Markets to Open Lower Absent of Any Postive Signals
November 12, 2008 – After tipping up into higher territory, the futures have reversed and are now indicating lower openings this morning as traders increasingly look to rationalize that we are reaching a bottom in the markets. To be sure, stocks are much cheaper than they were but the question is whether, relative to the dismal economic environment, they are actually cheap. There just aren’t any indications that the erosion in the U.S. and world economies’ underlying fundamentals is nearing a reversal – despite all of the coordinated bailouts from governments and central banks around the world.
Perhaps one of the best indicators of what traders really think in terms of whether the recessionary environment is getting worse or whether there is anticipation of an end in sight, we would point to oil prices, which reflect traders’ sentiment on global demand. This morning oil prices are down another $1.08 to the $58.25 level which indicates traders think demand will continue to decline on the basis of their deeper convictions and pessimism about the global economic outlook. Against this backdrop we doubt stocks have much of an upside.
That being said, we do think that oil has been oversold at current levels and if we are right, then energy stocks, which have taken a beating of late, should represent good relative value and growth. Our two favorite energy companies are Petrobras (NYSE:PBR) and British Petroleum (NYSE:BP). BP actually is an indirect play in wind energy, through its subsidiary BP Wind & Solar, who has a remarkable 20,000MW of wind projects in the pipe.
In any case, the reason we think oil has been oversold is based in large part on the situation over in China and demand in the region. Consider the fact that the U.S. currently purchases 25% of global oil production to sustain our economy. China’s currently purchases 6%. China’s automotive market is already the second largest in the world, and less than five consumers in one hundred own cars. As a contrast, in the U.S. almost 70 in 100 own cars. Even with the economic headwinds China is facing, as of October, its economy was still growing 9%. So in our opinion, even with a slowing economy China will be driving oil consumption significantly in coming years, and it is now getting more proactive about keeping its growth on track – pace the $585 billion stimulus program announced this weekend. So in our opinion, oil prices are reflected more by pessimism about other economic realities than the reality of demand.
Having said that, we agree on one thing – namely, that there is reason to get a bit pessimistic when looking at global economic conditions. News is coming out this morning that with the decline in oil prices, whose recent surge to $147 helped revive the Russian economy, Russia is now readying to tap reserves to bolster its economy. Germany’s economic advisors said this morning that it is predicting zero growth in the country for 20099, after growth of 1.7% this year. Expectations inside Germany are changing almost as frequently as the weather. The previous forecast was for growth of 0.2% growth, and just last month it was 1.2%. Britain’s unemployment rate has risen to 5.8% from 5.4% in the previous quarter. Expectations are for Britain’s unemployment rate to reach as high as 7.2% by the end of next year.
In the currency markets, the dollar continues to show relative strength against the euro, which stands at 1.2590 this morning. We continue to urge our readers not to be fooled by the relative strength in the greenback, and would hardly agree with many financial pundits that it has become a ‘safe haven.’ It is about as safe as a one-bedroom home filled with dynamite in a snowstorm. All it takes is a spark. To keep a corny analogy going, the spark is set to fly when the markets and traders begin to consider and factor in the trillions that the U.S. has recently added to its debt, expectations for more still to be piled on, and expectations that the Fed is going to cut rates again. We are forecasting that by this time next year, the U.S. economy will be steeped in inflationary circumstances.
In terms of what we expect in today’s session, we think the markets will get a lift at the open based on sheer hope. But hope without substance in the form of affirmation quickly fades, and we wouldn’t be surprised to see the markets check into negative territory by midway through. There just aren’t any catalysts in place to lift the markets higher, and we hardly think that a sensible case can be made that stocks, in general, are a good value. Value is a relativistic notion, and in this case, it is relative to the broader macro-economy. Unfortunately, visibility remains so poor, and the outlook remains dismal with conditions still demonstrating deterioration. In which case, we think traders will continue to have to recalibrate “value” on a daily basis, making the notion that ‘the broader markets are oversold’ totally meaningless.
So we stick to our recommendations to our readers that we would be exercising investment discipline and holding on accumulation until the DJIA slips to a range of 8,000 to 8,500. We aren’t calling this the bottom but we think that risk is substantially more mitigated here. That being said, there are individual cases where, if the investment horizon is appropriately longer-term, we would be less picky at current levels about our entrance points and would be inclined to be buying now. The market sector that we continue to focus on and accumulate is renewable energy and clean technology. Consider the statement that came from the International Agency this morning predicting world energy demand will rise 1.6 percent per year on average between 2006 and 2030 and calling for massive investment in energy infrastructure to prevent a supply squeeze. With increasing demand still expected to from China and India the IEA said that these trends call for energy supply investment of $26.3 trillion to 2030, or more than $1 trillion a year, but it noted that tight credit conditions could delay spending.Much of the infrastructure investment will be in the form of upgrading the energy grid to a ‘smart grid’ capable of more efficient transmission for renewable energy.
Much of the infrastructure investment will be in energy efficient technologies, which is the simplest way to ease tight energy supplies. And then much of the infrastructure investment will be in renewable energy development such as wind, solar, geothermal and hydropower. We have cited time and again on the Small Cap Pulse statistics and forecasts in countries throughout the world that demonstrate private sector and government sector investment alike is getting behind renewable energy development and investment in a major way. This support remains remarkably strong despite the current global economic environment.
Our opinion is that the growth is locked in, but valuations no longer reflect or are factoring in that growth. Renewable energy stocks have been sold off with the rest of them. We are seeing companies posting triple digit revenue and income growth trading at less than 10 times earnings and with PEG ratios less than 1. We are getting aggressive with our recommendations on these companies at this point, and think that the current environment represents a unique point in investment history where wealth can truly be built. Our readers can pick up on the companies we think are timely, and untimely in the renewable energy and clean tech sectors throughout the daily pages of the Small Cap Pulse.
Stupidest Headline
· The dumbest headline that we have seen this morning comes from the AP, which reports that “Bush Administration Still Working $700B Bailout Plan.” Really?
