Markets to Open Higher - Bank of America Gets Lifeline, Citigroup Restructures

January 16, 2009 – The futures are indicating higher openings for the broader markets this morning as traders react to the Bank of America bailout and Citigroup’s move to split into two businesses (see below).  And Obama is on the road this morning pitching his economic stimulus plan, which the Street appears to be reacting with tacit approval of.

The dollar is softer against the euro this morning (euro at 1.3285) while it is trading at 90.715 against the yen, near a 13-year low. Our outlook for the dollar remains bearish as traders digest the proposed $825 billion House Democrats proposed in a stimulus plan, and the Obama administration appears set to add trillions in debt to the national balance sheet. Gold is rallying this morning, up $20.30 to $827.60.  This day last year we reported that gold was trading at $902.

The International Energy Agency forecast this morning that global oil demand is going to fall a second consecutive year in 2009 (the first two-year decline in 26 years). It cut its forecast for oil demand this year by 1 million barrels to 85.3 million barrels per day (0.6% lower than 2008). Oil is trading slightly higher, up $.45 to $35.85. We continue to expect OPEC to announce further production cuts to buoy prices. France’s Sarkozy said this morning that OPEC should consider negotiating guaranteed pricing on oil, noting that producing countries should be more receptive to the idea with prices at current levels. In international markets, the European Union’s trade deficit increased to €23.8 billion ($31.1 billion) in November from €17 billion last year.

On the corporate front

·         Financial Sector – Citigroup (NYSE:C) post an $8.29 billion lost in Q4 and is splitting into a traditional banking business and one which will hold riskier assets; the government agreed to provide Bank of America guarantees against loans of $118 billion and an additional $20 billion in support from its TARP fund; UBS (NYSE:UBS) is selling part of its commodities business to Barclays;

·         Sony Ericsson (NYSE:SNE) reported a net loss of €187 million ($245 million) in the Q4 on sales of €2.9 billion, down 23% Y/Y. Last year in the same period, Sony Ericsson earned €373 million. For the full year it lost €73 million, down from a profit of €1.1 billion last year.

·         Intel (Nasdaq:INTC) reported after the close yesterday that profit fell by 90%  to $234 million and 23% lower sales of $8.2 billion in the Q4 last year, and forecast 25% lower sales growth in 2009 with tightening gross margins. Sales for the 2008 year were $37.6 billion, down 2% Y/Y and earnings were $5.3 billion, down 24% Y/Y.

·         Auto Industry - Honda is halting production at its British plant for 20 days in April and 15 days in May to reduce production by 17,000 units and it is cutting production in Japan by an additional 56,000 units. It is also cutting 3,100 jobs.

In terms of what we expect in today’s session, it looks like the Street is shrugging off all of this week’s negative news on the corporate earnings front, as well as further erosion in the labor markets and focusing on the hope that more stimulus and bailouts from Washington is bringing. The DJIA bounced off a session low yesterday of 7,949.54 and managed to close up 12 points to 8,212.49, on increasing volume. Volume actually was back closer to normal (on historical standards) yesterday with 7.8 billion shares trading hands, which is an indication that traders found some conviction with the DJIA pulling back closer to the 8,000 level – which is where we have been commenting is an attractive entrance level into stocks.

Given this is a Friday we expect to see lighter trading today and a fairly choppy session as traders position for the weekend and next week’s agenda which will likely be chalked with more profit warnings and job cuts. The good news it that there aren’t any significant economic reports on tap next which to sour the mood so it looks like the downside will be relatively limited. We wouldn’t be chasing stocks in today’s session but would look to be accumulating down here on market weakness.

Obama’s Stimulus Plan – What’s in it for Alternative Energy and Clean Tech?

Obama’s targets are going to require massive funding (not to mention the logistics of execution), some of which will come from the economic stimulus plan, which House Democrats unveiled yesterday totaling $825 billion. Included in the proposed plan is $20 billion in tax cuts for alternative energy and a multiyear extension of the production tax credit for wind, geothermal, hydro and bioenergy, as well as tax credits for R&D focused on energy efficiency and conservation. In addition, the legislation calls for $32 billion to upgrading the energy grid, $16 billion to making housing more energy efficient and $2.4 to the development of carbon capture technologies. An additional $6 billion will go to the weatherizing of low-income housing.

Sector Watch

Global PC shipments dropped 0.4% in Q4 2008, according to IDC. Gartner reported Q4 2008 shipments world-wide rising 1.1%. US PC sales fell 3.5%, according to IDC. Gartner said US shipments dropped 10.1%.According to NPD Group, Americans bought $21.33 bln worth of video game systems, software and accessories in 2008. This is a big jump from 2007’s $18 bln. Total hardware sales climbed 2% in December 2008, to $1.88 bln. For 2008, software sales hit nearly $11 bln, a 26% increase from 2007. Hardware sales jumped 11% to $7.81 bln.