Markets to Open Higher Ahead of Fed Comments, House Vote and on Hopes for FDIC Plan

January 28, 2009 – The futures are pointing to higher openings for the broader markets this morning as the Street anticipates a vote on Obama’s stimulus plan in the House and ahead of the Fed’s comments. The Fed has no room to cut rates so its statement is going to be even more highly anticipated as the Street waits to hear what the Fed might have left in its arsenal to deal with the economic situation. Also adding a lift in the mood this morning are reports that the FDIC may create a ‘bad bank’ to sweep all of the toxic assets from banks under one umbrella. The financial sector is moving higher this morning on renewed hope for the ‘bad bank’ plan.

The primary objective would be to help clean up banks balance sheets and get the debt and credit systems running again. Meanwhile, the U.S. Federal Government and the taxpayers would increase its status as the world’s largest hedge fund – theoretically good for the financial services industry and Wall Street and less clear how good it is for taxpayers.

The euro is stronger against the dollar this morning, at 1.3262. And as the economic crisis has grown in the UK, the pound has slid from about 1.98 against the dollar to 1.40. This morning the pound is at 1.4306. George Soros recently weighed in and said he is not betting against the pound at current levels.

Gold is softening on expectations that the stimulus plan is going to help revive the economy. Prices are down $13.50 to $886. We think this is going to be a near term pullback and will present an opportunity to accumulate more gold. Regardless of what the FDIC does to sweep toxic debt away from banks, and whether the Obama stimulus plan gets approved by Congress we are a long ways, and probably at least another trillion in stimulus proposals away from getting the economy back on track – and then, who knows where the dollar is going to be but our expectations are that it is going to be worth a lot less. We think throughout this period and amidst all of the uncertainty that gold will retain and expand its ‘safe haven’ status.

On the corporate front,

·         Airline Industry – Boeing reported a Q4 loss of $56 million, or $0.08 per share, compared to a profit of $1.03 billion, or $1.36 per share last year. Revenue for the quarter declined 27% Y/Y to $12.68. Our outlook for airline stocks is negative.

·         Communications Industry – AT&T (NYSE:T) reported a 23.6% Y/Y decline in Q4 profit to $2.4 billion, or $0.41 per share on a 2.4% increase in revenue to $31.1 billion. Our outlook for communications is positive.

·         Financials – Wells Fargo (NYSE:WFC) reported a Q4 loss of $2.83 billion, or $0.79 per share. However, the stock is up on expectations about the FDIC move and because traders are looking at the performance on an adjusted basis – backing out one-time items including $5.6 billion, or $0.99 per share of credit reserve to cover future losses. Our outlook for financial stocks remains negative - buy puts and sell calls into strength

·         Wind  - The American Wind Energy Association reported this week that wind energy grew by 8,358MW in 2008.  In the Q4, 4,112MW of wind energy came online. Total U.S. wind energy now stands at 25,170MW.  Denise Bode of the AWEA said, however, that the wind industry is being negatively impacted in the midst of the financial downturn and urged Congress to move forward on the stimulus bill – which includes a three-year extension of the tax credit for wind energy production. Out outlook for wind sector remains positive.

·         Oil & Gas – ConacoPhiliips (NYSE:COP) reported a Q4 net loss of $31.8 billion, or $21.37 per share, compared to a profit of $4.4 billion, or $2.71 per share last year. Revenue fell 18% Y/Y to $44.5 billion. Backing out one-time charges, it earned $1.9 billion, or $1.28 per share for the quarter.  Our outlook for oil & gas is positive

·         Job Cuts – Panasonic (NYSE:PC) is cutting 560 jobs, SAP is cutting 3,000 jobs,

In terms of what we expect in today’s session, stocks are clearly heading higher at the open, which is always welcome. A positive signal  is that after dipping below 8,000 on the DJIA each of last week’s session and on Monday, the DJIA held above 8,000 in yesterday’s session. Another good signal is that stocks have been pretty buoyant in spite of a lot of back news reported over the past couple days on the earnings front and amidst more job losses. A bad signal is that stocks moved higher on anemic volume – at 5.3 billion shares traded. So there isn’t really any conviction out there. We expect an uptick in volume into increased buying pressure today as the Street suspends its focus on all of the dismal earnings reports, lower guidance and job cuts and focuses instead on hope – hope that the stimulus plan will be a big step further to getting the economy back on track and hope that the FDIC bad bank plan will free up credit and lending again in the financial services industry.

We would be cautious about buying and accumulating into strength though, even with the DJIA at 8,174. There has just been too much ugly news lately and too much talk, which is reasonable enough, about the fact that much more stimulus is going to be needed than even the $816 billion plan being voted on in the House today. On a case-by-case basis there are stocks out there which we think are tremendously oversold and would be accumulating but we recommend investors hold on to at least 20% to 30% cash in their portfolios – even at current levels. We take bearish forecasts from the likes of Jim Rogers and Nouriel Roubini very seriously.

Roubini’s forecast:

·         The U.S. will lose 6 million jobs (last year it lost 2.5 million, so he is expecting 3.5 million more)

·         The U.S. economy will see 1% growth, at most in 2010

·         Economic growth in China will slow to less than 5%

·         Emphasis: U.S. banks are insolvent and losses could reach $3.6 trillion.
 

Wit Wisdom Fools and Folly

Jon Hatzius, Chief U.S. Economist of Goldman Sachs thinks the Fed will be looking for more ways to support the economy and buying treasuries is a natural decision in that environment. The treasury can’t cut rates further at this point. He expects further expansion of the unemployment rate between 9% and 10%. He thinks the large fiscal stimulus is “indispensible” in the current economic environment. His concern about the stimulus package is that it won’t be large enough. Things take awhile before the package really is felt in the economy so he would like to error on the aggressive side as opposed to not having enough – to the tune of $1.2 trillion over 2-3 years and as much as $2 trillion over 5 years.

Fast Facts

·         Wall Street bonuses fell 44% Y/Y in 2008 to $18.4 billion.