Verizon Beats Estimates, Markets to Open Higher
July 28, 2008 – The futures are indicating a choppy opening this morning for the broader markets as oil prices move back over $125 on comments from Iran’s government concerning its nuclear program, the dollar trades lower against the euro, and the Street is bracing for more bad news on the economic front with low expectations in terms of corporate earnings, although Verizon’s beat, is helping the mood a bit.
In addition to Iran’s comments about its 6,000 centrifuges on hand, more kidnappings of Nigerian oil workers are raising concerns again this morning about exposure to production disruption in the region. Last week, oil prices pulled back significantly in the absence of any major news in Nigeria and Iran, while the focus was on both the fact that a slowing U.S. economy will dampen demand for oil, with traders likely also taking some profits off the table. The punditry came out in full force it seemed to tell us all that oil would pull back to $100, and even $80, but we just don’t see it in the near term. There is just too much tightness in the supply-demand area, where global demand is offsetting any decline in demand here in the U.S.
On the economic front, this week we are going to get more of a picture on the state of the economy, with the GDP for Q2 on Thursday, auto sales for July as well as the July employment report both due on Friday.
The dollar is moving lower again this morning against the euro at $1.5709 and Japanese yen, at 107.72 while it is flat against the pound at $1.9876. One would think that the downbeat consumer confidence report in Germany would have given the dollar more of a lift against the euro, but there are just so many other factors weighing on the dollar and the outlook remains dismal. Until we get an administration in Washington that is willing to show a real commitment to curbing the burgeoning deficit and spending, look for the dollar to trend lower. The only help it is getting right now are expectations that the Fed will need to raise rates sooner than later to curb inflation, but we don’t see the Fed making that decision until it looks a bit more clear that the economy is getting back on a growth track.
On the corporate front,
· Ametek (NYSE:AME) is buying Xantrex (XTX.TO) for $120 million in cash.
· Toyota (NYSE:TM) is lowering its sales target for 2008 to 9.5 million vehicles, down from 9.85 million on a sluggish U.S. market. Adjusted for the new guidance, it expects sales growth to be 1% this year.
· Verizon (NYSE:VZ) reported earnings of $1.88 billion, or $0.66 per share for the Q2, up 12%, on revenue of $24.1 billion. Expectations were for earnings of $0.65 on revenue of $24.3 billion.
In terms of what we expect for today’s session, we think that more downward pressure in the markets is likely. There just aren’t any catalysts to turn the negative momentum around, and there is a lot of uncertainty out there. The bailouts of Fannie and Freddie, as well as the backstop for mortgage owners (Housing Bill) is a positive from the psychological perspective, but the implications of these moves on taxpayers and the national debt are negative. Moreover, the fact is, that the fundamental circumstances that have led the country into the economic quagmire it is now in remain firmly in place. So we see the near-term trend for the markets as being choppy, and downward.
Wit, Wisdom, Fools and Folly
Thanos Papasavvas, Head of Currency Management of Investec – Interviewed on Boomberg this morning says that There are two things that should help the dollar, the underlying economic turnaround in the U.S. economy and signs of financial stability around the world. In the near term, we expect the euro to continue in the range of $1.53 and $1.59 but towards year end, we expect the dollar to appreciate to $1.50 or even to break that level. While we agree that a turnaround in the U.S. economy and global financial stability are certainly bullish for the dollar, we don’t see a turnaround in the U.S. economy likely this year. Moreover, Papasavvas completely ignores the impact of the burgeoning deficit on the dollar as well, which other notable economists including Robert Rubin have pointed to. We think Mr. Papasavvas is way too bullish on the dollar in the near term, though we would be thrilled to be wrong about this one. Fast Facts· The national debt is up to $9.538 trillion this morning.
