Markets to Open Lower - WSJ Paints Dim Picture on Banks

April 28, 2009 – The futures are indicating lower openings for the broader markets as the Street contemplates the ramifications of the swine flu pandemic on global markets, more earnings reports, the conditions of the banking sector and ahead of the day’s economic data.

The S&P CaseSchiller Home Price Index fell 18.63% nationwide on a Y/Y basis, slightly less than expected. On a month-over-month basis, the decline was by 2.2%. There wasn’t any significant reaction to the futures on the news, as investors remain focused on the financial sector. The dollar is slightly stronger against the euro this morning as traders anticipate another rate cut on tap by the European Central Bank. The euro is trading at $1.3024.

Meanwhile gold prices are back below $900, down $9.90 to $898.30 this morning. The weakness in gold is being attributed to concerns about the swine-flu outbreak negatively impacting trade and demand. Commodities in general are reportedly softer on these concerns – which seem to be a stretch relative to other factors that should be driving them higher, including massive amounts of money printing by the US Treasury Department, and other governments around the world coupled with decreasing interest rates.

Oil prices are down $0.81 to $49.33 this morning on general concerns about global demand, and new concerns that the swine flu will exacerbate an already dismal outlook. The Abu Dhabi National Oil Company said it is cutting crude oil supplies for June by as much as 18% to comply with OPEC’s last round of output reductions. OPEC has cut production by 4.2 million barrels per day since September, but decided this week instead of cutting production further that it would do a better job of monitoring compliance amongst its members with previous cuts. The fact that OPEC decided not to cut at its most recent meeting surprised us.

On the corporate front,

·         Auto Industry – The United Auto Workers leadership is recommending approval of a plan where the UAW will own 55% of the restructured Chrysler LLC.

·         Drug Manufacturer Sector – Pfizer (NYSE:PFZ) reported an 8% Y/Y decline in Q1 revenue to $10.9 billion and net income of $2.73 billion, or $0.40 per share, down from net income of $2.78 billion, or $0.41 per share for the same period last year. Expectations were expecting earnings of $0.49 and revenue of $11.1 billion. Bristol-Myers (NYSE:BMY) reported a 3% Y/Y increase in Q1 revenue to $5.02 billion, and net income of $638 million, or $0.32 per share, compared with net income of $661 million for the same period last year. The net income was slightly better than expected while revenue came in below expectations of $5.13 billion.

·         Financial Sector – Banks could see weakness this morning after the Wall Street Journal reported that Bank of America (NYSE:BAC) and Citigroup (NYSE:C) may fail the government’s stress test and need billions in more capital.

·         Oil & Gas Sector – BP plc (NYSE:BP) reported net income of $2.56 billion, beating the Street estimates of $2.2 billion, and raised its quarterly dividend by $0.14 per share. Keep in mind that BP owns one of the largest wind and solar developers as well, BP Wind and Solar, so this stock could be an interesting consolidated play on energy going forward.

·         Travel & Hospitality Sector – airline companies and hotels are amongst the hardest hit by the swine flu and look for more weakness in these stocks  in today’s session;

In international markets, Lithuania’s economy contracted by 12.6% in Q1. Its Finance Ministry has forecast a 15% decline in GDP for the year.

In terms of what we expect in today’s session, the negative report at the WSJ this morning on the health of Bank of America and Citibank will add to an already negative mood and should drive stocks lower. Yesterday’s session’s resilience was a bit surprising in light of the negative tone at the outset, and it managed to make up significant ground from intraday lows – though still closing negative.

Another key signal was that volume was absolutely anemic. The DJIA volume was only 5.6 billion shares traded, compared with 7.1 billion traded on Friday. So while yesterday’s 51 point decline on the DJIA did paint a bearish tone, the conviction was clearly not there, and that is reflected by the fact that it bounced off 7,920 to close back over 8,000 by the close. We think 8,000 will be breached again today, and our take is still, that there is still retracement further to the downside that needs to take place. At current levels, we just see more downside risk to the markets than there are catalysts in place to take stocks higher.