Markets to Open Mixed - Cautious Outlook on Earnings Reports Ahead

April 15, 2009 – The futures are indicating mixed openings this morning as the Street reacts to UBS results this morning which is a stark contrast to Goldman’s report earlier this week, and continues to digest lower than expected retails sales numbers for March which were reported yesterday.

On the economic front, the CPI for March increased 0.2%. On a Y/Y basis, it has decreased 0.4%, which is the first 12-month decline reported since August 1955. For the complete report, click here. The US Empire State Factory Index came in at -14.7 in April, indicating conditions for NY manufacturers continued to deteriorate in April. For the complete report, click here. On tap a bit later this morning is the industrial production and capacity utilization report.  

The dollar is basically flat against the euro this morning as traders look for a reason to buy or sell. There performance of the dollar lately, as with the broader market in general has been reactionary to the day’s events, much more so than forward-looking. Looking down the road a bit, it is pretty widely expected that the dollar is going to weaken as a result of the trillions of debt having been added to the nation’s balance sheet. On an intraday basis, the dollar has managed to hold up, however, relative to its peers which have softened against the backdrop of their own struggling economies and related interest rate cuts.

Gold prices are up $4 this morning to $896, on the heels of selling in the global equities markets overnight and expectations that inflationary pressures will mount amidst increased government spending. We have commented lately that gold’s recent decline below the $900 level was primarily a consequence of the IMF’s plans to sell some gold reserves, but note again, that we expect central bank purchases of gold to soak up this supply. We remain bullish on gold and our target for gold prices in 2009 remains at $1,200.

Oil prices are up $0.91 this morning to $50.32, which is a bit surprising ahead of today’s inventories report from the EIA which is expected to show an increase of 2.5 million barrels for the week. Crude stocks are at 16-year highs, reflective of the fact that demand has curtailed in the midst of the current recessionary environment. We anticipate that OPEC, which meets on May 28, may take the opportunity to further cut production. Since September, it has announced 4.2 million barrels per day.

On the corporate front,

·         Alternative Energy Sector – Solar – LDK (NYSE:LDK) said it secured a credit line for RMB 1 billion (about $146 million) from the Agricultural Development Bank of China, and said it has unused credit facilities totaling US$785 million as of April 14, 2009.  

·         Financial Sector – UBS (NYSE:UBS) reported a $1.75 billion Q1 loss (larger than expected) and said it is cutting 8,700 jobs.

·         Semiconductor Sector – Intel (Nasdaq:INTC) reported stronger-than-expected earnings for the Q1, although results were still pretty downbeat with an 11% Y/Y decline to $647 million. Moreover,  it isn’t providing any guidance.

In international markets, the Bloomberg Global Confidence Index rose to an 11-month higher to 21.2 in April from 5.95 in March (any reading below 50 is indicative of more bears than bulls). Unemployment in Turkey has increase to 15.5% in January. The government expects its economy to contract by 3.6% this year, down significantly from its previous estimate of 4% growth. South Korea’s unemployment rate has increased to 3.7% in March, from 3.5% the prior month. Its government is expecting the economy to contract this year by 2.4%.

In terms of what we expect in today’s session, we are looking for downward pressure on stocks. Yesterday’s 137 point selloff on the DJIA notably saw an increase in volume over the prior session, so it looks like momentum could carry through to the downside today. As we noted yesterday, there is light support at the 7,830 range for the DJIA, and we think that will likely be tested today. If that level is breached, then look for a move back to 7,520.

We just don’t see any catalysts in place to push stocks higher. The outlook, as exemplified by Intel’s report, is as opaque as it ever has been and the markets don’t like uncertainty.

Wit, Wisdom, Fools and Folly

Gary Schilling spoke with Bloomberg this morning about the banks and his overall outlook on the markets. With respect to visibility in the banking sector, he doesn’t think visibility has improved. He noted that while Goldman beat estimates, estimates have been “cranked down” and that is the story throughout the story. In terms of his outlook for the economy, he thinks we still haven’t turned the corner, citing yesterday’s decline in retail sales as evidence, noting also that we are only beginning to liquidate inventories. Schilling said he doesn’t expect inflation to become an issue any time soon, citing the fact that the economy is going to slow down to such a long period of time.

We hope he is right, but can’t help but think that the influx of more money into the system will pressure the dollar and create higher prices. We agree that growth is going to be challenged for the foreseeable future, and the big danger we see is stagflation down the road. For now, Schilling’s view is supported by yesterday’s PPI report which showed that we are still leaning more to a deflationary environment than anything.