Markets Open Lower - More Downbeat Corporate Earnings Reports

January 23, 2009 – The markets are set to open lower this morning as more negative corporate earnings reports and warnings set the tone. Pundits and media are beginning to focus more on Obama’s stimulus package and there are some doubts about how quickly some of the stimulus can even come online. There is no quick fix to the economy, and a large part of the $825 billion in stimulus won’t make its way into the economy until 2010 and 2011, so traders are clearly setting expectations that the recession is going to be a protracted one.

In terms of currencies, Treasury Secretary Designate Tim Geithner is saying Obama is blaming China for manipulating its currency – thankfully Geithner suggests this is a bad idea. Think about it, China is the largest purchase of our treasuries. Without them, we would have far less flexibility to print money, adding more debt to the balance sheet in our efforts to stimulate the economy. The fact that we are adding so much more debt has pressured the dollar, thereby deflating China’s investments. How does that seem reasonable, and how audacious do we have to be to ask China to buy our debt, while we deflate our currencies and think that they should sit on their hands? Geithner rightly sees that branding China as a “manipulator” would carry unwanted consequences. Hopefully Obama listens, and avoids the peer pressure to name call.

The dollar is stronger against the euro this morning on the heels of more downbeat economic news in the EU. The euro is trading at 1.2837. Gold is up $22.00 to $880, signaling that traders are beginning to turn away from the dollar as a near-term “safe haven” (good idea) and to gold instead. Our outlook for gold remains bullish and we expect $1,000 prices in the first half of 2009.

Oil prices are down $2.10 to $41.57, though still significantly off recent lows. We continue to look for OPEC to announce further production cuts.

On the corporate front,

·         Electronics – GE (NYSE:GE) said its earnings fell 46% Y/Y for the Q4 to $3.65 billion, or $0.35 per share on a 5% decline in revenue to $46.2 billion. Samsung reported a loss for the quarter of 20 billion won ($14.4 million), down from a profit of 2.2 trillion won for the same period last year. Sales were 18.45 trillion won, up from 17.48 trillion won last year. For the FY08, profit fell 25.6% to 5.53 triliion won and sales were up 15.5% to 72.95 trillion won. Xerox (NYSE:XRX) reported that Q4 earnings were down to $1 million from $382 million in the year ago period, while sales were down 10% to $4.37 billion. The reason for the massive slide in profit was a one-time charge for job cuts. Excluding that, earnings would have been $265 million. For the FY08, earnings were $230 million, or $0.26 per share, on revenue of $17.61 billion, compared with a profit of $1.144 billion, or $1.19 per share and revenue of $17.23 billion last year.

·         Solar – Suntech Power (NYSE:STP) raised revenue guidance but noted its gross margins will be lower. It sees Q4 revenue in a range of $405 to $420 million, but an inventory provision in the range of $46 to $58 million may have a negative impact on GMs by 11% to 14%. Consequently it said Q4 GMs are expected to be in the range of -1% to 2%. It also said it reduced its workforce by about 800 employees. Trina Solar (NYSE:TSL) said it achieved its estimated module shipment target of 55MW to 60MW, and has reduced its module non-silicon manufacturing costs by about $0.13 per watt.

·         Semis – German chipmaker Qimonda AG has declared bankruptcy this morning noting that last month’s rescue package of €325 million ($421.98 million) failed to keep it afloat. MEMC (NYSE:WFR) cut its outlook.  

·         Manufacturing & Defense – Schlumberger (NYSE:SLB) said Q4 earnings fell almost 17% to $1.15 billion, or $0.95 per share on revenue of $6.87 billion, up from $6.25 billion for the same period last year. For the FY08, income rose to $5.43 billion, or $4.20 per share on revenue of $27.2 billion, up from $23.3 billion last year.

·         Automotive – Harley Davidson (NYSE:HOG) said Q4 Y/Y profit fell almost 60% to $77.8 million, or $0.34 per share on a 6.8% decline in revenue to $1.29 billion per share. For the FY08, earnings were down 30% to $654.7 million, or $2.79 per share on a 2% decline in revenue to $5.59 billion.

·         Job cuts – Harley Davidson (NYSE:HOG) cutting 1,100 jobs;  Interline (NYSE:IBI) cutting 85 jobs; Polaris (NYSE:PII) cutting 460 jobs;

In international markets, the British government reported this morning that its economy contracted 1.5% in the Q4, after contracting 0.6% in Q3.

In terms of what we expect in today’s session, more weakness and a test of the 8,000 level on the DJIA. Corporate earnings are the primary downer, and traders continue to recalibrate as analysts lower estimates based on downbeat corporate guidance. We wouldn’t be surprised to see a near-term test of the 7,600 lows hit on November 21. Adding to the volatility this morning is the fact that it is a Friday and traders will be cutting positions heading into the weekend. Also keep in mind that next week’s is going to be fairly busy on the economic report front, with home sales, consumer confidence, durable orders, weekly jobless claims, and advanced GDP estimates on tap. The expectations across all of these fronts is pretty muted and lackluster results is probably already getting priced into the markets.

Wit Wisdom Fools and Folly

One of the economists we respect the most, is Nouriel Roubini. His most recent projection is that stocks will be pressured further by slowing demand in China for the world’s goods. He expects global equities to fall 20% form current levels.