Stocks Open Lower - Some Profit Taking After Yesterday’s Rally
November 16, 2009 – The markets are giving a bit back on profit taking this morning after yesterday’s rally, while the Street is looking for catalysts and rationale to validate valuations at current levels. The PPI data for October came in up by 0.3% (expectations were for 0.5%), while core PPI was down by 0.6%, indicating that inflationary pressures remain tame in the U.S. Energy prices rose 1.6%, crude goods prices were up 5.4%. Rising unemployment and tepid consumer spending is helping to keep prices down. TransUnion reported this morning that mortgage delinquencies for the three months ended September 30, increased to 6.25% of loans, up 58% from 3.96% last year. The rate was up 7.6% from the second quarter, but smaller than the 11.3% rise in the second quarter from the first, and from the 14% increase in the quarter before that on a sequential basis. This is another example of ‘less bad’ news, but still dismal news. The Street has taken a decidedly asymmetric view on all economic data and is equating ‘less bad’ news with ‘good’ news, which seems to be a surreal perspective to take. The dollar is stronger against the euro this morning, with the euro trading at $1.4874. The dollar index most recently closed back over $75 to $75.37. The likely reason the dollar is showing relative strength comes from Bernanke’s European Central Bank counterpart, Jean-Claude Trichet’s efforts to talk it up, noting that the euro is not designed to serve as a reserve currency. That may be the case, but central banks around the world are becoming increasingly averse to the dollar as the Obama administration is demonstrating no commitment to supporting it, either through raising rates or through putting forward a tangible plan to reduce the nation’s debt. Gold is down $8.80 to $1,130.40 this morning, likely on profit taking as well as relative strength in the dollar. Look for gold to continue to benefit from its status as a ‘safe haven’ as the dollar grows increasingly weaker. We continue to think that gold will trend up past the $1,200 level while the dollar index slides to the $72-$73 level. Oil is down $0.58 to $78.32 this morning. Oil prices have rallied this year on expectations that the U.S. and global economies are stabilizing, and, to that extent, they are tracking with equities. A soft dollar should also continue to help buoy oil prices, as with other commodities. On the corporate front, · Alternative Energy Sector – Wind – A-Power (Nasdaq:APWR) and U.S. Renewable Energy Group signed a cooperation agreement mutually committing the companies to building a new production and assembly plant in the U.S. which is anticipated to produce 1,100MW of turbines annually. The companies had previously announced plans to develop a $1.5 billion, 600MW wind farm in Texas – which Senator Chuck Schumer complained about because the contemplated project, being developed by a foreign company, would have access to ARRA funds. The announcement this morning should soften that criticism a bit. · Home Improvement Sector – Home Depot (NYSE:HD) reported an 8% Y/Y decline in Q3 revenue to $16.36 billion, and an 8.9% Y/Y decline in earnings to $689 million, or $0.41 per share. Management raised its FY earnings outlook and noted that it is seeing signs of stabilization. The DJIA is up 3,966 since its March lows, or 61%. The Nasdaq is up 932, or 73%, and the S&P 500 is up 443, or 66%. Granted, stocks in March were, in hindsight, completely oversold – which was our take then – but in our opinion, the economy has not stabilized enough to warrant current valuations, which imply a much rosier set of underlying fundamentals. To wit, the S&P 500 is now only 37% off its all-time high. Is our labor market only 37% off the strongest it has ever been? Does the current outlook for the dollar, and the strength of our national balance sheet suggest that we are that close to ‘feel good’ territory? We noted yesterday that a vast majority of this earning season’s reports have been ‘beats’ but this is primarily on the profit side, and not on the revenue side, and it largely a consequence of dumbed-down expectations and cost-cutting. But you can only cost cut so much. Revenues are down, and with consumers still facing higher job losses (keep in mind that last week’s consumer confidence report surprised to the downside) we still see plenty of headwinds ahead for revenue growth.
