Markets to Get Lift on Better than Expected Jobless Claims Report

December 31, 2008 – The futures are pointing to higher openings this morning for the broader markets as the Street reacts to a significantly better than expected weekly jobless claims report with claims down 94,000 to 492,000 from 586,000 in the prior week. Traders are likely looking past the seasonal factors driving the results, focusing on the fact that they have a catalyst to take stocks higher in the last day of trading in an otherwise dismal year. Expectations had been for the number to come in at 565,000.

Oil is down more than 60% this year. Median forecasts for 2009 are $60. Inventories will be out at 10:30am EST this morning. Oil is down $1.34 this morning to $37.69. It had move back to the $40 recently on concern about the geopolitical situation in Gaza, but the focus amongst oil traders is clearly on slowing global demand on 2009.

Iraq has opened about 90% of its reserves for international oil firms to bid on, planning to add 4 to 4.5 million barrels a day to its production within the next four to six years to help it rebuild. It currently produces about 2.4 million barrels per day and depends on oil revenues for 95% of its budget.

The dollar is down slightly against the euro this morning, which is at 1.3920. There is now a surplus of dollars in the system which should continue to drive the euro higher against the dollar through 2009. In our opinion, there is no way to make a case for the dollar and our biggest concern is that it buckles later in the next year if the government keeps tacking on debt. Meanwhile, gold is down $9 this morning to $861. We think the primary catalyst here is profit-taking, but our outlook on gold remains long-term bullish (as long as the Fed keeps authorizing the Treasury to print more money). Look for $1,000 levels to be tipped in the first half of 2009.

In international markets, the Czechs are taking over the EU’s rotating presidency from France. Look for the Czech Republic to leverage its position and pressure the U.S. to increase its critical posture towards Russia on its borders. China is increasing its spending on railway construction by 80% in 2009 to $87.9 billion as part of its $586 billion stimulus plan. Singapore’s GDP declined by 1.5% in 2008, the slowest pace in seven years. As recently as last month, the government had expected the number to show 2.5% growth. Its forecast for next year is between a 1% to 2% contraction. Malaysia’s incoming prime-minister said he may inject further stimulus into its economy, in addition to the $2 billion announced in November.

On the corporate front,

·         GMAC Financial Services (NYSE:GM) raised $21.2 billion in a debt-for-equity swap, and $6 billion from the Treasury Department but it still needs another $2.8 billion to become a bank holding company;

In terms of what we expect in today’s session, it looks like the markets are going to post an ironic gain on the last day of 2008. The gift jobless claims report this morning will be the catalyst. But we caution that seasonal factors are likely creating a deceptive number here, and total jobless rolls are still at a 26-year high and worsening conditions are still expected. In any case, the weekly claims came in better than expected and that is apparently all that matters. We will take it, using this morning’s strength to position ourselves for what we think will be further weakness.

We have been commenting that a January rally could be in the works, but that we expect the markets to retest November 21 lows again at some point in the first quarter. We are holding to this viewpoint. Our reference case has been the DJIA, and the line we are drawing on accumulation is at 8,500 – anything above this level we are positioning for risk to the downside. Yesterday’s 184 point gain to 8,668 took us into a territory which we consider to be overbought, all underlying economic factors being equal. Today we could push up to 8,800 or so. Our strategy into the strength will be to look for positions to write out of the money covered calls against. At the 9,300 to 9,500 level we are buying puts. Wishing you all a happier new year.

Fast Facts

·         China’s shares ended down 2008 by 65%. We are BULLISH on China and China stocks and think its economy, which is poised to rebound faster than the rest of the world, will lift its markets from current levels in 2009.

Quotables

"2009 is going to make us nostalgic for 2008" – Ken Goldman of the Conference Board