Markets to Sell Off at Open on Worse Than Expected Economic Data, Cautious Outlooks for Companies

February 4, 2010 - The futures are indicating lower openings this morning for the broader markets as the Street reacts to this morning’s worse-than-expected nonfarm productivity and weekly jobless claims reports, as well as a general trend of cautious guidance and outlooks coming from businesses reporting this earnings season.

Nonfarm productivity for Q4 was expected to come in at 6.5%. It came in at 6.2%. Weekly jobless claims came in at 480,000, higher than expected.  Expectations were for 455,000 claims (we were at about 430,000 at the start of the year). Economists want to see the number get to 400,000 or below to provide some sense that a recovery is underway. The uptick in jobless claims is a concern. The Treasury Department said Wednesday that it expects to reach the government's limit on borrowing, known as the debt ceiling, by the end of this month.

The debt ceiling is currently $12.4 trillion. The Senate has approved an increase to $14.3 trillion but the House has yet to act. Interestingly, the dollar is actually a little stronger this morning against the euro. While gold is softening, down $9.10 to $1,102.90. Oil prices are down $1.02 to $75.96, which is pretty predictable given the lackluster economic data in this morning. Oil continues to trade in a $65 to $85 range.

On the corporate front,

·         Alternative Energy – Solar Sector – Trina Solar announced a 40MW module supply agreement with AE Photonics, which will be delivered in 2010. 20MW will be shipped in the first half (began shipping in January) with prices locked in during Q1.

SunEdison, a subsidiary of MEMC (NYSE:WFR), has activated the first phase of its 16MW solar farm in Davidson, County, North Carolina, which represents 4MW of capacity. Duke Energy is buying the entire output of the project under a 20-year PPA.

Energy Conversion Devices (Nasdaq:ENER) said it will supply up to 25MW of UNI-SOLARA PV laminates to Enel Green power for installs on several buildings owned by CIS-Interporto di Nola, in Italy.

·         Clean Tech – Demand Management – Comverge (Nasdaq:COMV) is expanding its agreement with Pepco Holdings to include marketing, installation and call center services and will be managed by Comverge’s Apollo Demand Response Management System software. The agreement includes the installation of more than 40,000 home energy management devices.

·         Clean Tech – Energy Storage – Power Integrations (Nasdaq:POWI) announced Q4 revenues of $66.1 million, up 56% Y/Y. Gross margin for the quarter was 51%. Net income for the quarter was $9.18 million, or $0.32 per diluted share, compared with a net loss of $20.7 million, or $0.72 per share for the same period last year. For the FY09, revenues were $215.7 million, up 7% Y/Y, and net income was $23.2 million, or $0.82 per diluted share, compared with net income of $1.8 million for the FY08.

In international markets, the Bank of England left its key interest rates in place at 1%. In terms of what we expect in today’s session, look for stocks to open lower. Futures were negative even before the jobless claims report and nonfarm productivity. We have been commenting for months now that we think the Street has been too early in pricing in a recovery this year and that there remain significant headwinds to that thesis.  

Regardless, stocks continued to move higher building an increasingly large premium relative to historical valuations and at this point, it appears that the Street is sobering up to the possibility that stocks are overbought and there really aren’t any clear catalysts in place out there to justify current valuations. Tomorrow’s nonfarm payrolls report will be critical in determining the direction of the broader markets in the near term, and a worse than expected number will likely drive the indices down to test support levels:

·         Light support for DJIA at 10,067 and then at 9,712

·         Light support for Nasdaq at 2,147 and then at 2,045

·         Light support for S&P 500 at 1,073 and then at 1,036

We would wait to start accumulating again until we see a test here, and check the market conditions at that point. However, look for broader market weakness as an opportunity to sell puts on companies that you might want to own at lower prices (ask your broker more about this strategy).