Markets to Open Higher on Optimism about Obama Stimulus Plan
January 6, 2009 – The futures are indicating higher openings this morning for the broader markets as traders look forward to Obama’s stimulus package which is expected to be as much as $775 billion. Lawmakers met with Obama yesterday to discuss the plan and on a bipartisan basis the support for immediate action is in place.
As we get closer to the revealing of Obama’s stimulus plan it is interesting to note that the dollar has actually been strengthening against the euro lately – despite the fact that the stimulus plan is going to pile on more debt to the national balance sheet .This morning the euro against the dollar is down 0.264 to 1.3372. We disagree with several pundits that the dollar is going to continue to be a safe haven in 2009. These pundits argue that the dollar will benefit from other countries devaluing their own currencies to adjust for lower exports, as well as expectations that the U.S. will be the first economy to rebound.
While the dollar is benefiting this morning from optimism that an Obama stimulus plan will get the country back on track, we can’t see how all of the additional debt won’t ultimately weigh on it. We continue to believe the dollar will lose ground against the euro throughout 2009.
Oil prices are trading higher this morning, up $1.09 to $49.90 as the markets react to cuts in production at OPEC and ongoing tensions in Gaza. We think oil prices were tremendously oversold in November and December and agree with the general consensus that prices will be moving higher in 2009. Look for OPEC to announce a further cut at its next special meeting as well. Oil is trading at a 5-week high this morning.
Gold prices are down $14.10 this morning to $843.70, as traders adjust for the relatively stronger dollar over the last few sessions and the stronger sense of optimism about the U.S. economy’s potential to rebound in the second half of 2009 in response to the Obama stimulus plan.
There is a lot of optimism out there despite the fact that the news continues to be pretty dismal. This morning reports that foreclosure sales in the 25 largest U.S. metropolitan areas almost tripled in the first 10 months of 2008 were released from Radar Logic. While RealtyTrac reported that U.S. foreclosure filings increased 71% in the Q3 on a Y/Y basis.
On the corporate front,
· In the auto sector, Toyota (NYSE:TM) is suspending production at all 12 of its Japan plants for 11 days in February and March to deal with less demand; and General Motors (NYSE:GM) said its sales in China were up 6% to 1.09 million vehicles in 2008. China’s total auto sales growth last year is projected to be about 8%, down from 22% growth ni 2007. Expectations for auto sales growth in 2009 are about 10%.
· More announced job cuts this morning – this time from chip maker Micrel (Nasdaq:MCRL) which is cutting about 6% of its workforce and lowering sales and profit estimates for Q4; and Sanyo Electric is announcing cutting 1,000 workers over the next few months;
· American Superconductor (Nasdaq:AMSC) received its first order for a D-VAR system for a 220 kilovolt power transmission grid in Chifeng, Inner Mongolia, China.
In terms of what we expect in today’s session, look for the focus to be on the Obama stimulus plan and less on the key economic data being released. In which case, it looks like the markets will trend higher. We have been commenting that a rally in January leading into Obama’s inauguration is likely, but that we expect markets to turn south again in the near term testing November lows. With the DJIA closing at 8,952 yesterday, we still think the fundamentals don’t support current stock levels in the near term – on a general basis.
On a case-by-case basis and even looking at specific sectors, there are groups that we think are tremendously oversold. That being said, these stocks will likely feel further pressure if the broader markets sell off and we think they will. One of the key reports being released this week which should dampen any prospective rally is the nonfarm labor report which is expected to show further increases in job losses and an increase in the unemployment rate to 7%. Against this backdrop, there really isn’t too much conviction in either direction on the Street. Yesterday’s 81 point decline on the DJIA only saw about 5.4 billion shares trading hands – a relatively lightly traded session.
Our recommendation is to use market strength at current levels as an opportunity to hedge against downside risk. A couple ways to do this is through selling out of the money covered calls and buying puts on days where the broader markets are moving higher. We are holding off until the DJIA retraces to the 8,000 levels before we begin accumulating again.
Fast Facts
· Health care spending on hospitals, doctors and other services increased 6.1% to $2.2 trillion in 2007, coming to $7,421 per person.
