Markets to Open Higher - Counting on the Worst Being Behind the Economy at this Point

April 30, 2009 – The futures are pointing to higher openings this morning for the broader markets. Initial jobless claims were forecast to come in at 640,000, and came in at 631,000.  While personal income and spending fell more than expected, down 0.3% and 0.2%, respectively. The futures moved higher on the news.  The data is still really bad, it is just not as bad as it was. Pundits and analysts are saying, with respect to a move in jobless claims below 600,000 would be a key indication that the economy is, in fact turning the corner.

The dollar is softer again this morning against the euro. The euro is trading at $1.3276 against the dollar. Recent strength again in the equities markets is being attributed as the primary catalyst for dollar weakness, in as much as the dollar’s ‘safe haven’ status is less attractive when investors are willing to take more risk in equities. With the Treasury’s printing machine for currency operating at full pace, we hardly think the outlook for the dollar is attractive.

Gold prices are down $9 this morning to $891.50. The softness in gold can be largely explained by widening expectations that the worst, in terms of a global recession is over. And oil prices are up $0.73 to $51.70, largely based on the same thesis. We would see any significant pullback in gold as a buying opportunity and that significant erosion in the dollar will reignite a gold bull market heading into 2010.

On the corporate front,

·         Alternative Energy – Solar - First Solar (Nasdaq:FSLR) reported a 112% Y/Y increase in Q1 revenues to $418.2 million, and earnings of $164.6 million, or $1.99 per share, compared with earnings of $46.6 million, or $0.57 per share for the same period last year. Consensus expectations were for earnings of $1.50 per share. Look for more strength in First Solar’s stock in today’s session.

·         Automotive – It looks like Chrysler is heading into Chapter 11 bankruptcy. Apparently discussions have broken down between the company and the Treasury department to reduce its $6.9 billion in secured debt. The deadline was last evening to get this worked out.  

·         Chemicals – Major Diversified – Dow Chemical (NYSE:DOW) reported a 39% Y/Y decline in Q1 revenue to $9.09 billion, and earnings of $24 million, or $0.03 per share, compared with earnings of $941 million for the prior year period. Expectations were for a loss of $0.21 per share.

·         Telecommunications – Motorola (NYSE:MOT) reported a 28% Y/Y decline in Q1 revenue to $5.4 billion, and a loss of $231 million, or $0.13 per share, compared with a loss of $194 million, or $0.09 per share for the same period last year. Expectations were for a loss of $0.11 per share. Ericcson (Nasdaq:ERIC) reported a 12% Y/Y increase in sales to 49.6 billion kronor in Q1 with net profit of 1.7 billion kronor, compared with 2.6 billion kronor for the same period last year.

In international markets, unemployment has increased to 8.9% in March in the euro zone. Spain is posting the highest unemployment rate in the region, at 17.4%. In Japan, the country’s central bank chose to keep its benchmark interest rate unchanged at 0.1%. Its economy is expected to contract by 3.1% this year, according to the Bank of Japan.

Legislation in the House is set to be voted on today which would rein in credit card usary practices, eliminating overnight rate hikes and late fees that are breaking consumers’ backs. It would prohibit the double-cycle billing and retroactive rate hikes, as well as the issuance of credit cards to people under 18. The biggest problem we see is that even if passed, it will take a year to enact.

In terms of what we expect in today’s session, the markets have clearly had a bent to move higher lately with the Street compiling evidence that the pace of erosion in the economy is slowing. To be sure, there has been an increase in this anecdotal evidence lately. So stocks will move higher again today.

That being said, we remain unconvinced that we are anywhere close to being out of the woods, and that the fundamentals still have a significant ways to go in terms of improvement to support the moves that the markets have made lately. If you look at the ‘earnings beats’ that we are seeing in this round, keep in mind that the expectations have been dumbed down to such low levels that even dismal results are being reported as ‘better than expected.’

To be sure, stocks may likely have been oversold in the past few months to the rebound in stocks, or at least part of that, should be uncontroversial. We just don’t think that there are any catalysts in place at this point to warrant driving stocks much higher from here, and from a technical perspective, we think stocks will need to retrace a bit sooner than later in order to affirmatively put some bases in place.

We are still taking strength in the markets as an opportunity to hedge various long profitable and at-the-money positions against downside weakness. We are using the following instruments: out of the money covered calls (about 60-90 days out), protective puts, DowShort Pro 30s (NYSE:DOGs) and SPDR GLD shares. Ask your broker about these strategies.

Fast Facts

·         US credit card debt has increased 25% in the past 10 years to $963 billion in January.