Markets To Open Higher on Election Day

November 4 – Election Day. The futures are indicating higher openings this morning as voters head to the polls. The markets may be reacting to growing expectations that Democrats may take control of the Senate, while Obama is expected to take the White House, and this would bode well for expectations that the Dems will likely push for another round of stimulus. The general notion for a $100 billion-plus plan has been endorsed by economist Nouriel Roubini, who said that the economy is in such bad shape that a stimulus plan is necessary and it may have to be much larger than $100 billion.

In any case, the Street has generally reacted favorably to any move that the Fed, the Treasury and central banks from around the world have taken to stem the financial crisis – regardless of the longer term implications.  We are skeptical about another stimulus package but Nouriel Roubini, in our opinion, is the smartest economist in the room, who correctly saw this mess coming long before most others did. So if Roubini says the country needs another stimulus plan, we think it is worth taking seriously.

Meanwhile, the dollar is softer this morning against the euro, which is at 1.2812 on the heels of last week’s rate cut and in anticipation that more will be added to the national debt sooner than later by way of another stimulus plan. Against that backdrop, we would expect commodities to outperform, and the dollar to eventually begin a slide. Lately, the dollar has shown relative strength amidst expectations that the U.S. economy will be the first to break out of the recession that it led the rest of the world into, but we remain convinced that dollar weakness is on tap.

Oil prices are up slightly this morning by $0.63 to $64.54 as traders have recalibrated their expectations for global demand all the way from $147 per barrel to the low $60s amidst the global recessionary environment. We expect that OPEC will move to cut production further as some point in the near term to help buoy prices. The benefit we have all been experiencing lately from this recalibration is at the pump. Yesterday gasoline prices here in north San Diego fell to $2.65 per gallon, down from more than $4.00 per gallon back in July.

Gold prices are trading $10.50 higher this morning to $737.30. Many have been surprised that gold has weakened the way it has in the current global financial crisis but the markets clearly have been indicating deflationary pressures and this has effectively quelled the ‘safe haven’ status of gold – at least in the near term. Longer term, in light of the fact that we are bearish on the dollar, we think gold will benefit and we would be accumulating gold on any dips closer to $700.

On the international front, Malaysia is injecting $2 billion into its economy in 2009 to help boost spending and it warned that growth may slow to 3.5%, revised down from the previously projected 5.4%. The Bank of Korea said this morning that South Korea’s reserves fell in October to $212.25 billion, by 11.4%. Spain’s jobless claims rose to 11.3%, the highest rate in the 27-member EU. EU nations have approved an $8.3 billion loan for Hungary as part of an international package, which is part of a larger $25.1 billion rescue plan. The IMF is set to approve a standby loan of $15.7 billion and the World Bank is set to loan $1.3 billion. Sweden’s debt office said the country’s finances are deteriorating and that its debt is going to be around 32% to 33% of its GDP.

On the corporate front,

·         VeraSun (NYSE:VSE) received a $215 million funding commitment in DIP financing to pay bills after filing for Chapter 11 bankruptcy, from AgStar Financial Services. VeraSun will be able to borrow $40 million of the funds to keep its doors open.

·         Archer Daniels Midland (NYSE:ADM) reported Q1 revenues of $21.16 billion, up 65% Y/Y and profit of $1.05 billion, or $1.65 per share, up from $441 million, or $0.68 per share for the same period last year.

·         UBS (NYSE:UBS) posted a net profit of $252 million for the Q1, benefiting from a $776 million tax credit and a revaluation of its credit positions that led to a $1.88 billion gain on its books. It recorded writedowns of $4.4 billion for the quarter.

In terms of what we expect, after yesterday’s relatively calm trading session, we think the markets will be pricing in an Obama win today. Whether you like it or not, the markets have historically performed better under a Democrat in the White House. That is an historical fact. Not that past performance is an indication of future performance, but we happen to be more bullish on the economy getting back on track under Obama than McCain as well.

But after the vote is over and the Street begins looking forward again, there is still a dismal economy with deteriorating conditions ahead. We remind our readers that Nouriel Roubini’s economic forecast is for an 18 to 24-month recession, if we are lucky. He also said the S&P could decline by another 15% to 20%. We think this is worth paying attention to, and we would use any strength in the markets in the near term to hedge against further downside risk. We definitely see another test of recent lows in the near term.