Markets Set to Move Lower - More Downbeat Earnings Reports Set the Tone

April 21, 2009 – The futures are indicating lower openings this morning for the broader markets as the Street sorts through more earnings reports and concerns mount about whether banks will pass the ‘stress test.’ Despite comments from Fed VP Donald Kohn last evening suggesting that the economy is positioned for a recovery later this year, the mood has turned downbeat again amongst investors.

The ‘stress test’ issue is increasingly becoming a no-win situation. If it is too strong, more banks will fail, undermining what little confidence has been built in the financial markets. If the stress test is too weak, it won’t be believable. In any case, the administration and the Fed are tied to the discussion at this point.

The dollar is basically flat against the euro this morning, with the euro getting $1.2923. The relative strength of the dollar in past months can be attributed almost completely to the fact that peer currency countries are facing their own economic headwinds which has resulted in a steady flow of central bank cuts on key rates. Lately, the dollar has been helped by the same upstart in optimism that had fueled the recent rally in stocks. However, the focus is now turning back to the ‘glass half empty’ scenario for the economy which will likely weigh on the dollar. In any case, we continue to be absolutely bearish on the dollar as the US continues to flood the markets with money supply. Moreover, with unemployment widely expected to increase we expect economic headwinds to continue, which will weigh on consumer confidence as well as the greenback.

Gold is up $1.30 this morning to $888.80. Likely gold will be helped by the recent selloff in stocks, but our bullish thesis is much more focused on our bearish outlook on the dollar.

Oil prices are flat at $45.90 this morning having pulled back recently on renewed concerns that the US and global economies are continuing to struggle – thereby reducing demand. OPEC is meeting on May 27 and we expect it to lean toward cutting further production to help buoy prices.

On the corporate front,

·         Alternative Energy – Solar - First Solar (Nasdaq:FSLR) said it has secured financing for a 53MW facility in Germany. Construction on the project began in January this year and the first 15MW has been completed. The remaining 38MW will be completed by the end of this year. First Solar and Juwi plan to sell the majority of the project upon completion.

·         Beverages – Coca-Cola (NYSE:KO) said Q1 revenue fell 3% on a Y/Y basis to $7.17 billion while earnings were $1.51 billion, or $0.58 per share, down from $1.5 billion for the same period last year. The results met expectations.

·         Chemicals – DuPont reported a 17% Y/Y decline in Q1 revenue to $7.27 billion, and a 59% Y/Y decline in profit to $488 million, or $0.54 per share. Expectations were for a profit of $0.52 per share on $7.74 billion in revenue.

·         Drug Manufacturers – Schering Plough (NYSE:SGP) reported a 6% Y/Y decline in revenue, but a 177% increase in profit to $767 million, or $0.46 per share. Expectations were for earnings of $0.47 per share. While Merck (NYSE:MRK) reported an 8% Y/Y decline in revenue to $5.39 billion, and a 57% Y/Y decline in profit to $1.43 billion, or $0.67 per share – expectations were for earnings of $0.77 per share on revenue of $5.77 billion. It reduced forecasts on revenue and earnings.

·         Financial Sector – Bank of New York (NYSE:BK) reported a 57% Y/Y decline in Q1 profit to $322 million, or $0.28 per share, and cut its dividend. Expectations were for earnings of $0.63 per share.

·         Technology – IBM (NYSE:IBM) reported an 11% Y/Y decline in sales to $2.32 billion, and profit of $2.3 billion, or $1.70 per share – better than the $1.66 expected. In international markets, Germany’s consumer confidence improved in March, showing first positive reading since June, 2007. In Britain, the CPI declined to 2.9% in March, from 3.2% the prior month. In Sweden, the central bank cut interest rates by 0.5% to a record low of 0.5%. India’s central bank cut its key interest rates as well, and cut its growth forecast for the year to 6%.

In terms of what we expect in today's session, more weakness is on tap. We are sticking to our analysis yesterday that risk to the downside in the near term is 7,522 on the DJIA, 1,500 on the Nasdaq and 787 on the S&P 500. There just isn't any good news out there, and short of that, focus will turn to the bad news, of which there is plenty.

Wit, Wisdom, Fools and Folly

Nouriel Roubini forecast the ‘suckers rally’ to subside in the equities markets as the US economy continues to struggle. He also is projecting China’s economy to expand by up to 5.5% this year, lower than its government’s target of 8%. “For people who say there are green shoots, I see only yellow weeds.” Roubini expects further contraction in the US economy in 2009 and unemployment to expand up to 11% next year. Chief

Market Technician at MKM Partners, Katie Stockton talked to Bloomberg about oil prices. She said crude has established a base to rally over the long-term. She thinks oil will hold at current levels and that the long-term outlook is “looking much rosier.” She said there isn’t resistance until you get to the $58 levels.

Fast Facts

·         The national debt is at $11.1 trillion (the debt ceiling is $12.1 trilllion)