Stocks to Open Lower on More Erosion in Labor Markets, Downgrades and Lowered Guidance

January 7, 2009 – The futures are pointing towards lower openings this morning for the broader markets as traders both react to economic data which has been released so far this week, generally worse than expected and position for tomorrow’s weekly jobless report and Friday’s nonfarm payrolls report which are expected to show further erosion in the labor markets. The ADP job report this morning showed that 693,000 jobs were lost in December, much worse than the 495,000 expected. This is an ominous sign ahead of tomorrow’s weekly jobless claims report and Friday’s jobs report from the Labor market. Moreover, on the corporate front, reduced guidance and analyst downgrades have been steady.

Also on the corporate front,

·         More job cuts - Alcoa (NYSE:AA) said it is cutting 13% of its global workforce, or 13,500 jobs, by the end of the year to deal with economic conditions; Ethan Allen (NYSE:ETH) is cutting 350 jobs;

·         Time Warner (NYSE:TWX) is cutting its forecast this morning, citing the challenging economic environment expecting to post an operating loss for 2008;

The dollar is softening this morning against the euro and the yen on the heels of more negative economic data released in the past couple days including:

·         National Association of Realtors reports that pending homes sales fell to lowest level on record in November – 4% to 82.3 from 85.7 in October. Expectations were for a reading of 88.

·         U.S. auto sales fell 18% in 2008, to 13.2 million, from 16.1 million in 2007. Expectations are for sales to drop to 10.3 million in 2009. In December, U.S. sales dropped 36%.

·         Factory orders fell for the fourth straight month in November, by 4.6%. Expectations were for a decline of 2.5%.

The only positive data out this week was that:

·         The ISM Services index rose to 40.6 in December from 37.3 in November. Expectations were for a decline to 37. Any reading below 50 signals contraction.

The euro is trading at 1.3674 against the dollar this morning. We expect the euro to strengthen further throughout the week as more employment data is released that shows economic conditions to be deteriorating. Our outlook for the dollar this year remains very bearish and we expect the euro to tip above 1.50 against the dollar. Gold is down $4.30 this morning to $861.70. It had rallied yesterday on the string of negative economic data and should strengthen throughout the remainder of the week.

Oil prices are basically flat this morning, up $0.03 to $48.61. The softening dollar should help buoy oil prices, as will increasing geopolitical tension in the Middle East. In addition, look for OPEC to announce another production cut in the near term.

In international markets, Russia has cut all gas supplies to Europe through Ukraine, leaving many people in Europe without heating in the midst of a cold winter. Negotiations are still halted between Russia and Ukraine regarding Ukraine’s outstanding debt to Russia and Russia’s decision to raise prices going forward. Taiwan’s central bank cut its key lending rate from 2.375% to 1.875%. The steep cut can be largely explained by a recent report which showed that exports in Taiwan for December fell 41.9% in December on a Y/Y basis. Germany’s unemployment rate is risen to 7.4%.

In terms of what we expect in today’s session, look for downward pressure. This shouldn’t be a surprise to anyone that reads our commentary as we have been warning that the employment data is going to sour the mood which had been relatively polyanna – focused on hope of a reboot to the U.S. economy on the heels of Obama’s stimulus plan. We definitely think Obama is the best suited for the job and are happy to see the Bush circus leaving town, but even if Obama does everything right in terms of stimulus and policy, it is still going to get worse before it gets better.

The DJIA managed to shake off yesterday’s economic data to close up 62.21 to the 9,015 level. But volume was really light, at 5.39 billion shares trading hands which is an indication that there really wasn’t any conviction. We expect heavier volume today, above the 6 billion level in downward pressure which will likely set in motion at least a couple consecutive sessions of losses. We continue to urge our readers to hold off on chasing stocks anywhere above 8,500 on the DJIA and accumulation levels make more sense closer to 8,000.

Sector Watch

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