Markets to Open Higher - Focus Remains on Earnings Performance, Outlook and Jobs
January 27, 2009 – The futures are indicating higher openings this morning for the broader markets, which is a bit surprising in light of the fact that the earnings reports coming in have generally been pretty bad with more reports of job cuts. Economists (see below) interviewed on Bloomberg this morning generally had downbeat forecasts, but stocks have been pretty resilient of late.
With more than 74,000 announced job cuts yesterday alone, the DJIA managed to post positive gains in the session even after the National Retail Federation released a forecast for retailers in 2009 to record a 0.5% drop in revenue, and as the S&P Case/Shiller index reported that home prices in 20 U.S. cities declined by 18.2% in November on a Y/Y basis. Sales for the first half of 2009 are expected to decline by 2.5%, then a 1.1% decline in Q3 and a 3.6% increase in Q4. We wouldn’t begin to suggest that the markets have found a bottom at this point, but the fact that stocks are holding up at the 8,000 level on the DJIA is a positive signal.
The dollar is softening against the euro this morning as traders react to a stronger business sentiment report in Germany. The euro is at 1.3190 against the dollar. We continue to think the dollar is going to weaken considerably as the U.S. adds to its deficit and amidst further erosion in its employment market. Meanwhile, oil prices have been rising lately as traders recalibrate demand/supply estimates based on recent OPEC cuts in production. However, this morning prices are off by $1.16 to $44.57. We think OPEC will be leaning to more production cuts as expectations for the duration of the global recession get extended.
We continue to like gold and think gold stocks (in particular ETFs) will outperform. More money is flowing into gold and gold stocks amidst further deterioration in underlying fundamentals in global economies. Our expectation is that gold moves back through $1,000 at some point this year. Regardless of inflation or deflation, gold should perform. Also keep in mind that gold is a leading indicator for other commodities. Gold prices are down $9.70 this morning to $899.10, but have been rallying lately.
In international markets, India’s central bank cut its growth forecast this morning to 7%. China criticized a WTO decision which sided with a recent U.S. product piracy complaint but said it will cooperate. The number of new homes in France fell by 15.7% last year, while housing permits fell by 16.7%. South Korea has allocated 4 trillion won ($2.87 billion) as emergency funds this year. German business sentiment rose to 83 points in January from 82.7 in December. Japan passed its ¥4.8 trillion ($54 billion) stimulus budget today, which contains a ¥2 trillion payout to taxpayers. Germany’s Cabinet approved its €50 billion ($67 billion) stimulus budget, adding to an earlier €22 billion plan.
On the corporate front,
Chemicals – DuPont (NYSE:DD) reported a Q4 loss of $629 million, or $0.70 per share on sales which declined 17% Y/Y to $5.8 billion. FY08 earnings were $2 billion, or $2.20 per share, down from $2.9 billion, or $3.22 per share last year. Our outlook on Chemicals Sector - neutral
Airlines – Delta (NYSE:DAL) reported a $1.4 billion Q4 loss, or $2.11 per share compared to a loss of $70 million, or $0.18 per share for the same period last year on revenue which rose 43% Y/Y to $6.7 billion. For FY08, Delta lost $8.9 billion, or $19.08 per share, compared to a profit of $1.6 billion for the same period last year. Revenue for the year was $22.7 billion, up from $19.2 billion last year. Our outlook on Airlines sector - negative
Communication Equipment – Corning (NYSE:GLW) reported a 65% Y/Y decline in Q4 profit to $249 million, or $0.16 per share on sales which fell 31% Y/Y to $1.08 billion. Siemens (NYSE:SI) reported an 81% Y/Y decline in Q1 profit to €1.23 billion ($1.62 billion) on revenue which rose 7% Y/Y to €19.6 billion. Our outlook on communication equipment sector - neutral
Communications – Verizon (NYSE:VZ) reported a 15% Y/Y increase in earnings for Q4 to $1.24 billion, or $0.43 per share. Revenue rose 3.4% Y/Y to $24.6 billion. Our outlook on communications sector - positive
Drugs – Bristol-Myers (NYSE:BMY) reported a higher Q4 net profit of $1.24 billion, or $0.63 per share on revenues which were up 4% Y/Y to $5.06 billion. For FY08, net income was up almost 2.5 times, to $5.25 billion, or $2.63 per share. Our outlook on drugs sector - positive
Solar – ReneSola (NYSE:SOL) signed a RMB800 million project loan agreement with China Construction Bank for the construction of its polysilicon facility in Meishan, Sichuan Province. Our outlook on solar sector – positive
Job Cuts – Corning (NYSE:GLW) cut 3,500 jobs, Quiksilver (NYSE:ZQK) cut 200 jobs, Weyerhauser (NYSE:WY) cut 221 jobs, Clariant cut 1,000 jobs, In terms of what we expect in today’s session, we think stocks are going to have a tough time gaining any traction to the upside. There just isn’t any catalyst. We can’t buy into the argument that, on a macro level stocks are oversold.
On a case by case basis, we think there are plenty of stocks that are tremendously oversold, and sectors we would be looking in are solar, wind, geothermal, energy efficiency, oil and gas, gold, commodities in general, utilities and certain drug companies (we think M&A here is going to pick up). Sectors we would sell are financials, industrials, retail and discretionary, and housing. We think it makes sense to accumulate on a case-by-case basis into weakness at present levels, and would not be buying stocks into strength. Accumulate into weakness. We continue to recommend selling puts on stocks you would like to own at lower levels – be patient, take the premium and get put the stock.
Wit Wisdom Fools and Folly
Stephen Roach, Chairman of Morgan Stanley Asia said on Bloomberg this morning that there isn’t a country in the Asian region which hasn’t been hit hard and there is more to come. He said this is a stock picker’s market and the macro is very challenging. If you really want to put money to work, you can’t play macro trends. The recovery is going to be very will. You need the skills of a great stock picker.
When asked when he thinks China will come back, he said it is an economy that took its export share of GDP to 36% in the past year from 20% a few years back and that dynamic will make it difficult for China to lead out of a recession. In India, he said its economy is much less exposed to the rest of the world than China is. Asked if the U.S. economy will go the way of Japan’s collapse, he said we could be in a multi-year adjustment like Japan went through.
Nouriel Roubini spoke with Bloomberg and said countries around the world are heading for hard landings with severe economic contraction. He thinks there is nowhere to hide, due to globalization of the markets. It will be severe amongst most industrial economies. For China, growth falling from 10% to 5% is a hard landing. In terms of a return to growth, he thinks it will be negative through 2009 and very low in 2010. He said we if we make the wrong policy decisions we could end up like Japan’s protracted recession was with stagflation.
In terms of jobs in the U.S. he thinks we will lose more jobs in 2009 in addition 2.5 million jobs lost last year. He thinks the unemployment rate will continue through 2010 to 9%. He said all of the fiscal stimulus is necessary but it will be very costly down the line. He said he thinks the losses for the banks will be $1.8 trillion. We need another $1.4 trillion to get the banks back in shape to begin lending again. Unless we let the banks go bust, we will have to provide more money. He said the top 3-4 banks in the U.S. are technically insolvent.
Perhaps a solution would be to nationalize the banks, clean them up and then sell them. If you do it right, you can privatize them again in 2 to 3 years. The consequence could be a long-term problem lasting a decade or so like Japan. In terms of risk in the U.S. risking its sovereign credit rating with all of the deficits it is building, he said if it isn’t handled properly down the line it will be a huge problem. We aren’t yet there. But we are getting closer as we add to the debt. Asked where he sees value, he said all debt looks cheap and if you can buy and hold for a while you should be ok.
