Markets to Open Modestly Lower - Profit Taking on Gold Adding to Relative Strenght in Dollar
November 12, 2009 – The futures are indicating lower openings this morning on a downbeat outlook from Wal-Mart (NYSE:WMT), and the Street is setting expectations for a tough holiday season for the company and other retailers.
Initial jobless claims declined more than expected to 502,000 (expectations were for 510,000). The futures are coming off their lows on the report – which is symptomatic of the asymmetric view that the Street is taking to economic data. In the last nonfarm payrolls report, the Street overlooked a much worse than expected report.
Adding this sentiment in the retail sector, a report from Spending Pulse, a service of MasterCard Advisors, said this morning that retail sales rose 1.5% in October, but is down 2.3% from September, which is the biggest sequential decline since December 2008.
The dollar is strengthening a bit against the euro this morning, with the euro back under $1.50 to $1.4925. The primary catalyst for relative strength in the dollar is likely profit taking in gold after it hit record highs again yesterday. We see this as a very short-term dynamic and that the dollar will resume its slide. For now, the dollar index is back over $75 to $75.34. Our expectations for the dollar index are that it will move to the $72-$73 level.
Tim Geithner has been jawboning the dollar lately, saying the U.S. supports a strong dollar but he has no credibility on the issue, and his latest round of rhetoric – absent of any change in policy like raising interest rates – has will only undermine that credibility further. His comments of advocacy for the stronger dollar carry no weight in the international community as the U.S. debt continues to mount. Bloomberg reported comments from Wallace Ng, of Fortis Bank’s commodity-derivatives unit, who said gold is on track to hit $1,300 before year-end and that the dollar will be the primary catalyst for gold’s move.
Gold is off $0.90 this morning to $1,113.70, primarily on profit taking. Gold has been on a tear lately and we expect that it will continue to surge higher as interest rates remain low and the U.S. government has no plans to reduce its debt. In fact, in the midst of 10.2% unemployment, there is increasing pressure on Obama to increase stimulus spending.
Oil prices are down $0.76 to $78.52. The Department of Energy is expected to report today that U.S. inventories increased by 1 million barrels last week.
On the corporate front,
· Alcohol and Beverages Sector – AB InBev SA reported $9.76 billion in Q3 revenues, down from the combined revenue from Anheuser and InBev of $10.89 billion, and $1.55 billion in profit. Management said demand is expected to remain soft in Q4, forecasting a slight Y/Y improvement. It also noted that it has made $875 million in cost savings from the takeover this year.
· Retail Sector – Wal-Mart (NYSE:WMT) reported Q3 revenues of $99.4 billion (up from $98.3 billion for the same period last year), and profit of $3.24 billion, or $0.84 per share, compared with a profit of $3.14 billion for the same period last year. Expectations were for earnings of $0.81 per share on revenue of $99.9 billion. However, same-store sales fell on a Y/Y basis, and management said the sales environment continues to be difficult.
In international markets, Ireland’s average prices declined by 6.6% Y/Y in October to the lowest rate since 1931. In Brazil, the Deputy Trade Minister Welber Barral said this morning that the economy will grow about 9% in Q4 – driven by surging consumer demand and recovering exports.
In terms of what we expect in today’s session, while stocks are totally overbought in our opinion, they could be buoyed today by a better than expected weekly jobless claims report (which is still dismal, but the Street has a decidedly asymmetric view on economic data, looking past the dismal and focusing on any evidence that the economy is stabilizing), and M&A activity, as well as a resolution on the Intel/AMD patent dispute which will help out tech stocks. We continue to remain on the sidelines in terms of adding positions and are looking solely for opportunities to mitigate downside risk.
Fast Facts
· Foreclosures are up 19% Y/Y, with more than 332,000 households, or one in every 385 homes, receiving notice in October. This is the eighth consecutive month that foreclosure filings have surpassed 300,000 homes. If there is any silver lining in this, the number is down 3% since September. Banks repossessed almost 77,000 homes last month, down from 88,000 homes in September.
