Morning Call: Gold, Housing, and the Fed

0 CommentsTuesday • September 28, 2010 • by alwaters

“Action is eloquence.”

Shakespeare

Morning Call

September 28, 2010

Off the cuff: How long before California is deemed “too big to fail”?

Investment Ideas: Pick of the Day

Buy Energy Support Services

We will be keeping an eye on pipeline companies and other energy support services in the coming weeks.

Talks continue between Chinese and Russian officials as the two countries try to secure a natural gas supply contract. Pricing issues have delayed an agreement, as China’s insistence for a dedicated pipeline rather than being part of Gazprom’s grid. Russian and Chinese officials will also inaugurate a China-Russia pipeline extension, which will deliver some of the 300,000 barrels of oil per day Russia has promised China. We are now looking at what support companies are most likely to benefit from this large scale project.

Global Markets

A sharp selloff late in the day yesterday left the Dow and other US indexes lower by about 0.5%. This amounted to a 48 point loss on the Dow, led lower by conglomerates and financial stocks. The only sector to remain positive on the day was transportation, which benefitted from some bargain hunting after a few days of losses.

Investors are also mulling over the Fed’s next move. The plan appears to be to step in with a smaller-scale program than many had expected. The line of thinking is that the Fed wants to keep it flexible so it can adjust as the recovery strengthens. The Fed’s next meeting is in early November.

Most investors had expected another flood of Dollars in the system, the thought of which has boosted stocks and hit the Dollar. With the markets facing a different reality, some of this momentum may shift.

This morning, futures indicate a modest upside for US Stocks ahead of home price and consumer confidence data. The fact is, however, that most economists expect weak numbers today and we think they could be a little worse than expected.

The Chicago Fed released their National Activity Index for August yesterday, which also weighed on sentiment. The index fell from -.11 in July to -.53 in August.

The loss of momentum in the US carried over to Asian stocks as well. Most of the major indexes there ended lower by 1%. Bank shares were considerably mixed, while several industrial stocks boosted the broader averages.

The Nikkei has finished lower in 4 of the last 5 days. Excluding Japan, the MSCI Asia index is up by about 10% in September, in what is typically a bad month.

Weighing on sentiment in Asia is growing speculation that Beijing may be planning to introduce policy changes to make housing more affordable. Shares in Chinese property developers and banks have moved lower as a result.

Stocks are mixed in Europe this morning, with the FTSE in London the weakest and Germany’s DAX the only bourse in positive territory. Bank shares are seeing the most activity and are mostly lower.

Yesterday, Moody’s Investors Service downgraded the senior debt rating of Anglo Irish Bank. Today, rumors are circulating that the ratings agency may also downgrade Spain’s credit rating this week.

Premiums on credit default swaps on government debt from Ireland, Portugal, Spain, and others have been rising significantly as fears grow across the continent.

Energy Investing

Commodities are mostly lower this morning. Crude oil has given back a half-Dollar to fall a few cents shy of $76.

Traders are waiting for the latest U.S. supply report to assess the strength of demand for crude. Analysts expect inventories will have risen 2.2 million barrels last week. The American Petroleum Institute announces its inventory numbers later today, while the Energy Department’s Energy Information Administration reports its weekly supply data tomorrow.

The average analyst forecast for crude prices for the fourth quarter was revised down to $77.48 from $79.36 in August. Demand from emerging markets will be the primary driver of prices over the next few quarters. Oil demand in China, currently the second largest consumer in the world, increased in August, lending support to global pricing.

Gasoline futures have fallen at a slightly slower pace than crude. Gasoline inventories probably rose 750,000 barrels last week, according to analysts. Prices at the pump have fallen nationally by a few cents, but experts expect consumer prices to fall another 10-20 cents per gallon, at least, or as far down as close to $2 per gallon, by some estimates.

Natural gas has risen by about 0.75% this morning, to $3.82. Here, too, high inventories have weighed on natural gas prices all year.

With Natural gas producers facing a fourth consecutive winter of low demand and prices, some are now looking at cutting production,

ConocoPhillips, for one, is shutting down onshore natural gas production in Canada and the United States while it waits for prices to recover.

Conoco hasn’t disclosed how much production is being cut, but it is the latest sign producers in the U.S. may finally be ready to cut production in the face of low prices. Canadian producers have already dramatically reduced drilling since the third quarter of 2006.

Gold Price and Precious Metals

With the speculation rising that any new Fed intervention may be a little more mild than expected, gold has rected by pulling back about $8 to $1290. With the third quarter drawing to a close, a strong round of profit taking may also be a factor.

With the likelihood of weak economic data this week, a new uptrend could develop over the next few days.

The London Bullion Market Association, at its recent conference, forecast that the price of gold would be over $1,406/oz by this time next year. At last year’s conference, the group proved to be overly cautious in its estimate that gold would reach $1,181/oz by this time.

Silver has also fallen by more than 1% this morning to $21.20. Prices have doubled since the formal beginning of the recession in 2008 and are riding just below their 30 year high.

Platinum and palladium have also followed the markets lower. Platinum has given back $18 to $1609, while palladium has lost $5 to $545.

International Currencies

Amid sovereign debt concerns in Europe, the Euro has drifted a little lower from yesterday’s fresh five month high. It does remain slightly higher on the Dollar this morning, which is also lower on the Pound and Yen.

Many traders expect the Dollar’s downtrend to continue, believing that any quantitative easing by the Federal Reserve, even less than expected, will still be more aggressive than other central banks.

The Yen is still giving Japanese officials grief as it remains stubbornly high; effecting Japanese exporters negatively. The Yen is back to a two week high against the Dollar despite the recent intervention by the Japanese government.

Economic News and Corporate Earnings

On the economic calendar today we have the Case-Shiller Home Price Index and Consumer Confidence.

The main focus in the U.S. will be consumer confidence. The consensus is that confidence dipped slightly during September to 52.5 from 53.5.

This is seen as an important factor in an economic recovery, as consumer spending accounts for around 70% of the US economy.

Economists expect property values to have increased 3.1% in July from the same period last year. The Case-Shiller report will be released just before today’s opening bell.

Oil traders will be watching for inventory data coming from two sources today and tomorrow.

Earnings news will be coming from Avatech Solutions, Landec, ModusLink Global Solutions, Sealy, Walgreen, and a few others.

Washington and Regulation

The Federal Deposit Insurance Corp has decided to delay its vote on how it plans to dismantle failing financial firms. This comes as two more small banks failed on Friday.

The financial reform law gives the FDIC the authority to shut down and unwind systemically important financial institutions, but the details of how this will be done are yet to be worked out.

Meanwhile, the Financial Stability Board met yesterday in Paris. The group is charged with monitoring and advising on global risk and regulation in the financial industry. The group states that, while considerable progress has been made, “financial systems in advanced economies remain vulnerable to risks of fiscal strains in national and local governments, of renewed fragilities in bank funding markets and of weakening economic conditions.”

In Summary

Today’s economic data could be a little disappointing, but the market is likely to drift along most of this week.

In the housing market, any recent boost from the homebuyer tax credit a few months ago is long gone and we should get a better picture of how well the market can stand on its own.

On our borders, slowing U.S. growth and limited domestic demand is having a worsening affect in Mexico and there are signs of slowing in Canada as well.

Collectively, investors have one eye on weakening economic data and another on Washington and the Fed, hoping someone has a plan.

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.