Markets Softening Further Despite Lower Oil Prices

July 8, 2008 – The markets are going to open lower this morning after failing to sustain a move to the upside in yesterday’s session as we kick off earnings season today with Pepsi Bottling (NYSE:PBG) and Alcoa (NYSE:AA).  Oil prices are pulling back for the second straight session this morning dipping below $140 billion. However, expectations are that the retreat will be short-lived as the dollar is expected to soften a bit from 2-week highs and as the supply-demand fundamentals remain firmly imbalanced to the demand side.

The Street will be watching Fed Chariman Bernanke’s speech today closely at a mortgage lending forum for indications on whether the Fed intends to raise rates in the near term, and whether it might have any other “stimulative” plans on tap. Also in the housing sector, this morning we will get a look at pending home sales data for May from the National Association of Realtors. Expectations for the report are subdued, at best. The G-8 summit in Japan this week is focused on world hunger and cutting global emissions.

This morning the G-8 is endorsing cutting emissions by 2050, but so far there has been no substantive game plan to do so that was set forth and no consensus even how to meet short-term goals in reductions. For example, the United States is on record for contending that the EU goal of cutting emissions by 20 to 40 percent by 2020 is not realistic. The summit host, Yasua Fakuda, intends to get some more tangible commitments. We’ll see.

On the corporate front,

·         Pepsi Bottling announced that Q2 profit is up 7% on stronger international growth at $174 million, or $0.78 per share on revenue that moved 5% higher to $3.52 billion. Expectations for profit were about $0.75 per share on revenue of $3.55 billion. The company’s guidance for FY2008 remains $2.30 to $2.38 per share on revenue of $14.27 to $14.41 billion.

·         Siemens (NYSE:SI) announced today that it is cutting 16,750 jobs worldwide, which is about 4.2% of its global workforce.

·         Office Depot (NYSE:ODP) reported this morning that Q2 same-store sales are down 10% on weakening business conditions and says it expects a challenging market for the remainder of 2008. It reports financial results on July 30. ·         In the automotive sector, GM (NYSE:GM) and Ford (NYSE:F) reported stronger sales in China this morning, with GM’s sales up 12.7% to 590,126 vehicles in the first half and Ford reporting sales growth of 21% Y/Y to 172,411 vehicles.

·         Hydrogenics (Nasdaq:HYGS) one of our recommended stocks, which is up 126% since we recommended it on May 14, announced this morning that it is supplying 20 fuel cell power packs to Concurrent Technologies.

·         Energy Conversion Devices (Nasdaq:ENER) announced that its UNI-SOLAR laminates will power the world’s largest rooftop solar power system (12MW) on GM’s assembly plant in Spain.

·         Allen & Co is hosting its annual retreat today where media and Internet leaders come together for the week to network, make deals and discuss industry trends

In terms of what we expect in today’s session, more downside pressure and choppy trading is likely on tap. We predicted back in April as the DJIA and Nasdaq rallied back closer to all time highs that the DJIA would pull back to 12,000 and the Nasdaq would pull back to 2,200 and opined that we couldn’t understand, given the market fundamentals, why the markets had rallied so gamely. The only rationale at the time, which was basically a hope that the worst was behind us, seemed to be really bad. Well, the DJIA has blown through 12,000 and is now set to test 11,000 sooner than later, but the Nasdaq is just pulling into the 2,200 range.

What We Said Last Year

July 10, 2007 - We are deeply concerned about consumer credit in the light of the fact that personal savings are at negative levels not seen since the Great Depression and despite the fact that the job market is relatively strong, wages are not growing. Meanwhile, masses of consumers are now beginning to be hit by spiking home payments that they cannot afford to pay. This could also be a catalyst for the spiking consumer debt as consumers are not able to pull more debt out of their homes right now so they have to resort to plastic to get their fix. The outlook in our opinion for the economy is precarious at best.

Well, we remain deeply concerned. This afternoon the Federal Reserve will release the latest numbers on Consumer Credit.  Historically, the Street doesn’t look to closely at this report, but we think it is a critical one. Consumer credit just cannot be sustained in the current environment where consumers are being hit by record gas prices, and other inflationary pressure, amidst negative personal savings.

Fast Facts

·         The national debt is tripping through $9.5 trillion this morning, well on its way to test the next debt ceiling. This will keep the pressure on the dollar.  

·         Lame legislation – with all of the critical legislation in place at present dealing with appropriations of funding in the face a burgeoning deficit, and addressing national security through energy policy, there is actually a bill on the floor, H.R. 6068, which is called the “Don’t Let the Bedbugs Bite Act of 2008”. Yes, as the title implies, it is focused on legislation to ensure that States will be properly funded to inspect hotel rooms for bed bugs.