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Stocks Set to Move Lower - Libya and Rising Oil Prices in Focus

February 24, 2011 – The futures are indicating lower openings for the broader markets this morning as the Street continues to react to higher oil prices and instability in Libya.  

In terms of key economic data on tap, weekly jobless claims as reported by the Labor Department came in at 391,000 (expected to come in at 405,000, down 10,000). The Commerce Department is reported that durable goods increased by 2.7% in January (expected to increase by 3%).

The markets brushed off the better-than-expected jobless claims as it continues to focus on the implications that higher oil prices have for a recovery and inflationary pressures. Pundits are saying we shouldn’t be worried about the durable goods number, citing seasonality and volatility, Boeing and weather effects.

RealtyTrac reported that a total of 831,574 homes which were sold in 2010 had received notices of default, auction or repossession, and that properties in distress accounted for almost 26% of all homes last year. Homes in foreclosure sold at an average 28% discount, and expectations are that pricing pressure will continue through 2011 as supply increases.

The dollar is slightly softer against the euro, with the euro trading at $1.3764. We are fast approaching the deadline for Washington to determine whether or not it will increase the debt ceiling. The debate is heated and both sides are acknowledging the potential of a government shut-down.

With oil prices jumping to north of $100, more pressure will be coming from the Democrats side to raise the ceiling so that it can have room for further stimulative spending in the case that the economy gets pushed back into a no-growth scenario, which would exacerbate the labor market situation. Meanwhile, the GOP will continue its rhetorical push for not raising the debt ceiling and cutting spending, where it proposed that lower taxes, the free markets and smaller government are sufficient to reign in the national debt while keeping the economy on track. That model under GW Bush didn’t work, and when Reagan deployed a version of it, debt increased. But back then, according to Reagan, deficits didn’t matter. At the end of the day, the GOP knows that the debt ceiling needs to be raised, it just wants the political ammunition it can use in the next election cycle where it can blame the Dems for spending us into more debt.

What is surprising is that currency traders haven’t been pricing more systemic risk and higher U.S. debt levels into the dollar. If we are right, and the debt ceiling is raised, then we are that much closer to the debt ratings agencies cutting U.S. debt ratings. We remain bearish on the dollar.

Gold prices are up $3.30 to $1,417.30. Against what we see as ever-increasing systemic risk in the U.S. economy and our belief that the dollar’s status as a so-called safe haven is in real jeopardy, gold continues to look very appealing. Look for gold to test, and even blow through $1,600 in the next 12 months. It is trading near a 7-week high.

Oil prices are up $2.76 to $100.86. Libya’s instability is driving oil prices higher. It is interesting to note that OPEC has been relatively silent in the past week on its position. We would have expected some assurances from other OPEC countries that they would increase production to compensate for the potential of lost production in Libya. Traders are also gearing up for the weekly U.S. inventory report from the U.S. Energy Information Administration. Analyst forecasts called for a 1.2 million barrel increase in domestic crude stocks in the week to Feb. 18 (EIA/S)  The poll also forecast a 1.2 million barrel decline in distillates and a 400,000 barrel build in gasoline supplies.

On Tuesday, the American Petroleum Institute said in its inventory report that crude stocks rose by 163,000 barrels, distillates fell by 534,000 barrels and gasoline stocks dropped by 1.6 million barrels.

In terms of corporate/sector news:

·         Energy Storage - China BAK Battery (Nasdaq:CBAK) said its Tianjin facility was awarded a new contract to supply lithium-ion high-power batteries to leading e-bike manufacturer, XDS Shenzhen Xidesheng Bicycle Co., Ltd., wherein it will will supply 20,000 units of lithium-ion high-power batteries this year.

In terms of what we expect in today’s session, look for more selling pressure as the Street calibrates for increased risk in the U.S. and global economies which is making stocks look more expensive. We have been arguing for months that rising stock prices have not been factoring in underlying systemic risk, but with oil prices now over $100, it is pretty hard for the Street to maintain its Pollyanna view on recovery, or at least not to recognize that there is legitimate risk building. The implications of $100+ oil prices on GDP are direct and consequential. Traders are reacting, with the DJIA down more than 300 points in the past couple days.


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