Markets to Open Lower - Dismal ADP Report, G-20 Summit and Outlook for Autos Set Tone

April 1, 2009 – On the first trading session of Q2, the futures are indicating lower openings this morning for the broader markets ahead of the highly anticipated G-20 meeting. Manufacturing data is one of the key reports out this morning. And the Obama Administration has said it believes that bankruptcy is the best option for GM and Chrysler.

On the employment front, ADP reported that 742,000 jobs were lost in March, which came in larger than expected (expectations were for a decline of 663,000 jobs, after 706,000 jobs were shed in February). Firing announcement rose 181% from March 2008 to 150,411 from the prior month. This is an ominous report ahead of Friday’s nonfarm payrolls report.

The dollar is stronger against the euro this morning as traders adjust for an expected rate cut from the European Central Bank tomorrow. The euro is getting $1.3256 against the dollar this morning. We have noted in other recent commentary that we think the dollar has seen relative strength based solely on weakness in its peers and having nothing to do with the actual fundamentals here at home – which include the infusion of trillions of debt and expansion of money supply. In the mid- to long-term we think these fundamentals will catch up with the dollar and we are forecasting a 29.78% decline in the dollar index from current levels to 55.8 to reflect the additional $1.78 trillion which has been added to the national debt since March 3, 2008.

It shouldn’t be any surprise that we are bullish on gold. Gold is up $3.70 this morning to $928.70. Our forecast for gold this year is to hit $1,200 and we think that the fundamentals pointing to this target are more salient than ever – China’s heavy criticism of the US handling of its debt issues and lack of protection of its currency, while calling for a new world reserve currency; no end in sight for further debt-driven stimulus spending; a $36 trillion unfunded Medicare liability and a $7 trillion unfunded Social Security in the lurch.

Oil prices are down $1.47 this morning as traders continue to recalibrate for dimmer expectations for global demand amidst the current economic crisis.

On the corporate front,

·         Alternative Energy – Wind – Siemens AG has received a €450 million ($595 million) to supply 88 turbines to StatoilHydro and Statkraft for the Sheringham Shoal offshore project off the coast of England. When complete the project will have capacity to produce 315MW of energy. Siemens was also awarded a 5-year service project that can be extended up to 11 years.

Duke Energy said it is planning a another wind project in Cheyenne, Wyoming – the 42WM Silver Sage Windpower Project which will consist of 20 Suzlon 2.1MW wind turbines. Construction is expected to begin this spring with a 2009 year-end completion goal. It has signed 20-year PPA agreements with two regional utilities.

·         Auto Industry – Automakers are releasing their March US sales numbers today. GM faces a June 1 government deadline to find a way to restructure, while Chrysler has 30 days to do the same.

In international markets, China’s monthly purchasing managers index showed manufacturing contracted in March (eighth consecutive month) to 44.8, down from 45.1 in February. In Japan, sentiment for manufacturers has slipped to minus 58, the sixth straight decline and the worst reading ever. In Germany, February retail sales fell 5.3% on a Y/Y basis. Sweden is forecasting a 4.2% decline in GDP in 2009, with unemployment to hit 8.9%, rising to nearly 12% in 2011. It expects growth to resume in 2011 and 2012. In Indonesia, exports fell 32.9% in February on a Y/Y basis to $7.08 billion and were down about 1% from January. Its projected GDP growth in 2009 is between 3% and 4%. India’s exports fell 21.7% in February on a Y/Y basis to $11.9 billion, while imports fell 23.3% to $16.8 billion. In Ireland, unemployment has hit a 12-year high of 11%. In the 16-nation euro zone, unemployment hit 8.5% in February. The unemployment rate across the entire 27-nation European Union has hit 7.9%.

In terms of what we expect in today’s session – downward pressure. The ADP numbers were dismal, and foreshadow tomorrow’s weekly jobless claims and Friday’s nonfarm payrolls which is the report which will be focused most on. Look for traders to adjust into those reports on the basis of what they saw with the ADP numbers. Moreover, stocks, in our opinion, are at the high end of the current range. Also keep in mind that we are heading into the next round of earnings reports and the expectations here are subdued at best – the Q1 was a mess in the economy and that will be reflected in earnings reports.

So, against this backdrop, look for stocks to decline. We think a retest of the March lows is a likely event, so if you have any dry powder we would recommend to be disciplined about using it.

Recommendations against Downside Risk in the Markets

All things being equal, we think the DJIA is topped out at the 8,000-plus level, and the downside on the DJIA is closer to 6,500. That being said, we would be using hedging strategies to hedge against downside risk with the DJIA anywhere over 7,700. Here are some considerations:

·         Buy SPDR Gold Shares (NYSE:GLD) – hedge against dollar weakness and inflation

·         Buy Pro Shares Short Dow30 (NYSE:DOG) – hedge against downside on the DJIA

·         Buy puts against long profitable positions Into weakness (anywhere below the 7,000 level) we would be selling puts on stocks that we find attractive and well positioned for the longer-term, which we would be happy to own more of at lower prices. Into strength (above the 7,700 level) we would be writing out of the money covered calls to bring in a little extra cash and lower cost averages. In the current environment, we don’t see stocks running away from us to the upside once we get to this level – there is just too much uncertainty out there.