Markets Opening Lower - More Deterioriation of Economic Data, Corporate Warnings in Focus

January 15, 2009 – The futures are indicating lower openings this morning as financial and tech stocks are looking week in pre-market activity. JP Morgan(NYSE:JPM), Intel (Nasdaq:INTC) and Apple (Nasdaq:AAPL) are the headliners. Despite the fact that JP Morgan actually came in with better-than expected results, it is the first of the financials to report and concerns are mounting that this is going to be another quarter of dismal financial reports for the group. Traders are also nervous about Intel’s report which is due out later today. Intel has already warned it was going to miss estimates. And Steve Job’s health at Apple is a big concern to Apple shareholders.

The Labor Market was expected to report unemployment claims were 500,000 last week. Instead, jobless claims rose 54,000 to 524,000. The one positive note is that continuing claims declined to 4.5 million from an upwardly revised number of 4.6 million the prior week. The Producer Price Index is expected to show a decline of 2% in December. The number came in down 1.9%, slightly below expectations. The markets reacted slightly positively to the numbers, which can probably be chalked up to the fact that the numbers were ridiculously worse than expected (which has been a trend lately). But the fact is that this is yet another economic release that is worse than expectations, which in our opinion, is foreshadowing a scenario where a second half recovery is not likely.

The housing market continues to reel. Reports this morning are that more than 2.3 million American homeowners faced foreclosure last year, an 81% increase from 2007. 860,000 properties were actually repossessed by lenders and Moody’s Economy.com is projecting that the number of homes lost to foreclosure will rise by another 18% this year.

The dollar is stronger against the euro this morning which can be attributed to a rate cut (see below) at the ECB. Our outlook for the dollar remains firmly bearish. At some point currency traders will adjust valuations to adjust for the trillions being added to the national balance sheet in debt and the fact that it should not be clear the U.S. is not pulling out of this recession as early as expected. Gold is up $4.40 to $813.20 but well of recent trading levels. Our bearish outlook on dollar leads us to have a bullish outlook for gold. We see $1,000 prices this year.

Oil prices are down slightly, by $0.37 to $36.91. With global economic trends deteriorating, we think, short of another OPEC production cut (which we expect sooner than later) oil prices are going to continue to face heavy downward pressure. Keep in mind that China has been stockpiling oil lately with prices at current levels. It is now officially the third largest economy in the world and historically it has pulled only about 6% of global oil supplies while the U.S. has pulled 25%. Look for China to begin bridging this gap (even in the current economy) and this, alone, should be enough to drive oil prices back to $70. It shouldn’t surprise anyone that we are bullish on energy stocks.

In international markets, the European Central Bank cut its interest rates by 0.5% to 2% in another effort to try and buoy its economy. In a move that is as ‘out of the box’ as anything we have seen yet, a Lithuanian debt collector reportedly hired a witch to track companies and individuals that are failing to pay their debt. Foreign direct investment in China was up 23.6% in 2008 to $92.4 billion. And Mongolia is asking China for a $3 billion loan to help stabilize its financial and infrastructure systems. Singapore’s retail sales were down 5.2% in November. Japan machinery orders fell 16.2% sequentially to ¥754.2 billion, the fastest pace of decline ever. Australian unemployment hit a 2-year high of 4.5% in December.

On the corporate front

·         Financials – JP Morgan reported better than expected earnings with a profit of $702 million, or $0.07 per share, but down 76% on a Y/Y basis. It reported $2.9 billion in writedowns.

·         Air/Transportation – Airbus expects orders to dip below deliveries in 2009 for the first time in six years.

·         Auto Industry – Nissan is cutting domestic production by 64,000 vehicles in February and March.

·         Tech – Google (Nasdaq:GOOG) is cutting 100 jobs.

·         SABMiller (NYSE:TAP) said its beer shipments in Q3 are down 1%, but its financial performance over the quarter is still in line with expectations.

·         First Solar (Nasdaq:FSLR) was selected by Masdar Abu Dhabi Energy Company to supply 5MW of modules for what it says is to be part of the largest grid-connected PV system in the Middle East.

·         Green Plains Renewable Energy (Nasdaq:GPRE) announced a marketing services agreement with Bushmills Ethanol, which brings it to more than 300 million gallons per year of expected operating capacity for firms it provides third-party marketing services to.

One of the key things we would point out about yesterday’s 248 point decline on the DJIA is that volume picked up by 8%  to 5.4 billion shares trading hands. On an historical basis, volume was still light but momentum decidedly shifted in favor of the bears so we would look for some follow though in today’s session. In terms of what we expect in today’s session, more choppiness and more downward pressure on stocks. We have been commenting lately that as we approach the 8,000 level on the DJIA we are more inclined to advocate accumulation and entrance points into stocks.

Yesterday the DJIA closed at 8,200. We think the DJIA could very well tip into the 7,000 levels and even retest November 21 levels of 7,550, but at these levels (all things being equal) we would be pounding the table that stocks are tremendously oversold.

·         Sectors we like: energy, utilities, alternative energy and clean technology

·         Sectors we would run from: consumer discretionary, transportation, industrial, retail, financial and housing

·         We don’t really have a strong opinion about biotechs and healthcare.

We suggested yesterday that a smart trading/investment strategy is to sell puts on a stock that you would like to own at a lower price. We won’t explain the strategy again here but we would suggest consulting your broker on it. This is a perfect time to do so.