Markets to Open Lower - Morgan Stanley Loss Dampens Mood

April 22, 2009 – The futures are pointing to lower openings this morning in the broader markets, as the Street grapples with another stacked day of earnings reports. Morgan Stanley’s worse-than-expected report set a negative tone overall. In the housing market, Realty Trac reported this morning that the number of US households facing foreclosure increase 24% in the Q1 and is expected to increase further.

The dollar is basically flat against the euro this morning, which is getting $1.2960, while gold is up $3.70 to $866.40. Daily sentiment and confidence about the economy and investor reaction to equities appear to be the key correlative factors influence both the dollar and gold prices. Longer-term, we think the most important factor here will be the US debt and amount of money being injected into the economy.

Oil prices are also basically flat this morning at $48.37. The IMF’s forecast released this morning (see below) is likely not going to help oil prices move any higher. The only buoy that we are seeing for oil right now is the anticipated OPEC meeting on May 27, where expectations are widening that OPEC will cut production further.

In international markets, the IMF released a forecast this morning that the world economy is set to contract by 1.3% this year, which would be the first contraction in more than 60 years. In January, the IMF had forecast a 0.5% contraction, so conditions appear to have deteriorated significantly. For the US it is forecasting a contraction of 2.8%, Japan is expected to contract 6.2%, Russia by 6%, Germany by 5.6%, Britain by 4.1%, Mexico by 3.7% and Canada by 2.5%. China is expected to grow by 6.5%.

On the corporate front,

·         Aerospace/Defense Sector – Boeing (NYSE:BA) reported a 3% Y/Y decline in Q1 revenue to $16.5 billion, and a 50% decline in Q1 profit to $610 million, or $0.86 per share.

·         Auto Sector – Volkswagen (VOW.DE) reported an 11% Y/Y decline in Q1 revenue to €24 billion and a 74% Y/Y decline in Q1 profit to €243 million.

·         Financial Sector – Morgan Stanley (NYSE:MS) reported worse-than-expected Q1 financial results, losing $578 million, or $0.57 per share, and said it is cutting its dividend. Expectations were for a loss of $0.08 per share. Wells Fargo (NYSE:WFC) reported Q1 revenue of $21 billion and profit of $2.38 billion, or $0.56 per share. Expectations were for earnings of $0.41 per share on revenues of $19.37 billion.

·         Restaurants – McDonalds (NYSE:MCD) reported a 10% Y/Y decline in Q1 revenue to $5.08 billion, with profit of $979.5 million, or $0.87 per share, up from a profit of $946.1 million for the same period last year. Expectations were for a profit of $0.82 per share.

·         Telecommunications – AT&T (NYSE:T) reported Q1 revenue of $30.6 billion, basically flat on a Y/Y basis, and earnings of $3.1 billion, or $0.53 per share down 9.7% Y/Y. Expectations were for earnings of $0.48 per share.

In terms of what we expect in today’s session, the markets look set to open decisively lower. Yesterday’s rally was a bit surprising in light of the fact that the earnings reports have been less than upbeat in general. We commented ahead of the open yesterday that there is just as shortage of good news. We are maintaining that viewpoint this morning, and are holding to our expectations of tests at 7,522.02 on the DJIA, 1,500 on the Nasdaq and 787.53 on the S&P 500 in the near term.