Weaker Than Expected Jobless Claims Confirm Recessionary Environment - Markets to Open Lower

November 20, 2008 – The futures are indicating the markets are moving lower again this morning as the drum continues to beat across capital markets around the world about recessionary fears. That we are heading into a recession, and that many other economies are heading into a recession, should be a foregone conclusion. The question at this point for the U.S. economy, as well as those elsewhere is just how deep it will get. With respect to Wall Street, the selling has been non-discriminate. Yesterday we watched one of the few companies still showing remarkable top and bottom-line growth (triple-digit) in a growth market, report quarterly earnings which beat expectations, raise forward guidance and it still was sold off, despite the fact that it is now trading less than 5x current year forecasted earnings. This market is showing no intelligence and only fear and loathing.

Adding to the fear and loathing is speculation  about the implications of bankruptcy amongst Detroit’s big three. The GOP and the Bush administration rejected Democrat plans to vote on a bill yesterday to provide $25 billion in auto industry loans, and clearly the markets didn’t take that well as the DJI close down below 8,000. So Congress is back to it today to try and come up with a plan that can get bipartisan support. Against this backdrop, it shouldn’t be a surprise to anyone that the Fed is warning that the outlook for the economy indicates things will get worse in the near to mid-term.

This morning’s weekly jobless report was expected to show that claims actually dipped to 505,000 but we thought it would increase and couldn’t figure out why expectations were otherwise. Regardless, anything over 400,000 is a signal of recessionary pressures. The number came in at 542,000, well above expectations and the reaction in the futures markets was decisively negative. We have to doubt that traders were surprised, but the worse-than-expected number is just another reason to put pressure on the markets. The Fed is projecting that the national unemployment rate will increase to between 6.3% and 6.5% this year and will rise to a range of 7.1% to 7.6% next year.

Oil prices are down another $1.32 this morning to $52.30 as traders adjust for a deepening global recession and lower demand. The recent strength in the dollar has also been helping to create a deflationary environment for commodities. Gold prices are up $9.70 to $745.70 this morning.

In international markets, Japan reported its October exports marked the biggest decline in seven years, down 7.7%, resulting in its second trade deficit in the last three months. Autos and electronics exports dipped 15% and 10.6%, respectively. China’s government said this morning that its employment outlook has worsened. However, it still showed pretty impressive growth in the last quarter at 9%, and the recent injection of 4 trillion yuan ($586 billion) should help the country weather the storm more effectively than many others, including the U.S. The IMF, Finland, Sweden, Norway and Denmark have committed $4.6 billion in loans to Iceland.

In terms of what we expect in today’s session, more choppiness is on tap. As we say day in and day out, there just aren’t any catalysts to stimulate a reversal in the downward trend and regardless of how ‘cheap’ stocks have gotten, and many of them are ridiculously cheap, the markets are being flushed out by redemptions and forced liquidations. In these circumstances economic rationale and valuations are as relevant as the temperature.

Prime brokerages continue to change the rules on a daily basis for margin requirements and that is creating daily deleveraging, fund managers are shutting down funds and liquidating with the intent to start again with a clean(er) slate next year, and others are just going out of business. Fund managers that are fortunate enough to be sitting on any cash are holding it close, as confidence in forecasting is at an all-time low giving money no sense of security with respect to timing and entrance points back into the markets. This is a mess.

Fast Facts

·         The national debt is up to $10.64 trillion this morning·         2008 poised for worst year since 1931: Nov 19, S&P 500 down 45% for the year