Markets to Open Lower, Oil Sets New Record, Fate of Freddie and Fannie Uncertain

July 11, 2008 – The markets are set to open lower this morning on concerns about the solvency of Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM) and whether they will need to be bailed out, and as oil prices close in on $146 on concerns about production in both Iran and Nigeria.

The U.S. traded balance for May declined to $59.8 billion more than expected, but it really didn’t do too much to alter the downbeat mood this morning. Traders focus is on the financial services markets and oil prices, and when there is time to breath, concerns about how long and how deep this economic recession is going to get. Sure, yesterday’s weekly jobless claims was better than expected, but continuing claims over 4 weeks grew, so it is hard to get too upbeat about that.

The dollar is softening again this morning which will further exacerbate higher oil prices, while gold is trading higher to $967. We remain bearish on the dollar in light of the fact that the Fed doesn’t have the stomach in the current economic environment to raise rates. And as we have argued previously, one rate hike isn’t  going to do much for the dollar, and it certainly won’t offset the damage that is continues to be done by the mounting national deficit, which at $9.5 trillion, is rising precariously close to the next ceiling. Meanwhile, the ECB’s rate hikes in the euro zone have exacerbated the diverging relationship between the dollar and the euro.

On the corporate front,

·         General Electric (NYSE:GE) reported that Q2 profit fell 6 percent to $5.07 billion, or $0.51 per share on revenue of $46.89 billion, up from $42.38 billion the year before. GE is also selling its consumer finance business for $5.4 billion.

·         Freddie Mac and Fannie Mae are trading lower again in pre-market as concerns mount about whether they are going to need to be bailed out by the government. If ever there was a “too big to fail” in the mortgage sector, this is it.

·         Ashland (NYSE:ASH) announced this morning that it is buying Hercules (NYSE:HPC) for $2.6 billion in a cash and stock deal – a 38% premium to yesterday’s close.

·         Citigroup (NYSE:C) is selling its German retail banking operation to France’s Credit Mutuel for $7.7 billion in cash. The company is doing everything it can to shore up its bleeding balance sheet. It has announced 13,200 job cuts since the credit crisis started last summer, and has lost about $14 billion in its investments.

In terms of what we expect in today’s session, more downward pressure. The bottom line, is that there is just too much uncertainty out there. Uncertainty on a geopolitical front, uncertainty on a domestic political front, uncertainty about how deep and long the economic recession is going to get, uncertainty about the fate of Freddie Mac and Fannie Mae, and uncertainty about the labor market. Against this backdrop, it is senseless to suggest that stocks are oversold on an historical basis, in which case there is no potential catalyst in place to bring the bulls into today’s session.

We continue to urge our readers to remain defensive and cautious as we head into a weekend where it truly looks like anything can happen.