Markets to Open Lower At Open - Bulls Looking for Catalysts

January 5, 2009 – The futures are pointing towards lower openings this morning for the broader markets ahead of the first full week of trading in 2009. The markets got off to a pretty solid start for 2009 last week as traders focused on hopes that the worst may be behind us and that the incoming Obama administration is going to get very aggressive in its efforts to re-stimulate the economy. Obama is set to meet this morning with a bipartisan group of Washington lawmakers to push his economic stimulus plan agenda with the goal of being able to sign it as soon as he steps into office later this month.

Obama’s plan will seek to create 3 million jobs, and look for the instrument here to be infrastructure and green job investments. The plan is expected to cost as much as $775 billion, but it could very well increase. It is expected to include tax cuts of $500 to $1,000 for middle class individuals and couples and about $200 billion for states to help states pay for health care programs for the poor, amongst other things. The state governors met last week and came up with a number of about $1 trillion they are going to be asking for from Congress to help them right their own budgets.

The dollar is getting a lift this morning on hopes that the Obama stimulus plan is going to revive the economy. This is a surprising reaction, in our opinion, given the fact that the stimulus plan is going to pile hundreds of billions, if not trillions of further debt onto the U.S. balance sheet. There are some experts that are projecting a stronger dollar for additional reasons (see Schilling’s comments below), but we just don’t buy it. This morning the euro is at 1.3591 against the dollar. Our forecast for the euro against the dollar is to move back closer to the 1.50 level in 2009.

Oil prices have moved back over $46, although they are declining slightly this morning by $0.17 to $46.17. Rising oil prices this morning are being attributed to OPEC’s production cuts, as well as ongoing tension in Gaza, and reports of sabotage of a Nigerian oil pipeline which cut daily output by 12,000 barrels. In addition, Iran is fanning the flames in Gaza, with a Revolutionary Guard commander reportedly urging Islamic nations to use their oil production as a “weapon” to create further pressure on Western nations’ support of Israel. Expectations for oil prices in 2009 are generally for an average of $60. Iran said this weekend that OPEC countries are going to hold a special meeting in Kuwait in February to discuss strategic alternatives to help buoy oil prices. Iran is advocating a further cut in production.

Gold prices are trading lower by $23.80 to $855.70. We attribute profit taking in large part to the softness, as well as expectations for an economic recovery in 2009 led by the new Obama administration. Our outlook for gold remains bullish and is driven primarily by our bearish outlook for the dollar.

This week’s key economic data includes a construction spending report for November and auto sales data for December both released this morning. Tomorrow we will get factor orders for November and ISM Services for December. On Wednesday will be the weekly crude inventories report. Thursday brings weekly jobless claims and consumer credit for November. And we round out the week on Friday with the nonfarm payrolls report for December, as well as wholesale inventories. Expectations across the board are muted, but the key report this traders will be positioning for will be the nonfarm payrolls report which is expected to show that unemployment rose to 7% from 6.7%.

On the corporate front,

·         In the financial sector, JP Morgan (NYSE:JPM) estimates were cut by Deutsche Bank analyst Mike Mayo to earnings of $2.05 a share from $2.70 per share  in 2009;

·         A sign of the times – Waterford Wedgwood, maker of crystal and china filed for bankruptcy protection this morning;

In terms of what we expect in today’s session, we think that the markets are going to have a hard time extending gains of last week. The DJIA gained 518.82 points, or 6% for the week, which is remarkable in light of the fact that the only catalyst was hope that the worst may be behind us and optimism that Obama’s stimulus plan is going to get the economy back on track. All of the economic data continues to point to further erosion in the economy’s fundamentals.

The big report this week is nonfarm payrolls. After all, consumers represent more than 70% of GDP and until we backstop job losses, confidence and spending will continue to wane. A report which is likely to get overlooked, but which is a huge concern to us is that consumer credit report. We think this is the next shoe to drop. We have been commenting for some time now that it is a major problem that consumers, who have negative personal savings (the lowest levels since Depression era) have also taken on record credit debt. If the labor market continues to erode, consumers are going to find it more and more difficult to pay their debt and we could see a new round of write-downs in the financial services markets.

We have acknowledged, however, that the hope for a stimulus package to take effect, alone, may be enough to stimulate a January rally to the 9,400 to 9,500 range on the DJIA. If the DJIA gets to this level, we will be recommending out of the money covered calls and put buying strategies. We continue to recommend holding off on accumulation until the DJIA retraces back closer to 8,000.

Wit, Wisdom, Fools and Folly

·         Gary Schilling of Schilling & Co. on Bloomberg this morning said he expects another 30% decline in stocks in 2009. He sees another 20% decline in housing prices, which will negatively impact housing stocks. The goods and services sector is also going to be under pressure. With respect to stimulus plans, he doesn’t expect them to take any effect until later in the year. He likes high grade and municipal bonds. He said treasuries are pretty much played out at this point. He thinks the dollar is still a safe haven, and other countries that are depending on U.S. exports for their economies want weaker currencies of their own, so the dollar will benefit from this dynamic as well. Finally he thinks the dollar will benefit from the likelihood that the U.S. will be the first economy to recover.  

·         Michael Darda of MKM Partners on Bloomberg this morning said he thinks the stimulus plan will be helpful but there is no silver bullet. In terms of job creation, we need to curve our expectations, but the private sector has to get on track first and this may not happen until 2010. The risk of adding so much debt, Darda, conceded is real. It really depends on how the investments are made, and it is important to make sure the process isn’t corrupted. In terms of risk, he said you can see inflationary pressures cropping up in the next year. He said at some point the Fed is going to have to be disciplined enough to take the liquidity back out of the system when it sees this beginning to happen. But there will be a lot of pressure on the Fed not to drain liquidity. He said the first priority of the new administration to roll out a stimulus package will take a while and it will take until 2010 for us to really see any impact.  

·         Credit Suisse forecasts that 16% of all homes will be in foreclosure by 2012.