Stocks to Open Lower on Job Cuts, More Red Ink

January 29, 2009 – The markets are set to open lower this morning as the Street digests more corporate earnings reports, downward guidance and job cuts. Without GOP support, the House approved Obama’s $819 billion stimulus package and now it is heading to the Senate for debate. The GOP is branding the bill a “spending” bill instead of a “stimulus” bill – more partisan politics in a broken system. Meanwhile, December Durable Goods came in down by 2.6% showing that business spending is slowing down. Ex-transport, it is down 3.6%. Weekly jobless claims came in up 3,000 to 588,000, higher than expected, while continuing claims rose as well. Futures moved lower on the data, which reflects the fact that all is dismal in the private sector.

The economic data out this morning shouldn’t be surprising. We have been reporting regularly in our morning commentary and also in the Misery Index about job losses and profit warnings. Corporations are reigning in their costs, cutting, and doing all they can to preserve cash. There isn’t any silver lining here. This is just a bad economy that we have got to endure, and hopefully, the heads on the Hill will get over their party affiliations long enough to instill some policy that gets to the root of the problems that have brought this mess on, instead of turning back to quick fixes aimed at jolting the economy back into growth. By this, we mean that any long-term solution has got to create a framework which emphasizes consumer savings, and significantly lower levels of debt on a systemic level. Not sure this is on tap.

The dollar is slightly stronger against the euro this morning, which is getting 1.3122 against the greenback. Gold prices are dipping again by $16.40 to $883.10. While oil prices are ticking higher by $0.49 to $42.07.

OPEC is reportedly planning for more production cuts to help buoy oil prices, though members are hoping that the stimulus packages being unveiled throughout the world will help get economic growth, and demand for oil, back on track. We continue to believe oil prices have been significantly oversold, but are also a bit surprised that it has taken as long for OPEC to begin talking about more cuts against that backdrop.

In international markets, growth in the Philippines slowed to 4.6% in 2008, the slowest pace in 7 years. New Zealand’s central bank cut key interest rates by 1.5% to 3.5%. Poland’s economy grew 4.8% in 2008, down from 6.7% in 2007. Germany’s unemployment rate has reached 8.3% in January from 7.4% in December.

On the corporate front,

·         Auto Sector – Ford (NYSE:F) reported a $5.9 billion Q4 loss, or $2.46 per share, compared with a $2.8 billion loss for the same period last year. Revenue fell to $29.2 billion from $45.5 billion last year. Our outlook is negative.

·         Airline Sector – Jet Blue (Nasdaq:JBLU) reported widening pretax losses to $49 million on a 10% increase in operating revenue for Q4 to $811 million. Alaska Air (NYSE:ALK) reported a Q4 loss of $75.2 million, or $2.08 per share, compared to a $7.4 million profit for the same period last year. Revenue fell 3.1% to 827.1 million. The International Air Transport Association said this morning that the industry lost $5 billion last year on lower passenger traffic. Our outlook is negative.

·         Drug Sector – Eli Lilly (NYSE:LLY) reported 30% decline Y/Y for the Q4 to a loss of $3.63 billion, or $3.31 per share. For the year, it lost $2.07 billion,  on a 9% increase in revenue to $20.38 billion. Our outlook is neutral.

·         Electronics Sector – Sony (NYSE:SNE) reported a 95% decline in profit for the Q3 to ¥10.4 billion ($115.6 million) on a 25% Y/Y decline in revenue to ¥2.15 trillion. Our outlook is neutral.

·         Oil Sector – Shell (NYSE:RDB-S) reported a Q4 net loss of $2.81 billion, down from an $8.47 billion profit for the same period last year. Revenue fell 24% to $81.1 billion. For the FY08, net profit fell 16% to $26.3 billion. Our outlook is positive.

·         Technology – Qualcomm (Nasdaq:QCOM) reported a 56% Y/Y decline in Q1 profit to 341 million, on revenue which rose 3.2% to 2.52 billion. Our outlook is neutral.

·         Job Cuts – Kodak (NYSE:EK) cutting 3,500 to 4,500 jobs, Black & Decker (NYSE:BDK) cutting 1,200 jobs, Teradyne (NYSE:TER) cutting 14% of workforce,

The S&P closed above its 50-day moving average, while pundits are getting encouraged about stocks avoiding testing October/November lows. In terms of what we expect in today’s session, we think stocks are going to pull back. The first few sessions of the week have been surprisingly positive in light of all of the bad news which keeps streaming forward. This is a near-term encouraging signal, indicating that stocks may have found their lower-ranges (all things being equal).

The problem we see is that things are seldom equal, and if news continues to worsen sufficiently, traders, corporations and analysts will all be further lowering expectations which will result in further multiple compression, i.e., lower stock prices.

Back to the good news – stocks rallied yesterday on a pretty meaningful uptick in volume. So traders were showing a bit of conviction on the heels of reports that the FDIC is going to sweep all of the toxic debt in the banking sector into one, “bad bank”. We think the strategy is questionable, but better than the status quo, which amounts to keeping the U.S. financial sector on a drip lifeline. We tend to agree with Nouriel Roubini, who argues that government should just nationalize the banks, clean them up, and take them private again in a few years.

Wit, Wisdom, Fools and Folly

Peter Weinberg, of Perella Weinberg said on Bloomberg this morning that companies that are unlevered and have cash, they should look back on this time where they could create opportunity. Trying to pick the bottom, he said, is impossible, and investors should look at long-term value knowing that prices may go down in the near term but longer-term there are some real opportunities out there.  

International Air Transport Association CEO said “2009 is shaping up to be one of the toughest years ever for international aviation.”

And Bill Gross of PIMCO, our favorite bond fund manager, said in his monthly commentary released this morning that: The current financial and economic crisis is difficult to appreciate, not only for the drop in elevation, but because of the swiftness of the declines. It’s been a Wile E. Coyote 12 months – straight down like a dead weight. A year ago, global equity prices were nearly twice today’s levels and recession was only a whisper on the lips of the gloomiest of economists. Today, descriptions drawing parallels to the Great Depression make it obvious that a major shift in economic growth and its historic financial model, as well as policy prescriptions for its revival, are underway. Most of the world’s connected economies and its citizens are in shock, conscious but not fully aware of the seismic shifts that will unfold in future years.

To PIMCO, the remedy for this deflationary delevering and mini-depression is simple and almost axiomatic: stop the decline in asset prices. If that can be done, the real economy will level out as well. When home prices stop going down, newly created households will be more willing to take a chance on ownership as opposed to renting. If stock prices consolidate, recently burned investors will be more willing to invest, as opposed to stuffing their 401(k) mattresses with Treasury bills. Business investment, jobs, and profits should follow quickly behind.

For the complete commentary click here:

Sector Watch Computer and video game industry hardware, software and peripheral sales climbed to $22 bln in 2008, with entertainment software sales comprising $11.7 bln of that total figure, a 22.9% jump over 2007, Entertainment Software Association announced. The industry set the new record, calculated by market-research firm NPD Group, on the strength of December 2008 sales, when industry revenue ($5.3 bln) topped $5 bln for the first time in any single month. By comparison, as recently as 1997, the industry generated $5.1 bln over the entire year. In 2008, total US video game console software sales reached $8.9 bln (189.0 mln units), PC game sales hit $701.4 mln (29.1 mln units), and portable software topped 2007’s record sales with $2.1 bln (79.5 mln units) in revenue. Overall, retailers sold approximately 297.6 mln computer and video games 2007. (Source: IT Facts)