Markets to Open Lower - Dollar Hitting Record Lows, Oil Rising, More Dismal Economic Data

July 15, 2008 - The markets are set to open lower again this morning as concerns about the country’s banks continue to mount. The FDIC Chair, Sheila Blair, said this morning that “The banking system as a whole is absolutely safe” but then, we remember last June when Bernanke and Paulsen both took a much more casual position on the economy, the housing and credit markets when problems were becoming evident, and have adjusted their outlooks to more negative ones on many occasions since. Meanwhile, traders are preparing for more dismal economic data out this week with key inflationary data (PPI and CPI reports, industrial and capacity utilization, retail sales, housing starts and permits). And then rising oil prices and a falling dollar are also weighing on the markets. Against this entire backdrop, the Street is going to be looking on as Bernanke testifies this morning on the economy.

Nowhere to Hide

Financial Services.  With respect to the country’s banks, Blair did concede that there will likely be more bank closings, but maintains that the number will be limited. So far this year, five banks have closed. More writedowns are certainly on tap, and weakness in the financials will continue to be a big story in the economy.

Oil Prices. Oil is moving back over $146 per barrel this morning and could very well set a new record again this morning. Geopolitical events are certainly exacerbating the tightness in the market, with threats to supply in Brazil, Nigeria and Iran remaining constant of late. Brazil’s oil worker strike at 33 rigs, which began yesterday, has cut Petrobras production by 4 percent.

Inflation. Economists expect that PPI rose by 1.4 percent last month. Energy prices will continue to create price pressure. The number came in at 1.8 percent, higher than expected. So inflation is on the rise at the fastest pace on a Y/Y basis in 27 years. Over the past 12 months, wholesale prices are up 9.2 percent. Core inflation, which is a lame duck number that excludes food and energy, rose by 0.2 percent.

Retail Sales. Expectations were that the stimulus checks will have helped in the past month. The number will also be boosted by higher gas prices, so it will be subject to interpretation and after we adjust for inflation.  The Commerce Department reported that it increased by 0.1 percent, lower than the 0.4 percent increase that was expected. Gas sales jumped by 4.6 percent.

Manufacturing. Expectations were for the fifth contraction since February

The Dollar. The dollar is hitting a new low against the euro this morning, which is above $1.60. The fact that this is happening despite the news that German investor confidence is hitting 16-year lows is a signal of just how weak the U.S. dollar is. We have been bearish on the dollar for years now and remain so. The administration and the Fed clearly have no commitment to supporting the dollar. The administrations fiscal policies continue to rack up a higher and higher national debt which has been weighing on the dollar for years, while the Fed’s seven rate cuts just exacerbated the situation and at this point, it doesn’t have the stomach to raise rates.

On the corporate front,

·         Blackstone Group (NYSE:BX) has partnered with German wind energy developer Windland Energieerzeugungs GmbH to build an 80-turbine  wind farm off of Germany’s northern coast for about $1.6 billion. The wind farm is expected to have a capacity of 400MW, generating about 1.6 billion kWh per year. Germany’s government’s stated goal for reducing emissions by 2020 is 40%.

·         Polaris (NYSE:PII) posted a profit of $24.4 million, or $0.72 per share on revenue for $455.7, which was up from revenue of $376.9 million last year. The results came in better than expected in terms of both earnings and revenue.

·         Evergreen Solar (Nasdaq:ESLR) signed a contract with IBC Solar valued at about $1.2 billion, which extends through 2013 and increases its backlog to about $3 billion with 5 customers.

·         General Motors (NYSE:GM) announced more layoffs, cuts in production and that it is suspending its dividend. Meanwhile, it will need to raise $15 billion to buttress its U.S. operations. GM forecasts sales of 14.7 million vehicles in the U.S. this year, down from 17 million three years ago.

·         Johnson & Johnson (NYSE:JNJ) reported that profits rose 8 percent to $3.33 billion, or $1.17 per share, beating expectations, on revenue of $16.45 billion, up 9% Y/Y. In terms of what we expect in today’s session, more pressure on stocks. Again, there aren’t any positive signals out there that can be grasped as a catalyst for the bulls. The news just gets worse and worse every day. We strongly recommend to our readers that they don’t buy into the argument that stocks are oversold on an historical basis. The fact is that we are in unchartered territory and stock valuations will need to be recalibrated on a daily basis. This is a stock picker’s market, and there are clearly sectors that need to be avoided, while there are sectors that we think will outperform, led by the alternative energy sector (wind, solar, geothermal, clean tech, hybrid electric vehicles, energy management and storage).

Fearless Predictions

CIBC’s Jeff Rubin is forecasting $150 oil prices for 2009 and $200 oil prices for 2010, which, “under prevailing refinery margins” would put gas prices at $7 per gallon. He also anticipates stagflation in the headwinds. But then there is CIBC's oil and gas group, lead by

Rob Plexman, who is calling for $125 a barrel oil in 2009 and 2010.

ICF International’s Kevin Petak doesn’t think that $140 prices per barrel are sustainable and thinks oil prices will correct back to the $70 to $80 level by 2010.

Goldman Sachs expects Brent crude would rise to an average $140 in 2009 and peak at $150 in 2010 and then prices would ease to an average $140 in 2011 and $85 in 2012.

Keeping Our Priorities

Well, Congress can’t get anything done when it comes to dealing with energy policy, but maybe it can have more success in terms of making sure that American flags aren’t built abroad. The very fact that this comes up as an issue that warrants time and energy spent on Capitol Hill when there are so many crisis ongoing in the economy, and from a foreign policy issues is a joke. Rep. Bob Filner (D-Calif.) is the dope that is worrying about where the flags are being made.