More Dismal Retail Numbers, Markets to Open Lower

November 14, 2008 – The futures are indicating lower openings again this morning amidst more disappointing earnings results and forecasts. This morning’s report on retail sales, which came in much worse than expected at a 2.8% decline (ex autos it was down 2.2%), is set to further dampen moods, despite the fact that expectations for deteriorating fundamentals in the retail sector should have more than been priced into the markets at this point. The problem is the each day and each report just seems to bring more negative data and sets the Street up for more reasons to revise its outlook downward. In addition to the negative mood regarding retail sales, now we hear that Freddie Mac (NYSE:FRE) is looking for another $13.8 billion after posting a $25.3 billion loss in Q3. Against this backdrop stocks will have a difficult time extending any rally beyond one or two sessions.

Expectations for October retail sales were for a 2% decline. This is just another indication that consumers are preparing for what looks to be a protracted recessionary environment. We saw weekly jobless claims jump to more than 530,000 this past week, unemployment is up to 6.5% and expected to widen. Personal savings remain in negative territory. Home prices continue to decline and foreclosures continue to mount. Stocks are in the toilet and consumer confidence isn’t far behind.

Nobody seems to have any handle on what to expect either. Even our government, which is supposed to be developing and executing strategy to address the fierce economic headwinds we are facing, and it doesn’t even seem to have an idea what its strategy will be. Paulsen, in our opinion, doesn’t inspire confidence. Bernanke isn’t much better, staying in perpetual reaction mode (this morning he said the Fed is leaving the door open for another rate cut). So it shouldn’t be a surprise to see this whip-sawing and volatility on a day-to-day basis. After a deep sell-off in the morning yesterday, we saw the third-largest single-session point gain ever (October 13 was a 936 point gain and October 28 was a 889 point gain).

The international front is also a mess. The euro zone has entered a recession – officially. EU statistics this morning show that the euro zone retracted by 0.2% in both Q2 and Q3. Italy and Germany are both in a recession, while technically speaking, France isn’t yet having posted 0.1% growth in the Q3. Japan is going to lend up to $100 billion to the IMF for its global support efforts. Currently the IMF is reported to have about $210 billion but concerns are that this might not be enough. Hong Kong has entered a recession, contracting 0.5% in the most recent quarter, after a 1.4% decline in Q2. Some countries are still growing pretty nicely though. Bulgaria said its growth slowed to 5.6% in Q3, compared with 7.1% in the previous quarter. Its agriculture business is a major driver for growth, up 37.8%.

Oil prices are up slightly, $0.28 this morning to $58.52. OPEC said this morning it is going to meet this month to address falling prices. We have been commenting that we expect it to slash production in the near term to address the dynamic of slowing global demand and to help support prices. Last month it cut production quotas by 1.5 million barrels per day, but that move had long been priced into oil prices and they have declined another $10 to $15 since.

On the corporate front,

·         The labor market continues to reel – this morning we are getting reports that Sun Micro (Nasdaq:JAVA) is cutting up to 6,000 workers (18% of its staff); Citiigroup (NYSE:C) is cutting at least 10,000 more jobs, bringing its total cuts in 2008 to 23,000.

·         The retail markets continue to worsen - J.C. Penney (NYSE:JCP) said Q3 revenues declined by 9% to $4.32 billion and profit fell 52% to $124 million, or $0.56 per share; Abercrombie & Fitch (NYSE:ANF) said revenue decline 8% Y/Y to $896.3 million and its profit fell 46% to $63.9 million, or $0.72 per share.

In terms of what we expect in today’s session, more downward pressure heading into the weekend. We have been advising our readers not to chase stocks over 8,500 and hopefully you didn’t in yesterday’s rally into the close. We think, all things being equal, risk is much more mitigated closer to 8,000 and we are inclined to accumulate in the 8,000 to 8,500 range. We wouldn’t be surprised to see the DJIA pull back below 8,500 in today’s session.

Channel Checks

Worldwide spending on IT will slow significantly in 2009 as a direct result of the global financial crisis that began in September 2008. IT spending will grow 2.6% YTY in 2009. In the United States, IT spending is expected to decline to 0.9% in 2009, much lower than the 4.2% growth forecast in August. On a regional basis, spending growth in Japan, Western Europe, and the United States will hover around 1% in 2009. Looking beyond 2009, IDC expects IT spending to make a full recovery by the end of the forecast period with growth rates approaching 6.0% in 2012. Despite these gains, IDC estimates that more than $300 bln in industry revenues will have been lost due to slower spending over the next four years.

Fast Facts

·         The national debt is at $10.6 trillion this morning.