Morning Call: Gold, the Stock Market, and Sovereign Credit Ratings

0 CommentsFriday • July 30, 2010 • by alwaters

“To him who is in fear everything rustles.”

Sophocles

Morning Call

July 30, 2010

Market Update

A slow and steady slide continues for stocks as the Dow finished yesterday 30 points to the downside. Futures indicate a lower opening again this morning. The losses come in spite of the fact that Initial Jobless Claims came in slightly better than expected and earnings continue to be mostly positive. New claims for unemployment compensation fell 11,000 to 457,000, the third drop in four weeks. Economists are expecting today’s GDP numbers to show a moderated pace of recovery compared to the first quarter. A close look at yesterday’s trading shows that the recently strong sectors, such as technology, pulled back on profit taking, while recently weak sectors were strong on bargain hunting.  In other words, there was not conviction in either direction for stocks.

Stocks moved lower in Asia as well, as banks shares pulled back and profit taking led the technology sector lower. Downside on the major indexes varied from marginal losses on the Hang Seng to a more notable 1.64% decline on the Nikkei.

In Europe this morning, the indexes are all lower by an average of about 0.5%. The financial sector is seeing the highest volume of trading, although price performance is relatively mixed. Investors here, too, await the latest GDP data from the US.

Commodity Update

With the exception of the energy group, commodities are holding up rather well this morning, considering weak economic sentiment. Oil has given up more than a half-Dollar thus far, but remains at the high end of $77; exactly where it should be fundamentally.

Gold has added back about $4 at $1170 in early trading. Some volatility is still expected in the market for gold and another $30-$40 downside remains a possibility. There will, however, be some support as bargain hunters move in hoping to time the next leg up.

The Dollar has moved higher against the Euro and Pound this morning, but is considerably lower against the Yen.

Economy and Earnings

Besides the GDP data, other economic news today includes the Employment Costs Index, the Purchasing Manager Index, and Consumer Sentiment.

Earnings updates will be coming from American Electric Power, Arch Coal, British Airways, Chevron, Fortune Brands, Merck, Simon Property Group, Ultra Petroleum, Weyerhaeuser, and a few others.

Private Equity and Venture Capital

Corporate investment in venture capital has been increasing as several big-name companies have formed funds or collaborations to invest in projects outside of their usual niche. General Motors has committed $100 Million to a new venture arm that will seek out early-stage technologies. PepsiCo has also partnered with Highland Capital Partners to launch an incubator program that will target new-media companies.

Elsewhere, Walt Disney Company has reportedly come to terms to sell its Miramax film division to a group of investors for more than $660 Million.

Washington and Public Finance

A new report says the Securities Industry and Financial Markets Association is now backing efforts to establish legislative framework for European-style covered bonds in the United States, adding momentum to the effort as it resurfaces in Washington.

The International Swaps and Derivatives Association is working to streamline the process for changing counterparties on credit-default swap trades and documenting the changes. The industry group is drafting new procedures for electronically documenting when counterparties are swapped, a process called novation.

In Summary

Most individuals understand the value of their personal credit and what it can mean to their overall financial health. Most also know, particularly in the past two years or so, how hard it is to keep a high credit rating.

Now, it is state, regional, and national governments that are feeling the pinch. The long term consequences are not much different for nations than it is for personal finance. Borrowing becomes more difficult, if not impossible, and the cost of doing so increases through higher rates. From there, a vicious cycle ensues where those most in need of a loan are least likely to get it.

Moody’s Investors Service has said that Spain will likely lose its Aaa credit rating after being put under review for possible downgrade in June.  Moody’s also said the U.S. needs a “clear plan” to reduce its budget deficit or be at risk of losing its top rating as well. Indications are that it will take 2 years or so before the US would be at risk of a downgrade, depending on what is done to address the deficit.

The states are also a factor as several states have had monumental challenges to adjust for falling revenues. This weakness could put further stress on Washington and accelerate the urgency of addressing the federal budget.

The assembled information disseminated in the Morning Call is for information purposes only, and is neither a solicitation to buy nor an offer to sell securities. All assembled information within the Morning Call is subject to change without notice. The assembled information within Morning Call is based on information believed to be reliable as of the date of the report but no representation, expressed or implied, is made as to its accuracy, completeness or correctness.

Forward Looking Statements:

Information in the Morning Call will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. All readers are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance or portfolio performance is no guarantee of future price appreciation or performance.

Morning Call: BABs, Beige Book, and Jobless Claims

0 CommentsThursday • July 29, 2010 • by alwaters

Morning Call

July 29, 2010

Market Update

An afternoon slide left the Dow almost 40 points to the downside yesterday. Federal Reserve Beige Book data showed a slowing pace of recovery in the US, which offset any optimism over positive earnings results globally. The report said that “nearly all districts reported sluggish housing markets” and manufacturing in several districts had “slowed or leveled off.”

Durable Goods orders also disappointed with a 1% slide in yesterday’s report, Analysts had predicted a 1% increase. In tomorrow’s GDP report, economists expect the numbers to show growth slowed to 2.5% in the second quarter, as opposed to 2.7% in the previous three months.

Stocks were mixed to slightly lower in Asia. Technology stocks were particularly strong, while the financial sector ran flat. Weak economic data in the US ended four days of broad gains, which had been led by buying in banks after upbeat news from European stress tests last week.

In Europe this morning, the indexes are higher by an average of about 0.5%. Here, too, the technology group is strong, while trading in bank shares has been a little more mixed. A post-stress-test sigh of relief, combined with strong corporate earnings across the region, has confidence on the rise in Europe. The latest data shows an index of executive and consumer sentiment rose to its highest level in more than two years and German unemployment declined for a 13^th consecutive month.

Commodities Update

Commodities are mostly higher this morning, illustrating improving economic sentiment. Crude oil has moved marginally higher, comfortably above the $77 mark.

Gold, which fell sharply yesterday, has recovered $2 of the losses to level off at $1165. Again, the lower level of the current adjustment could be around $1130, so volatility will remain high.

Adding some support to the gold trade will be a generally weaker Dollar, which is down against the Yen, Pound, and Euro this morning.

Economy and Earnings

The lone piece of new economic data today is the always-important Initial Jobless Claims. Economists are banking on new claims to have fallen for the third time in four weeks to a level of about 460,000. Futures point to a higher opening this morning, suggesting traders are buying into this expectation, but it is, as always, risky.

Earnings news will be coming from Amgen, Ball Corporation, Becton Dickinson & Company, Colgate-Palmolive, Dr. Pepper Snapple Group, Eastman Chemical, ExxonMobil, First Solar, Motorola, Raytheon, and a variety of others.

Private Equity and Venture Capital

Los Angeles-based Philo, a startup that has developed a social-media platform to let TV fans chat about their favorite shows, has raised an undisclosed amount of financing from institutional and angel investors. Philo has fewer than 10 employees and debuted its first application last month. The company hopes to sign deals with programmers to promote TV shows or series.

Washington and Public Finance

The House Ways and Means Committee has moved forward with a new bill that will extend the Build America Bonds program and several other bond provisions set to expire at the end of the year. The Investing in American Jobs and Closing Tax Loopholes Act, as it is called, would extend BABs for two years.

The bill also extends programs for recovery zone economic development bonds and recovery zone facility bonds for one year, and allocates an additional $10 billion and $15 billion to the programs, respectively.

The alternative minimum tax (AMT)exemption for all private-activity bonds would also be extended, Another provision allows an exemption for water and sewer exempt-facility bonds from state volume caps for PABs.

In Summary

A review of the latest Fed Beige Book data sheds some light on the fragility of economic recovery. Several districts reported “modest” improvement in activity, some were flat, and two others reported slowing activity. Retail sales were generally positive, though gains were modest in most districts. Sales of necessities were stronger, while “big ticket items moved more slowly.”

Manufacturing activity showed modest expansion in some districts, while the services sector also improved. Residential real estate activity was “sluggish in most districts” after the homebuyer tax credit expiration, and commercial construction remained weak. Some districts reported “soft or decreased” loan demand. The labor market also showed some modest improvement.

The outlook, however, was best summed by Chairman Ben Bernanke earlier this week, when he called referred to economic outlook “unusually uncertain.”

The assembled information disseminated in the Morning Call is for information purposes only, and is neither a solicitation to buy nor an offer to sell securities. All assembled information within the Morning Call is subject to change without notice. The assembled information within Morning Call is based on information believed to be reliable as of the date of the report but no representation, expressed or implied, is made as to its accuracy, completeness or correctness.

Forward Looking Statements:

Information in the Morning Call will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. All readers are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance or portfolio performance is no guarantee of future price appreciation or performance.

Morning Call: Gold, Corporate Earnings, and Home Prices

0 CommentsWednesday • July 28, 2010 • by alwaters

“Slight not what’s near, while aiming at what’s far.”

Euripides

Morning Call

July 28, 2010

Market Update

The Dow managed to finish a modest 12 points into positive territory yesterday, although a majority of sectors finished in the red. Financial stocks, utilities, and non-cyclical consumer shares moved higher and counterbalanced losses in energy, technology, and healthcare. This morning, futures point to a slightly positive opening led by bank stocks, once again.

As has been the case frequently, yesterday’s economic data was mixed. The Case-Shiller home price index rose 0.5% from last month and registered a 4.6% increase year over year. There were also some bright spots in earnings reports, including DuPont, Air France, and Infineon. On the downside, however, consumer confidence slipped to its lowest level since February, largely the result of concerns over joblessness.

Stocks in Asia focused more on strong corporate earnings in the region and improving conditions in Europe as the major indexes finished higher by as much as 2%.  Rising production numbers for Japanese automakers, and news that Canon earnings had quadrupled, were factors in a renewed optimism in the equity markets.

Confidence is slowly coming back in Europe as well as the vast majority of banks that were subjected to stress tests received passing grades. German consumer confidence was also shown to have improved. Stocks in Europe this morning are off of their opening highs, but still in positive territory.

Commodity Update

Commodities are stronger this morning after a lackluster performance yesterday. In fact, gold and oil struggled during the day, both falling about 2% despite a decent day for stocks.

Oil has recovered a few cents this morning to level off in the mid-$77 range. U.S. crude supplies unexpectedly rose last week, suggesting demand remains weak. Prices are likely to remain range-bound until inventories begin to move.

We mentioned downside risk for gold yesterday and prices, in fact, tumbled about $25 by the end of the day. Gold has stabilized somewhat today and is showing a fractional gain at $1162. The long term prospects haven’t changed, which means a buying opportunity lies ahead. For now, however, the potential downside could be as low as the 200 day moving average, which is around $1137.

The Dollar is higher on the Yen this morning but has lost ground on the Euro and Pound.

Economy and Earnings

Today’s economic data includes Mortgage Applications, Durable Goods, and the Federal Reserve Beige Book of Economic Conditions. Durable Goods orders are expected to be positive, but it is the Beige Book results that will be the primary driver in the marketplace.

Earnings news will be coming from Akamai Technologies, Allegheny Technologies, Cliffs Natural Resources, Coca-Cola, Comcast, ConocoPhillips, General Dynamics, Hess Corporation, International Paper, Newmont Mining, Rockwell, Boeing, Visa, and countless others.

Private Equity and Venture Capital

According to a survey by UK-based alternatives research firm Preqin, global private equity investment rose 60% to more than $43 Billion in the second quarter. The survey looked at other trends in the industry as well.

Hedge Fund-of-Funds saw a downtrend among seasoned investors but a renewed interest among newer investors. Among those moving away from FoFs, high multi-level fees was given as the primary factor.

Washington and Public Finance

The National Conference of State Legislatures, in its July preliminary report on state budgets and taxes, said “the impact of the severe economic recession that began in 2007 continued to create substantial revenue shortfalls during 2010 legislative sessions.  As a result, state legislatures were prompted to increase taxes and fees for the ninth consecutive year as they worked to shore up state budgets.” In fact, after trying to fill $84 Billion in budget holes for the coming fiscal year, states will face as much as $149 Billion in new gaps during the next three years, according to the report.

In Summary

A modest sign of a possible bottoming in the US housing market is welcome by all, but with a cautious tone. The underlying numbers of the Case-Shiller Index still show that several cities and areas are in a downslide, while others have strengthened.

Of the 20 cities included in the index, 19 showed a month-over-month gain in May. It is important to note that the index is published as a three-month moving average, so the numbers still reflect the rise in home sales created by the first-time homebuyer tax credit.

According to Case-Shiller, home prices are down 29% from the peak reached in mid-2006. Some analysts see a bottom and a gradual recovery ahead. Others contend that the market is temporarily skewed by the tax-credit-bounce and that the rising number of vacant homes will lead to another downward correction.

The assembled information disseminated in the Morning Call is for information purposes only, and is neither a solicitation to buy nor an offer to sell securities. All assembled information within the Morning Call is subject to change without notice. The assembled information within Morning Call is based on information believed to be reliable as of the date of the report but no representation, expressed or implied, is made as to its accuracy, completeness or correctness.

Forward Looking Statements:

Information in the Morning Call will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. All readers are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance or portfolio performance is no guarantee of future price appreciation or performance.