The Futures are Indicating Modestly Higher OpeningsThis Morning

April 17, 2009 – The futures are indicating modestly higher openings this morning for the broader markets with better-than-expected earnings from GE and Citigroup, which are being read as further indications that the worst is behind us and that the financial sector is on the mend.

The dollar is stronger again this morning against its peers, being helped by a generally better-than-expected series of earnings reports in the US financial sector and on the heels of the most recent series of economic data which provides faint signals that the pace of the deterioration in the US economy may be slowing down.

Gold is down $7 this morning to $872.80, on a stronger dollar, increasing moves back into higher risk with equities and on expectations that the IMF is going to be selling some reserves in the near term. And oil is down $0.18 to $49.80.

On the corporate front,

·         Conglomerates – GE (NYSE:GE) reported a 9% Y/Y decline in revenue to $38.4 billion, and 35% Y/Y decline in profit to $2.83 billion, or $0.26 per share (missing expectations). Equipment and service backlog was $171 billion.

·         Financial Sector – Citigroup (NYSE:C) reported better than expected financial results this morning (helped by $45 billion in bailout funds), posting a $1.6 billion profit, compared with a net loss of $5.11 billion, or $0.34 per share for the same period last year. On dividend payouts, it posted a loss of $0.18 per share (estimates were for a loss of $0.32 per share).

·         Semiconductor Sector – Toshiba said it expects a net loss for the last fiscal year to be larger than forecast, at  ¥350 billion ($3.5 billion) which is being driven by a write-off of ¥85 billion in deferred tax assets. It is also cutting 3,900 contract workers (in addition to 4,500 workers it said would be cut by last month).

·         Retail – Discretionary – Mattel (NYSE:MAT) reported a 15% Y/Y decline in  Q1 revenue to $785.6 million (lower than expected) and a loss of $51 million, or $0.14 per share, compared with a loss of $46.6 million for the same period last year (expectations were for a $0.13 loss).

·         Telecom – Sony Ericson (NYSE:SNE) reported a 36% Y/Y decline in Q1 revenue to €1.7 billion, and a €293 million net loss. In addition, it said it is cutting an additional 2,000 job. It shipped 14.5 million mobile phones in the quarter, down 35% on a Y/Y basis. The results are basically in line with expectations.

In international markets, in the Euro zone, the trade deficit declined to €2 billion ($2.6 billion) in February, down from  €10.9 billion in January. In the entire European Union (27 countries), the trade deficit in February was €27.2 billion. Germany’s Economy Ministry said on Friday that its economy likely contracted by 2.1% in the Q4 of 2008.

In terms of what we expect in today’s session, we think stocks will make a go at a higher open, but we just don’t seen enough fodder out there to sustain any conviction for bulls. And in our opinion, at current levels, stocks are overbought in the near term and some retracement needs to happen to provide stability to the markets.

On the DJIA, we expect the 7,600 level to get tested sooner than later, and the Nasdaq at about 1,528 with the S&P 500 at about 790 or so. In which case, we are advocating hedging positions at current levels against downside risk.

Adding to volatility in today’s session is that it is options expiration day.

Wit, Wisdom, Fools and Folly

Chris Whalen of Institutional Risk Analytics told Bloomberg that we are seeing a relief rally, but the overall credit environment remains awful. He said Citigroup still has significant issues. He doesn’t view trading as a stable form of long-term revenues. The key drivers for Citi are expense reduction, but revenue is continuing to fall. They can’t continue to put reserves aside because revenue is declining. He thinks they will need to continue to look for opportunities to cut expenses and this will become increasingly difficult. He thinks the government needs to replace Citi’s management and new management comes in to convert bondholders into equity, which would reduce liabilities. Then trading would look like a better opportunity. In terms of the government’s ‘stress test’, he thinks Citi is likely not going to pass muster.

Fast Facts

·         Barclays Capital projects US newspaper advertising will decline 22% in 2009 and another 10% in 2010.