Stocks to Open Mixed in First Session of 2009, Expectations for Lackluster ISM Report on Tap

January 2, 2009 – The futures are indicating mixed, to slightly lower openings for the broader markets today in what will be a lightly traded session to kick of the New Year. Nobody is sad to put 2008 in the rear view mirror, with the DJIA shedding 33.8%.

This morning’s economic data will focus on manufacturing activity which is expected to look dismal. The manufacturing sector is a key economic indicator for the economy, and one of the hardest hit is the automotive sector. Expectations for the ISM’s manufacturing index this morning are for a reading of 35.5 in December, down from 36.2 in November. This would signal a 26-year low. Anything reading under 50 signals contraction.

As long as the number doesn’t come in too much worse than expected, we don’t expect the reaction to be very significant in today’s session, as the negative data has already been priced in. And there isn’t really any corporate news to focus on, so look for traders to begin positioning for next week’s economic activity, which includes construction spending for November, factory orders for November, consumer credit for November, nonfarm payrolls for December and wholesale inventories for November.

The report that everyone will be keying in on next week is nonfarm payrolls, which is expected to see an improvement from a loss of 533 thousand jobs to a loss of 475 thousand jobs, but with the unemployment moving higher to 7% from 6.7%. This week the market reacted favorably to a better than expected weekly jobless report, but we think the number is deceiving due to seasonal factors. Chances are pretty good that traders have already priced in 7% to 7.5% unemployment into stocks at this point, so unless the report comes in significantly worse than expected, we don’t think the response to what looks to be a pretty depressing labor market report to be fairly muted.

The dollar is stronger this morning against the euro, which is trading at 1.3898. A downbeat report on manufacturing activity in the euro zone is likely the catalyst for euro weakness this morning. Our outlook on the dollar, relative to the euro in 2009 remains very bearish, and we expect the euro to trade up to 1.50 by June. Note: the Belarusian ruble is trading at 2,650 to the dollar and 3,703 to the euro (see below). Gold is down $9.60 this morning to $874.60, likely on profit taking. Our outlook on the dollar implies a bullish outlook on gold and we expect $1,000 prices to be hit again in 2009.

Oil is trading lower, by $2.08 to $42.52 this morning. It has gotten a life lately on violence in Gaza and general consensus expectations for oil prices to average $60 in 2009. Also, news that China has begun stockpiling oil at recent prices has also helped firm up oil prices a bit.

In international markets, Russia continues to cut off gas supplies to Ukraine in its dispute over prices and outstanding debt. Russia says Ukraine’s gas bill is $600 million (after it just paid a $1.5 billion which was overdue) and it is asking Ukraine for an additional $450 million in late penalties. In addition, Russia wants to charge Ukraine higher prices as well going forward. Manufacturing activity in the Euro Zone was revised down to a 33.9 reading in December from 35.6 in November. This is the sharpest rate of decline in 11 years. House prices in Britain fell at their fastest rate in 25 years, posting a 16.2% Y/Y decline in December, and 2.2% in December over November, the eleventh consecutive month of declines.

Singapore’s economy contracted 12.5% in the Q4 from the previous quarter and 2.6% Y/Y. The government has lowered its forecast for 2009, predicting a contraction of 1% to 2%. Its manufacturing sector contracted 9% in the quarter. India has announced plans this morning to lower key interest rates by 1% and boost spending to help buoy its economy. Belarus’ ruble fell 20% as its central bank devalued it  as a condition of a $2.5 billion loan from the IMF.

On the corporate front,

·         We have commented before that the government has created a hedge fund out of the Fed, which has just received 5 million shares of preferred GMAC stock in exchange for $5 billion in bailout funds, and it exercised a 10-year warrant to buy 250,000 more shares of GMAC preferred stock for a penny;

In terms of what we expect in today’s session, we think it will be lightly traded as most traders are still away for the New Year holiday. There isn’t any significant data out this morning which could serve as a catalyst, good or bad, for stocks. At 8,776, we think the DJIA is a bit rich and would advise holding off on any accumulation until the DJIA tips back closer to the 8,000 level. That being said, we wouldn’t be surprised to see a January rally take the DJIA up to the 9,400 to 9,500 range before we retest November lows. We are planning accordingly. If we get that rally, we will be selling out of the money covered calls and buying puts in the 9,400 to 9,500 range.

Sector Check

Semiconductor sales were $20.8 billion, down 9.8% in November on a Y/Y basis, with memory chips getting hit the hardest, according to the SIA. Backing out memory chip sales, the sector sold $17.3 billion, and declined 4.8% Y/Y. For eleven months through November, sales were actually up slightly, by 0.2% to $232.7 billion, Y/Y, and excluding memory chips, sales were up 5.6%.

Auto sales are slumping everywhere, not just in the U.S. This morning ANFAC reported that car sales in Spain fell by 28% last year, which is the worst year ever. In December, sales were down by 49.9% on a Y/Y basis.