Markets Opening Marginally Higher - Trade Deficit Widens, Dollar Remains Soft

November 13, 2009 – The futures are pointing to modestly higher openings this morning at the Street looks for a catalyst heading into the weekend.

In terms of key economic data this morning, the Commerce Department reported the trade deficit widened to $36.5 billion (expectations were for $31.65 billion, up from $30.71 billion in August). Imports were up 5.8% on the month while exports were up 2.9%.

The dollar is softer against the euro this morning, with the euro trading at $1.4873. The euro is strengthening on reports that the euro zone has emerged from its recession (see below). The dollar index most recently closed at $75.42, and we expect that to trend back below the $74 level.

Gold prices are up $1.30 to $1,107.90. The dollar trade will continue to be the primary driver for gold prices. Earlier this week gold backed off on profit taking, which provided near term strength to the dollar, but we see that as being a temporary dynamic. Look for gold prices to continue trending to $1,200 while the dollar index slides to $72-$73.

Oil prices are down $0.21 to $76.73. Oil had sold off yesterday on the Energy Department’s report that weekly inventories increased by 1.76 million barrels (more than the 1 million barrel increase expected), while U.S. refinery operating rates fell to the lowest  level in more than a year. The softening dollar should continue to buoy oil prices, as should a recognition that the surging Chinese economy and auto market is soaking up excess demand left over from a U.S. economy still facing plenty of headwinds.

On the corporate front,

·         Alternative Energy – Solar Sector - Yingli Green Energy (NYSE:YGE) reported Q3 revenues of RMB 2,225.2 million ($326.0 million), up 48.5% over Q2and up slightly on Y/Y basis from RMB 2,209.8 million from Q308. Gross margins in Q309 were 20.1%, up from 18.3% in Q2 but down from 22.3% in Q308. Net income was RMB 120.8 million in Q3, or RMB 0.79 per share and ADS, compared with a net loss of RMB 393.7 million in Q2 and 147.6 million in Q308. As of September 30, Yingli had RMB 2,657.6 million ($389.3 million) in cash and restricted cash, and RMB 3,045.3 million in working capital. In terms of guidance, management updated its PV shipment target for FY09 to a range of 490MW to 500MW from 450MW to 500MW, and estimates gross margins to be in a range of 19% to 20%.

·         Alternative Fuels Sector – Westport  Innovations (Nsadaq:WPRT) reported a 19% Y/Y decline in Q3 revenues to $31.7 million, with CWI revenue down $3.2 million to $30.1 million for the period on 1,039 units shipped. Net loss was $9 million, or $0.28 per share, compared with net income of $0.7 million ($0.02 per share) for the three months ended last year. For comments from Think Equity’s David Woodburn click here.

In international markets, the euro zone economy grew by 0.4% in Q3 (0.6% was forecast), which technically means that it has emerged from its recession. Germany’s economy grew by 0.7% in Q3, while France’s economy grew by 0.3%.

In terms of what we expect  in today’s session, pundits and most traders continue to talk up the markets, discounting any disturbing economic data – like this morning’s trade deficit numbers which exemplify how poorly U.S. industry is performing relative to the world. By the way, our trade deficit with China is $22.1 billion in September – 60% of our total deficit. No wonder China is so good about loaning us more money every week. Our export business is dismal, representing only about 11% of GDP. Meanwhile, consumer consumption represents 70% of GDP. This is some of the data that, in our opinion, highlights the fundamental flaw in this economy and why we remain totally cautious.

Our economy relies on debt spending and that is not sustainable. This so-called recovery in the Q3 in the U.S. is debt-driven and is largely the result of rebuilding those bubbles based on low interest rates that were built up back at the beginning of this decade. The Treasury Department reported yesterday that the federal deficit hit a record in October, at $176.4 billion (expectations were for $150 billion). The deficit for the FY09 budget year ended September 30, hit $1.42 trillion, $958 billion above the 2008 deficit. The administration expects this year’s budget to reach $1.5 trillion.

Meanwhile, individual and corporate taxes remain depressed – receipts in October were down 17.9% Y/Y at $135.3 billion. Valuations in stocks right now are presupposing a level of corporate performance which is not likely given the state of the consumer, and national unemployment at 10.2%. The only hope Wall Street has is for interest rates to stay near zero, but with the dollar now on a slide the window is closing. If interest rates get raised, the momentum in the markets, fueled by Kool-Aid is going to hit a wall.

Bottom line – we continue to see more risk in stock prices to the downside than opportunity to the upside. Keep in mind the University of Michigan’s consumer confidence numbers are out in another hour or so.