Investors are holding out hope for an Obama rally though any stock market bounce is unlikely to linger because of the weak economy.
While Barack Obama's inauguration is inspiring a hopefulness that the new president will approach the financial crisis with a new energy and fresh eye, there are also concerns that the economic problems are so severe that it will be a long, difficult process to restore trust in the system. Obama is sworn in at noon.
U.S. markets are open for business Tuesday after Monday's closing for the Martin Luther King holiday. European economic and bank news dominated Monday's headlines as the European Commission cut its forecast to a contraction of nearly 2 percent in the Euro zone economy for 2009.
Also Monday, as the Royal Bank of Scotland revealed $40 billion in losses, the U.K. government unveiled new measures it will offer banks to try to repair their balance sheets and boost lending. Part of the plan is a new "insurance" that would limit losses on mortgages and other loans. Financial firms would be charged a fee to participate in the program.
European stocks fell Monday, after initially trading higher. The banking sector was particularly hard hit. Standard And Poor's downgraded Spain's rating to AA+, the second Euro zone country downgrade in a week and another event that weighed on the euro currency. The dollar is likely to continue higher against the euro Tuesday, in an Obama rally, but also on the increasingly negative news out of Europe.
There is no U.S. economic data Tuesday, but there are a few earnings. Johnson and Johnson reports before the bell, as does State Street and T.D. Ameritrade. IBM and CSX report after the bell. In other company news, Chrysler is reported to be close to a deal to sell a 35 percent stake to Italy's Fiat SpA.
Binky Chadha, Deutsche Bank's Chief U.S. Equity Strategist, said he believes that stocks may have bottomed but credit markets and the financial sector have to heal before he would change his neutral stance.
"Our formal view is actually that equities are in a position to trade in a wide range between 800 and 1000 in the first half of the year ... If we don't have a second half recovery, we are basically going to continue to flounder along this bottom," Chadha said in a recent telephone interview. His year end target is 1140.
"Right now, if I was going to project forward ... what would make me change my call and go long equities is if I see that private capital is participating in a big way. We would then go long equities," he said.
Chadha said his firm is basing its assumptions on a second half rebound. "If the recession continues through the first two quarters of the year, that's sort of an 18 or 19 month recession. Equities typically bottom half way through a recession so a lot hinges on whether we get that recovery."
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The other requirements for the second half rebound would be continued deleveraging of the financial sector and a restoration of the capital markets for fundraising.
Chadha said his view on equities, with the world in a global recession, is that investors should overweight U.S. equities, relative to other parts of the world. In support of this view, he says underweight global cyclicals - energy and materials. He also said to underweight U.S. exporters and overweight importers and consumers.
He also said the consumer's slowdown has been going on for more than two years, but he newer story is capital expenditures slowing. He said underweight capital goods and the industrials, as well as technology which gets 60 percent of its sales form the rest of the world.
Oil prices continued to slide in Monday's electronic session, falling below $35 per barrel. The February crude contract expires Tuesday, and the discount to March's contract has widened as crude stocks at the Cushing, Okla.. delivery point continue to grow.
Also on Monday, Goldman Sachs commodities analysts in London said oil could fall below $30, and it should average $30 for the first quarter before rebounding to $65 in the fourth quarter.
"It basically just comes down to supply and demand right now and there's more oil than there is market right now ... I think it's that simple," said Dan Yergin, chairman of Cambridge Energy Research. "The more there's talk about additional storage, it just reinforces the idea that there's a lot of barrels out there that can't find a home right now."
Yergin, CNBC's global energy analyst, also said the economy is a big factor. "The focus is shifting form the collapse in credit to the extent that businesses are really slamming on the breaks in terms of investment," he said.
For those who missed my weekend post, the odds are against an Obama rally Tuesday. If you look back in history, you'll see why. Of 14 inauguration days when the Dow was trading, dating back to 1929, the market finished down nine times. The losses though were mostly minor and the average for the Dow on all of those days was negative 0.38. When Ronald Reagan took office in 1981, the Dow had one of its worst inauguration day performances, finishing 2.09 percent lower. When Franklin Delano Roosevelt began his second term in 1937, the Dow rose 1.05 percent, its best inauguration performance.
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