Markets to Open Lower as Street Sorts Through More Negative Data
November 17, 2008 – The futures are indicating another morning of lower openings absent any catalysts to give buyers a reason to wade back into the markets. This week’s debate in Congress about whether to try and bailout the auto industry will be a big focus in today’s session. Conventional wisdom is that without help from Congress, the big three will be heading into bankruptcy, which will have a pronounced and negative impact on the U.S. labor market – amongst other things.
As it stands, the Treasury has already spent $290 billion of the $700 billion allocated for bailouts. Under the rules, the Treasury needs to come back to Congress after it has spent $60 billion, to request the second $350 billion. The Democrat-led Congress is generally sympathetic to voting in favor of bailing out Michigan, and to be sure, the unions which were responsible for helping Obama raise $80 million will have some pull. We don’t disagree that the auto industry needs to get some help, but we also agree with the contingent that is stating there has to be some conditions on any financial help, including bowing to regulations such as CAFÉ standards which will make the industry more competitive.
In terms of economic data on tap this week, today we will get the Empire State Index for November, Capacity Utilization and Industrial Production for October, tomorrow we will get the Producer Price Index for October, Wednesday will bring Building Permits, Housing Starts and the Consumer Price Index for October, and the FOMC minutes from its October 29 meeting, on Thursday will be the initial weekly jobless claims, Leading Indicators for October and the Philly Fed for November. Interestingly expectations are not as bad as we would have thought for the housing market, and growth is actually expected for Building Permits from 770k to 805k, and Housing Starts from 780k to 817k. Also, somewhat surprising, is that expectations are for a slight uptick in prices, despite the relative strength in the dollar of late.
In international markets, Japan is the latest company to enter a recession – officially. Its economy declined by 0.4% in the most recent quarter. The euro zone trade deficit grew to 5.6 billion euros ($7.1 billion) in September, an increase from a surplus of 2.9 billion euros for the same period last year. Iceland said this morning it is going to guarantee British savers’ deposits to secure a $2.1 billion IMF loan. The Confederation of British Industry projects this morning that the UK economy is going to decline 1.7% in 2009, a marked change from its September forecast of 0.3% growth. Singapore’s October exports fell by 15% Y/Y to 13.4 billion Singapore dollars ($8.8 billion). The G20 meeting this weekend was generally believed to be a success for most, at least in principle. France would have liked to see a move to more global regulation. But there isn’t any silver bullet here, and the next meeting is scheduled for April 30, about 100 days after Obama is in office.
On the corporate front,
· General Motors (NYSE:GM) is selling its 3% stake in Suzuki to raise $230 million;
In terms of what we expect in today’s session, as we said at the outset, there just aren’t any catalysts in place to trigger any buying. There is an overwhelming sense that at current levels, stocks are definitely much closer to ‘oversold’ conditions, but this begs the question as to where ‘fair value’ is. It is a tough task to figure fair value when each day the underlying fundamentals to the economy erode further. This just gives us another reason to recalibrate our expectations again, and again.
There are certain areas of the markets that we do feel more compelled that risk for accumulation at current levels is mitigated and have been accumulating ourselves, when the DJIA dips to the 8,000 to 8,500 range. In particular, we are really bullish on solar, geothermal, wind, energy efficiency and clean technology at current levels. There will certainly continue to be a lot of volatility here, but there is so much global government support in place and the performance is still remarkably stronger here than in so many other sectors that we feel the opportunity outweighs the risk. Keep an eye out for stocks we mention in other commentary on the Small Cap Pulse for more specifics.
Amidst more news this morning about mounting credit card defaults, we would be avoiding discretionary stocks and retail stocks. We also remain bearish on the financial sector and would not begin bottom-fishing anytime soon. There is too much work to do here for companies and the recovery will be a long one for those financial institutions that make it though all of this. One area that we think could be interesting, though we don’t claim to be experts here, is healthcare, which is going to be a major priority of the Obama administration, and even amidst the current financial crisis, Senator Ted Kennedy has recently said he is going to push healthcare hard, even in the lame duck session.
