Markets to Open Cautiously Higher, Retailers Continue to Struggle, Things Are Worse for Detroit

December 23, 2008 – The futures are indicating slightly higher openings, but showing no real conviction on the heels of the Q3 GDP report which showed the economy retracted by 0.5, Q3 core PCE was up 2.4% and consumer spending in the Q3 fell by 3.8% (a bit more than expected). The good news for today’s session was that none of the news was significantly worse than expected. Now traders will be back focusing on the retail sector and the Q4 GDP which is expected to be down about 4.5%. The other key economic data out today is existing home sales which is expected to show that sales fell by 1.6%, and new home sales which is expected to fall by 3% to the lowest level in about 18 years.

The dollar is softer against the euro this morning which is at 1.3996, while it is stronger against the euro at 90.1350. Gold is trading $2 lower to $845.20 while oil is basically flat at $39.92.

In international markets, the British economy retracted 0.6% in the Q3 and expectations are mounting that the government will cut interest rates again. Vladamir Putin hosted a summit in Moscow for leading natural gas exporters to discuss how better to protect natural gas prices and expectations are that the group is going to form an OPEC-style cartel. The EU approved a bank rescue package for Germany, Britain, Spain and Italy. The World Bank signed a €975 million ($1.3 billion) loan for Poland.

·         CIT Group (NYSE:CIT) has received preliminary approval to receive $2.33 billion from the government’s $700 bailout bill;

·         In the job markets – Unisys (NYSE:UIS) is cutting 1,300 jobs in an effort to cut costs;

·         In solar, Yingli Green Energy (NYSE:YGE) signed a $70 million loan agreement with China Development bank to secured its planned expansion; while China Sunergy (Nasdaq:CSUN) signed a 12MW supply agreement for its multi-crystalline cells to Ajit Solar. The cells will be delivered in 2009;

·         The auto sector continues to look bad – expectations are that Chrysler is likely not going to make it, even with the government’s money, and GM too. Moody’s ratings have cut again on Ford and GM. And rumors are mounting that Toyota will cut jobs in the U.S.

In terms of what we expect in today’s session, we are looking for a choppy, technical session, which will be lightly traded – much like yesterday, which saw only 4.8 billion shares trading hands on the DJIA. There aren’t any catalysts to trigger buying. But the question is whether all of the bad news has been factored into stock prices. Even the most gloomy of prognosticators (see below) acknowledge that stocks could rally in the near term, and this possibility may be enough to buoy stocks at present, even while the news continues to foreshadow heavy economic weather ahead. We are sticking to our guns, however, and won’t be buying stocks at current levels. We think it makes sense to accumulate closer to 8,000 than here at 8,500 on the DJIA.

Wit, Wisdom, Fools and Folly

Marc Faber, whom we respect greatly, is setting ominous expectations for 2009. He said this morning on Bloomberg that we are faced with a global recession that will last a very long time (2 to 5 years). He thinks 2009 will be a catastrophe. The monetary policies pursued by the U.S. in past years are responsible for the current crisis. He said the Fed shouldn’t be in the business of bailout failed businesses, and that it left the interest rates too low for too long. He said the Fed has managed to blow up another bubble – treasury bonds. With the Fed’s easing and expansive monetary policy the rate of inflation rate will accelerate, exacerbated by a weak dollar, leading to a much more difficult situation.

But have the markets priced all of this bad news in? He said markets may rebound in the near term, but they will move lower again because valuations aren’t compelling on a P/E basis, dividend yield or book value. He expects corporate earnings to go down. What about China? He thinks the markets could easily rebound by about 30%, but the environment will remain volatile. Expect volatility across the board in 2009. He thinks the Chinese economy will suffer badly, and it will have a bad recession. What does he like? Gold and gold mining companies, as well as producers, exploration companies, and oil is getting more attractive.

Faber, like Jimmy Rogers, and Nouriel Roubini, has been right far more than he has been wrong in recent years about the economy, seeing that we are heading into a serious global crisis far ahead of most pundits you will listen to or read in the media. So we would urge that his outlook and comments be taken seriously.

Fast Facts

·         The EPA released a study yesterday which showed that seven western states have failed to meet new pollution standards, including Utah, Montana, Arizona, Idaho, Oregon, Washington, California and Alaska – and this is during the Bush administration whose EPA has been oblivious in many cases to its mandate. In total, 211 counties in 25 states failed to meet air quality standards.

·         Faced with a $42 billion shortfall in its budget projected through June 2010, California could run out of money in about 2 months.