Markets to Open Higher on Citigroup Bailout, Obama Appointments and Economic Plan
November 24 – The futures are pointing towards higher openings this morning for the broader markets as traders react to the government’s plan to bail out Citigroup (NYSE:C) which includes a $20 billion injection of capital, which comes on the heels of a previous injection of $45 billion, and a federal guarantee on $306 billion in loans and securities backed by mortgages. The government will get $7 billion in preferred shares. This is the latest in the “too big to fail” bailouts.
Over the weekend Obama iterated said he will push a two-year stimulus plan with the objective of saving or creating 2.5 million jobs. Obama wants to sign the package as soon as possible after he takes office on January 20. A key shift in Obama’s campaign platform, and as a response to the deepening recession in the U.S., Obama is rumored to be considering letting Bush’s tax cut expire as scheduled in 2011. And Senator Schumer, on George Stephanopoulos recommended a stimulus plan of about $700 billion to invest in the country’s infrastructure.
Today, Obama is expected to introduce key members of his economic team, including his Treasury Secretary, Timothy Geithner. Larry Summers is likely going to get the job as Director of the National Economic Council. Look for Obama’s team to take an unprecedented role in government involvement of the financial markets, which at this point, probably needs it.
The dollar is weaker against the yen and the euro. The euro is getting 1.2788. We attribute expectations for massive infusions of capital into the economy and financial markets, and the resulting massive buildup up debt, as being the primary catalyst for dollar weakness this morning and we reaffirm our forecast for the dollar to reach record lows against the euro and the pound over the next 12 months. Against this backdrop, gold is regaining its ‘safe haven’ status, up $27.70 this morning to $819.50. Given our outlook for the dollar, it shouldn’t be surprising that we think gold will likely trend higher over the next year. Oil prices are getting a help from dollar weakness this morning, as well as expectations that Obama’s two-year plan may have some level of efficacy on U.S. demand, China’s commitment to keeping its economy growing, and most importantly, in our opinion, due to the fact that oil is tremendously oversold. Oil is up $1.93 to $51.86.
An interesting point about oil – an oil pipeline in Turkey has been repaired after a three-day fire. Remember this time last year, when any disruption in oil production, whether it was due to weather in the Gulf of Mexico, terrorist activity in Nigeria, government intervention in the Middle East or any other ‘act of God’, it would almost assuredly mean a $5 to $6 increase in oil prices. This ‘effect’ is nowhere to be found in the current market. Our takeaway on this phenomenon is that (a) the markets last year were indeed influenced much too much by speculative forces and (b) the outlook for world demand is so cynical and pessimistic at this point that traders are only reacting to news that dictates what they are now well-conditioned to expect – lower demand. We think that this dynamic is causing a tremendously oversold condition in oil.
In international markets, China announced $1.4 trillion in potential investment projects that it may commit to as a strategy to re-stimulate its economy (which is still growing at 9% Y/Y by the way). German business confidence fell to a 15-year low in November at 85.8, down from 90.2 in October. German unemployment is currently at 7.2%. The Asia-Pacific Economic Forum (APEC) which consists of 21 economies, said over the weekend that the financial crisis can be resolved by 2010. Malaysia’s central bank reduced its interest rate to 3.25%, down 25 basis points. Russia’s Central bank said it is allowing its ruble to soften by widening the spread against other currencies (about 30 kopecks). As of November 14, Russia’s reserves have fallen to about $450 billion. Vietnam’s trade deficit has widened to $16.9 billion through November. And Singapore’s inflation eased to 6.4% in October.
On the corporate front,
· Financial stocks should get a lift in today’s session from the Citigroup bailout;
· Johnson & Johnson (NYSE:JNJ) is buying Omrix (Nasdaq:OMRI) for $438 million;
This week’s economic activity includes Existing Home Sales for October, preliminary Q3 GDP (expected to decline by 0.3%), Consumer Confidence for November, Durable Goods Orders for October, Weekly Jobless Claims, Personal Income and Spending for October, Chicago PMI, Revised Michigan Consumer Sentiment for November, and New Home Sales for October. Generally speaking expectations are subdued for all of these reports, but surprisingly, expectations for the confidence and sentiment reports is actually calling for an increase, which we think there is absolutely no basis for, especially in light of the most recent couple of unemployment reports.
In terms of what we expect in today’s session, we think that the markets will likely react positively to the Obama economic team announcements and discussion, as well as speculation about his 2-year plan. After all, this is a huge contrast, and a welcome change to the absolutely ineptness and lack of credibility of the Bush administration’s handling of the economy. We think stocks should be able to managed to close in positive territory, but keep in mind that the splash of cold water comes tomorrow with the preliminary GDP report, which will likely keep most of the focus in tomorrow’s session.
We are keeping to our range for accumulation, and would not chase stocks on any increase by the DJIA over 8,500. We think the risk, all things being equal, is mitigated at current levels, but the lows put in place last week in the 7,400 to 7,500 hundred could very likely be retraced. KEEP IN MIND - traders will be selling on strength in the current environment, so at the first signal that momentum to the upside is fading, downward pressure could set in. These are the kinds of sessions were we look for opportunities to hedge against downside risk through protective puts and out of the money calls into strength.And remember that the focus of news heading into tomorrow's session will be negative growth for Q3 GDP. So the focus will once again be back on how deep, and how long this recession is going to be - hardly a platform to look for stocks to move higher on.
Fast Facts
· The S&P Index is poised for the worst decline since 1931.
· The national debt is up to $10.68 trillion this morning.
Channel Check
Worldwide IT spending will grow 2.6% YTY in 2009, down from IDC’s pre-crisis forecast of 5.9% growth. In the United States, IT spending growth is expected to be 0.9% in 2009, according to IDC. IDC expects IT spending to make a full recovery by the end of the forecast period with growth rates approaching 6.0% in 2012. IDC estimates that more than $300 bln in industry revenues will have been lost due to slower spending over the next four years. IDC lowered the forecast for worldwide GDP growth in 2009 to 0.3%, which is 1.5% lower than the current forecast and worse than any year since World War II. This produced a forecast of 0.1% growth in worldwide IT spending in 2009 with negative growth in the United States, Western Europe, and Japan.(Source: IT Facts).
