Markets to Get Modest Lift at Open, Oil Prices Rise on Violence in Gaza

December 29, 2008 – The futures are indicating slightly higher openings this morning for the broader markets ahead of a holiday-shortened week of trading. In terms of what is going to drive the markets today, automakers will continue to be scrutinized; traders will be also focusing on the latest in holiday sales data; while commodities and oil prices are moving higher. Traders will be also positioning portfolios for 2009, well aware of the fact that corporate profits slipped again in the Q4, for the sixth consecutive quarter and aren’t expected to reverse until the second half of 2009 – best case scenario.

For retailers, this is expected to be the worst holiday season in 40 years, and a wave of retailer bankruptcies and store closing are expected in the first quarter of 2009. The challenge for retailers in the near terms will be how to get consumers to pay full price again after dropping prices over the holidays. To be sure, 2008 has been a wild year and thank god it is almost over. The S&P is on track for its worst year since 1931. Bucking the trend, biotech stocks are actually up 9% this year, while treasuries are set for their best year in more than a decade.

The dollar is losing ground again this morning against the euro, which is getting 1.4280, up 1.81%. This shouldn’t be a surprise to anyone, and we expect the dollar to continue its slide through 2009. With the dollar softening, gold prices are moving higher, up $13.20 to $884.40. And Oil is moving higher as well, helped by the weaker dollar as well as the conflict in Gaza.

This is noteworthy. It has been months since oil prices have fluctuated higher based on geographic volatility. Last year, events like hurricanes, saber-rattling in Iran, kidnappings and other violence in Nigeria were regular events that were attributed with daily oil spikes. This morning, oil is up $2.50 to $40.21 on after Israeli strikes in Gaza are creating concerns about supply in the Middle East. Also helping to buoy oil prices this morning, China is reportedly stockpiling reserves.

In terms of what we expect in today’s session, we think volume will continue to be light this New Year’s week, and trading will be technical-based. We don’t anticipate that economic data will be influential here, and don’t see any catalysts in place to spur any rallies either. The biggest wild-card is whether the Street begins to lean toward the notion that the markets have priced in all of the bad news and therefore have put in bottoms. In which case, we could be setting up for a bear rally in January on hope and optimism that the Obama administration will make the right decisions, throwing enough spaghetti against the wall to get the economy back on track by the second half.

Why not? After all, the markets can stay irrational longer than you can stay solvent, right? We aren’t as hopeful, that all of the bad news has been priced in. We still expect erosion for the retailers which will result in more layoffs and higher weekly jobless claims. And we think the markets are due for another round of indigestion from the implications of a failing U.S. auto sector by March when Detroit comes back to Washington asking for more financial assistance. Our outlook for unemployment is to move solidly into the 9% range from the current 6.8% range, so the markets will definitely have to digest more bad news which we think will continue to weigh in 2009.

Since we still feel dour about things, we continue to recommend discipline, and not to chase stocks. We reference the DJIA in our morning commentaries and aren’t buying anywhere over 8,500. We think a January rally could push stocks up to 9,400 or 9,500 and at those levels we would be taking profit, selling out of the money covered calls and buying puts on stocks we intend to hold through 2009 (see your broker for “protective put” strategy help).

What a Difference a Year Makes

Here is what we wrote on December 28, 2007:

Our take is that a consumer-led recession will be inevitable due simply to the fact that consumers are tapped out, with negative personal savings and credit debt that they already are having a hard time paying. Pace the reports over last weekend that credit defaults and late payments are skyrocketing. The bottom line is that consumers are strapped, and can’t turn to additional borrowing to fuel their spending habits. This is exacerbated now by the fact that consumers are turning less confident in the face of rising prices. So regardless of whether the job markets remain stable, which we have also been seeing modest upticks in jobless claims, we think a recession in 2008 is on tap. The question, in our opinion, is how deep the recession will get.

The DJIA on 12/28/08 opened at 13,361.23, 4,845.68 points higher (56.9%) than Friday’s close.

Fast Facts

·         Gold is up 218% in the last eight years.

·         The national debt (in terms of U.S. Treasuries) is up to $10.68 trillion. Net debt held by the public (at least what has been demarcated on the balance sheet) is up to $5.89 trillion.

·         $2.58 trillion – this is the total amount of consumer credit debt out there. Commercial banks hold about $846 billion, finance companies hold about $593 billion and credit unions hold about $237 billion. Consumer credit debt may be the next bubble to pop.