Markets Set to Open Lower - Two Sessions of Consecutive Gains for October is in Jeapardy

October 31, 2008 – The futures are indicating lower openings this morning as the Street continues to recalibrate expectations about how deep the recession in the U.S. economy is going to get, and its impact on corporate performance. The markets managed to hold on to most of their gains in the closing hour of yesterday’s sessions, which was a good signal, but we have seen them post two consecutive gains throughout the month of October, and it doesn’t look like today is going to get us over that milestone either.

The dollar is stronger this morning against the euro, at 1.2730 and oil prices are on the decline again, down $2.13 to $63.83. Gold prices are also pulling back, down $12.50 to the $726 level. We think that OPEC is going to step in again in the near term to further cut production to buoy oil prices which continue to decline as a result of relative strength in the dollar and widening expectations that the global recession is going to be longer and deeper than expected, which will further dampen demand for oil.

In the international markets, Japan’s central bank cut its key interest rate to 0.3% from 0.5%. Russia’s Alfa Bank is reportedly asking for $400 million from the national development bank to pay off another loan. Iraq is cutting its 2009 budget by $13 billion to $67 billion due to falling oil prices. French and Dutch programs to stabilize their banking sectors gained EU approval. France has set up a 265 billion euro ($345 billion) fund which will distribute urgent loans to French banks having liquidity issues. The Netherlands are guaranteeing 200 billion euros ($261 billion) of bank loans. Both programs are open to banks based in other countries.

In terms of economic data on tap today, expectations are muted for the Personal Income and Spending data for September which are expected to show declines. Also ahead, are the Chicago PMI numbers for October and the Michigan Sentiment report for October.

In terms of what we expect in today’s session, we think volume will be pretty light heading into the weekend, and pressure will be downward. There just aren’t any catalysts in place to driver stocks higher, or to sustain back to back gains. Sure, when the DJIA is tipping closer to 8,000 stocks look pretty cheap and the ‘bargain hunters’ have been wading into the markets, but there remain significant, and even mounting headwinds into the economy, led by expectations for sharp increases in the unemployment markets.

We noted in commentary earlier this week that Nouriel Roubini, one of the few economists that has been right in terms of forecasting the dismal economic scenario we are muddled in, predicts that we are going to be in a two-year recession (at best) and that the S&P has another 15% to 20% downside from here. This prediction is sobering, but we are inclined to listen to Mr. Roubini’s guidance and plan accordingly.

Our recommendation to our readers is to accumulated closer to 8,000 on the DJIA and to sell out of the money covered calls as the DJIA approaches 9,000. We don’t see the DJIA breaking out of this range any time soon.

Fast Facts

·         The national debt is at $10.54 trillion this morning