Markets to Get Lift At Open, Traders ‘Bottom Fishing’ on Heels of Yesterday’s Selloff - Too Early?

December 2, 2008 – The futures are indicating higher openings for the broader markets this morning after yesterday’s 679 point selloff on the DJIA. There aren’t any particular catalysts that we can point to which explain why stocks are pointing higher at the open this morning, other than a scenario where investors are doing some bottom fishing. The economic data still looks generally miserable, and throughout the week, we fully expect it to show that the fundamental outlook for the economy continues to erode. But against a backdrop where investors, traders, pundits and analysts seem to have no clue about where ‘fair value’ is for stocks, we continue to see a whip-saw effect in the markets which results in 1000 point rallies and selloffs in a purely reactionary manner.

This morning credit reporting agency TransUnion LLC said that the percentage of people that are behind on their mortgages rose in the Q3 over the same period last year, to 3.96%, compared to 2.56%. The firm projects that the number will increase in the Q4 to as higher as 4.6% to 4.7%.

Oil prices are trading at a three-year low this morning, around the $49 level as traders continue to recalibrate ‘fair value’ based on demand expectations in the midst of the global financial crisis. We continue to think the selloff in oil has been way overdone, and it is therefore probably a good time to be accumulating the energy sector on weakness.

The euro has strengthened against the dollar lately, but only slightly, at 1.2723. The dollar sold off on yesterday’s manufacturing data, and we expect further weakness this week in a reaction to other key economic data. Our longer-term outlook for the dollar remains bearish as well, as Washington continues to contemplate new ways to add trillions of dollars to the national debt. Meanwhile, gold is up slightly this morning, about $4.40 to $781.20, after selling off over the past few sessions back below $800. Given our outlook on the dollar, we think gold is attractive at current levels but our entrance point target is still lower, around the $700 level.

On the corporate front,

·         The housing markets continue to reel, as Beazer Homes (NYSE:BZH) reported Q4 revenue of $712.6 million, down from $1.09 billion for the same period last year, and losses of $473.9 million, or $12.29 per share, an increase from losses of $155.2 million, or $4.03 per share last year.

·         Staples (Nasdaq:SPLS) reported Q3 revenues of $7 billion, a 35% increase Y/Y, with earnings of $156.7 million, or $0.22 per share, down from $274.5 million, or $0.38 per share for the same period last year.

·         Look for the markets to react this morning to the submission of a request for $25 billion from the Big Three automakers to Congress, and Congress’ reaction to the request. Keep in mind that the Big Three are going to have to continue to paint a picture as bleak as they can if they are going to muster maximum support for their request.

In terms of what we expect in today’s session, we would be surprised to see stocks manage to stay in positive territory after yesterday’s debacle. Keep in mind that we still have the key employment data ahead of us this week, culminating on Friday, where expectations are pretty low. In our opinion, there was no real justification for the markets to rally the way they did last week, and yesterday’s selloff was more a reaction to that point, reinforced by another dismal economic report, than anything.

We definitely think, that on a case by case basis, in certain sectors there are stocks that have been way oversold. So much so, that we are pulling for them to buck the negative trend in the broader markets. But the problem is that there is absolutely a shortage of confidence in the markets, and traders are totally reacting to the day’s news, which is making for a pretty schizophrenic environment. We are sticking to our guidance, that accumulation is a good idea when the DJIA is ranging between 7,400 and 8,500, so at current levels we are buyers. That being said, we are buyers on down days, and wouldn’t chase out of the gate this morning.