Markets to Open Mixed Ahead of Fed Meeting

December 15, 2008 – The markets are opening lower this morning as traders as the Street continues to adjust for concerns about global economic uncertainty, downbeat expectations in the retail sector and for corporate performance in general in the Q4. This week’s economic schedule isn’t too heavy, but expectations are pretty downbeat about the reports that will be coming in. And the outlook for the auto industry continues to be opaque, despite expectations widely that Detroit will at least get $14 billion in the near term. Conventional wisdom is that it will need at least $75 billion more before everything is said and done.

Today we will get the NY Empire State Index for December, Net Foreign Purchases for October, Capacity and Industrial Production for November. Tuesday we will get Building Permits for November, the Consumer Price Index for November, Housing Starts for November and the most recent FOMC Policy Statement. Wednesday we will get Weekly Crude Inventories. Thursday we will get the Weekly Jobless Claims, Leading Indicators for November and the Philly Fed for December.Expectations across the board are subdued.

One of the few positives that we have seen in recent months is the softness in CPI data, which has helped out consumers – especially at the pump. But we expect with the Fed’s next rate cut, and trillions that have been added to the national debt lately and general deepening uncertainty in the U.S. markets, steeped by rising unemployment, that the dollar is going to begin softening again relative to its peers. We fully expect an inflationary environment on a buckling dollar by this time next year. This morning the dollar is weakening against the euro, which is up to 1.3575.

Against this backdrop, gold has been strengthening lately, which is up $5.90 to $826.40. Also, oil is on the rise, up $2.81 to $49.09. Oil prices are being helped by the weaker dollar, as well as expectations that OPEC is setting to cut production this month.

In international markets, the Bank of Japan’s “tankan” survey showed that confidence amongst manufacturers has slipped to minus 24, the biggest decline since 1975, and hitting the lowest level since 2002. China’s industrial output grew by 5.4% in November on a Y/Y basis, down from 8.2% in October, the slowest growth in since early 2002. British unsecured household debt is on the rise to about 50%, up from about 40% last year. This is the highest percentage since the Financial Position of British Households survey started in 1995. Turkey’s GDP slowed to 0.5% in Q3, while unemployment has risen to 10.3% in September, up from 9.3% in October.

On the corporate front -

·         More job cuts: Charles Schwab is cutting 100 jobs;

·         China’s BYD Co. has launched the country’s first hybrid vehicle for the retail market called the F3DM, which can run up to 100km (62 miles) on its electric engine. It fully charges in nine hours from a regular electric outlet, and faster at BYD charging stations. The car will sell for 149,00 yuan ($22,000).

·         Weakness in the tech sector is on tap: Google’s (Nasdaq:GOOG) earnings estimates are getting cut by analysts at ThinkEquity this morning. And Apple (Nasdaq:AAPL) got downgraded at Goldman Sachs. In terms of what we expect in today’s session, we continue to think that stocks are going to face downward pressure.

The fact that the markets have been as resilient as they have been amidst all of the deteriorating economic data and uncertainty about the U.S. and global economies has been remarkable, and is an indication to us that there is a growing sense that the markets have put in a bottom. That being said, we can’t help but notice and adjust our own expectations for stock performance based on the latest string of economic data and in particular, the situation in the labor market. It should be noted as well, that it looks like, based on volume, that traders continue to search for conviction. Last week on the DJIA, volume only rose above 6 billion shares on one day, Monday.

We continue to look for lower accumulation and entrance points in the markets, and are holding to our guidance that the DJIA is fully capable of retreating on short order to the 7,400 level. At Friday’s close at 8,629, the DJIA just looks to us to be overbought in the near term. Look for another choppy session today heading into the Fed meeting.