Markets Try to Look Past Dismal Economic Data to Earnings Season
July 16, 2008 – The futures turned out of negative territory into positive territory this morning after Wells Fargo (NYSE:WFC) reported better than expected results, and then turned negative on the inflationary data (see below). Meanwhile, concerns persist about the solvency of the banking system, the extent about how deep the recession is going to get here in the U.S. and inflationary pressures which are being exacerbated by a weakening dollar.
Today’s CPI data from the Labor Department came in at up 1.1%, with the core rate up 0.3%, both higher than expected. The equity futures reacted negatively to the news. This is a confirmation of what most of us have been expected. Namely, that prices will continue to trend higher as the dollar slides.
Ben Bernanke’s testimony before Congress yesterday didn’t really do much to instill confidence yesterday and he is set to speak again today. Secretary Paulsen was also present to testify with Bernanke and we still find him totally not credible. Clearly, based on the reaction in stocks yesterday, the Street is more apprehensive than ever that Bernanke and Paulsen’s recommendations for addressing the financial system breakdowns of late will have any near to mid-term positive impact. Interestingly, oil prices fell $6.45 per barrel yesterday, the biggest drop in 17 years, on the heels of comments from Bernanke that the U.S. economy will likely further slow, giving oil traders cause to recalibrate demand expectations for oil lower.Recently, OPEC has lowered its demand forecast for 2008 to an increase of 1.2% from 1.28%. Oil is trading at $137.51 this morning, down $1.21.
This morning the dollar is trading lower against most of its peers, with the euro at $1.5929 and the British pound at $2.004. Gold is trading lower, to the $974 level, down from $986 in yesterday’s session. Our outlook for gold remains moderately bullish due to the fact that we think the dollar will continue to slide. The dollar hit record lows against the euro yesterday. Bloomberg reported this morning that global confidence continues to slide, as its Bloomberg Professional Global Confidence Index fell to 10.3 from 21 last June. This was the weakest reading since the survey began.
On the corporate front,
· Intel (Nasdaq:INTC) announced after the close yesterday, with profit increasing 25 percent to $1.6 billion, or $0.28 per share, beating expectations, on record sales of $9.5 billion, up 9 percent and higher than expected.
· Wells Fargo reported earnings of $1.8 billion down from $2.3 billion Y/Y, on record revenue of $11.5 billion, up 16% Y/Y.
Delta (NYSE:DAL) reported financial results for the June quarter, with net income of $137 million, or $0.35 per share (excluding special charges). It noted a $1 billion increase in Y/Y fuel input costs. Including special charges, the company lost $1.04 billion, or $2.64 per share.
· Abbott Labs (NYSE:ABT) reported earnings of $1.32 billion, or $0.85, up 34.5% on sales of $7.3 billion, a 18.8% Y/Y increase.
· LDK Solar (NYSE:LDK) announced this morning that it has signed a 10-year contract to supply about 400MW of solar wafers to Photovoltech. LDK will deliver the wafers from 2009 to 2018.
The Small Cap Pulse basket of 16 recommendations, since the re-launch of Small Cap Pulse, are up on average 12%, while the DJIA is down 16%, the Nasdaq is down 9% and the S&P 500 is down 14%.
In terms of what we expect in today’s session, more downward pressure. Higher inflation, slower growth, ongoing concerns about solvency of the banking systems, credit tightness in the financial services markets, a still-reeling housing market, declining consumer and global confidence, negative personal savings, record credit debt, a softening labor market and a dollar which continues its slide – all of the factors are going to weigh on the markets and translate into lower stock prices for the foreseeable future. The Fed and Treasury secretary have proven almost feckless in their ability to anticipate where the next problem will arise, as well as in their ability to address them competently.
Wisdom, Fools and Folly
Arthur Levitt, former SEC Chairman, this morning on Bloomberg commented this morning on the “irony” of the numbers over at Freddie and Fannie not adding up, and cautioned that whenever you have government involved you are going to have problems. Levitt said that “Paulsen knows full well that Freddie and Fannie are not healthy right now” and that he and Bernanke are doing what they can to address systemic risk. Levitt’s commentary was much more empathetic than Jim Rogers, who described the Treasury Department’s plan to buttress Freddie and Fannie as “an unmitigated disaster.”
Fearless PredictionsWe are keeping tabs and will maintain a tally on forecasts for oil prices from market watchers:
CIBC’s Jeff Rubin is forecasting $150 oil prices for 2009 and $200 oil prices for 2010, which, “under prevailing refinery margins” would put gas prices at $7 per gallon. He also anticipates stagflation in the headwinds. But then there is CIBC's oil and gas group, lead by Rob Plexman, who is calling for $125 a barrel oil in 2009 and 2010.
ICF International’s Kevin Petak doesn’t think that $140 prices per barrel are sustainable and thinks oil prices will correct back to the $70 to $80 level by 2010.
Goldman Sachs expects Brent crude would rise to an average $140 in 2009 and peak at $150 in 2010 and then prices would ease to an average $140 in 2011 and $85 in 2012.
Fast Facts
· The national debt is up to $9.05 trillion.
