Street Looks Past Larger Than Expected Contraction in Q1 GDP and Focuses Hopes for Q2
April 29, 2009 – The futures are indicating higher openings for the broader markets today, despite reports that the swine flu is spreading with the first death being reported in the US. In addition to earnings reports, the focus this morning has been on a report due on Q1 GDP showing the pace of the contraction in the US economy slowed, which would be a hopeful signal.
The US economy contracted by 6.1% in Q1, much larger than expected (expectations were for a 4.9% number). The reaction in futures to the miss surprisingly didn’t move lower on the news. Business inventories were cut more than $100 billion in the Q1 (the biggest drop ever). This is a key number, because when consumer demand does begin to stabilize, businesses will have to begin producing more and that should help get some growth back on track. Right now, businesses are running about as lean as they could be. The question is, when will consumer demand stabilize. The take on the Street is that in the Q2 we likely will not see another cut this deep in inventories – hence the no-reaction in the futures.
The dollar has been softening a bit against the euro, primarily on an upbeat (relatively speaking) consumer and business confidence report in the EU. The euro is trading at $1.3239 against the dollar this morning. Gold prices are up $4 to $897, helped by a softer dollar and concerns about the swine flu.
Oil prices are up $0.69 to $50.61 this morning. Royal Dutch Shell, who reported this morning, said that it doesn’t expect oil prices to rebound any time soon. On the other hand, our thesis is that oil prices will move markedly higher: the pullback in oil prices has resulted in oil drilling projects being put on hold, The International Energy Agency, the Paris-based energy watchdog for many industrialized economies, thinks investment by non-OPEC producers will fall nearly 20% this year as countless small and medium-sized oil firms are unable to get financing to continue sinking cash into their operations. China and other emerging markets – with few incentives for conservation but plenty of price subsidies to amplify demand – continue to make headway toward topping the developed world in overall crude consumption in two decades or so and despite the current global economic recession.
The IEA and other forecasters still expect non-Organization for Economic Development Nations like China to account for more than half of global oil consumption by 2030 or so, effectively changing current places with the US and other developed world nations.
And, by the way, the world’s auto fleet is expected to rise from around 600 million currently to almost 3 billion by 2050 as developing world consumers seize that one token item that highlights their moving up the economic ladder, according to the International Monetary Fund. So in our opinion, there’s plenty of demand in the longer-term pipeline which will buoy prices in the near term and will drive prices higher in the mid-to-long term.
On the corporate front,
· Alternative Energy – Solar - First Solar (Nasdaq:FSLR) is supplying modules to Solar Shop Australia for a 1MW rooftop project – installed on six different buildings. While SunPower (Nasdaq:SPWR) announced a $363 million public offering in equity and debt. The equity is being sold at $22, slightly below yesterday’s closing price.
Akeena (Nasdaq:AKNS) reported a 37% Y/Y decline in Q1 revenue to $7.6 million, gross margins of 29.7% and a net loss of $5.1 million, or $0.17 per share. Commercial sales were $915 thousand and residential sales were $6.7 million. The company installed about 945kW for the quarter compared to 1,587kW in the same quarter last year. Cash and equivalents at March 31, 2009 were $2.9 million, and the company’s backlog was about $4.8 million. Management didn’t provide guidance, but noted that the quarterly EBITDA breakeven is about $15 million.
· Oil Conglomerates – Royal Dutch Shell (NYSE:RDS-B) reported a 49% Y/Y decline in Q1 sales to $58.2 billion and a 62%Y/Y decline in Q1 net income to $3.49 billion. It said it pumped 3.5% fewer barrels of oil, 3.32 million barrels and equivalents per day, with an average selling price per barrel of $42.16, down from $90.72 a year ago.
· Telecom Services – Siemens AG (NYSE:SI) reported a 5% Y/Y increase in Q1 profit to €19 billion and net income of €1.01 billion, an increase from €412 million for the same period last year.
In international markets, the European Commission reported that business and consumer confidence increased in April for the first time in almost two years. However, business managers expectations of export orders continues to decline. Germany’s economy is forecast to contract by 6% this year, with growth of 0.5% in 2010. In Spain, the economy contracted by 1.8% in Q1.
In terms of what we expect in today’s session, stocks look set to push higher. The Street is clearly focused on a developing thesis that the pace of erosion in the US and global economies is slowing, which would, in turn buttress the belief that the worst is now behind us and that the economy is on some sort of mend.
In the past couple sessions, despite showing far more weakness in pre-market activity, stocks have managed to hold their own. For example, the all-important 8,000 level on the DJIA, though breached in both sessions, remained in tact by the close in both days. And despite the fact that both sessions ended in negative territory, volume was lackluster, which is indicative of the notion that there just isn’t any bearish conviction at this point.
All that being said, we are not convinced, by any means that the worst is over, and in our opinion, given the pace that we are adding to the national debt, stagflation is a very real scenario at some point in the next 12-months. If we are right about that stocks will face a whole new set of headwinds. Regardless, we just don’t see a scenario where stocks are able to stage any significant rally from current levels and we still see more risk to the downside.
All things being equal, we are inclined to accumulate back at the 7,500 level on the DJIA, 1,500 on the Nasdaq and 787 on the S&P. And we are included to hedge against downside risk into strength at current levels (e.g., selling out of the money covered calls, buying protective puts, adding ShortDow 30 ProShares and buying SPDR Gold Shares).
Fast Facts
· The national debt is up to $11.2 trillion this morning.
· The US is selling $71 billion in debt next week.
