Many headlines in the financial media this morning are talking about the weak economy that the Obama White House is going to inherit and the microscope is now focusing on prognostication as to what Obama is going to do to get the economy back on track, and whether his plan will work.

Oil prices are trading lower this morning by $1.78 to $68.75 as traders return their focus on the slowing global economy and decreasing demand. Gold prices are slightly higher, up $2.90 to $760.20. The dollar is softer against the Japanese yen, but slightly stronger against the euro.

The ADP Employer index came in much worse than expected this morning, saying the U.S. lost 157,000 jobs in October. This is a bad signal for Friday’s Labor Department report. The question is whether this will reflect the worst of the deterioration in the labor market or whether there is more deterioration ahead. Our opinion is that there is more deterioration ahead, which supports expectations that we are in the midst of a long and protracted recession. It also is supporting a widening consensus that another stimulus package is needed. The number that is being tossed about is a package of about $300 to $400 billion.

We are skeptical about any proposed stimulus plans from the perspective that it is just tacking on more to the national debt, which will ultimately further weaken the dollar and in the long-term give rise to a whole other problem – inflation. But smarter people than us, like Nouriel Roubini, have also endorsed the notion that a massive stimulus plan is necessary.

In international markets, a dismal manufacturing and service report in Britain is fueling speculation that the Bank of England is going to cut interest rates tomorrow by 1%. The German government has approved a stimulus package of up to $64 billion over the next two years to help stabilize its economy. The European Union has cleared Denmark’s takeover of Roskilde Bank which is believed to be instrumental in preventing a collapse of the country’s banking system. The Swiss government has proposed to raise the state-required guarantee for bank deposits to 100,000 Swiss francs ($86,000) from the current 30,000 Swiss francs, to increase confidence.

On the corporate front,

·         Time Warner (NYSE:TWX) reported Q3 net income of $1.07 billion, or $0.30 per share, basically flat on a Y/Y basis, on revenue of $11.71 billion, again, basically flat on a Y/Y basis;

·         BNP Paribas said Q3 profit declined 56% to $1.15 billion on a $1.41 billion loss tied to the financial crisis;

·         SunPower (Nasdaq:SPWRA) cut its Q4 profit guidance on a stronger dollar against the euro. Management said it now expects Q4 revenue of $388 million to $418 million and net income of $0.24 to $0.31 per share, or $0.58 to $0.65 on an adjusted basis. For FY2009, it expects the impact of a stronger dollar will be about $50 million in revenue and $0.50 to adjusted earnings per share, resulting in profit of at least $1.68 per share on revenue ranging from $2 to $2.1 billion. On an adjusted basis, it expects earnings of at least $3 per share in FY09.

In terms of what we expect in today’s session, we think the markets are going to contract this morning as traders price in expectations for more dismal labor market data this week. Moreover, stocks have rallied nicely over the last handful of trading sessions, and frankly, we don’t see any catalysts in place to keep stocks moving higher. We think another retest of recent lows is more than possible, and we would be buying stocks in the 8,000 to 8,500 range on the DJIA and hedging long positions, and taking profits in the 9,500 range.

Fast Facts

·         The national debt is up to $10.57 trillion this morning