Morning Call

0 CommentsWednesday • May 27, 2009 • by alwaters

Morning Call
May 27, 2009

“I have not failed. I’ve just found 10,000 ways that won’t work.”

Thomas Edison

Yesterday, with the Dow gaining nearly 200 points, all sectors were in the green. Today, with futures fluctuating on either side of flat, it will be necessary to find the stocks or sectors that will be capable of adding to yesterday’s upside. We still feel strongly about the energy sector, for one. If you stayed in with the coal picks, you would have picked up another 3% on average with the big names such as Peabody Energy (BTU) or Alpha Natural Resources (ANR). Westmoreland (WLB), which has underperformed the sector recently, gained nearly 16% on the day. For the drillers, such as Diamond Offshore (DO) and Transocean (RIG), it was another 3% gain yesterday as well. We mentioned that the mining companies tend to lag behind the metals pricing and, even though gold fell off yesterday, Newmont (NEM) and some others picked up marginal gains. Today would be a good time to back off on the miners, take some profits in the coal sector and let it ride with the drillers. The healthcare sector lagged behind yesterday but with a less exuberant mood this morning, some of the large cap drug companies may make a move today. Take a look at Eli Lilly (LLY), Schering Plough (SGP), and Sanofi Aventis (SNY).

Asian markets followed the up day in the US with an average gain of over 1%. China’s Hang Seng outperformed the other markets with an upside of over 5%. After a tough run for the Asian banks, the financial sector moved higher along with some of the industrials. Volatile trading in Europe has stocks close to even at mid-day. Inter-sector trading is also mixed with no clear winners among industry groups. This is likely an indicator of what we will see here in the US today; mixed trading in a tight range.

Commodities are relatively strong this morning. Gold is lower by about $4 but remains above $950. It was, in fact, lower earlier this morning but has recovered somewhat. Oil continues to show strength; gaining another 1% to move above the $63 mark. We expect to see continuing strength in oil today but also caution that it will be due for a pullback as it nears another psychological barrier at $65.

For economic news today, we will have Mortgage Applications, Retail Sales, and Existing Home Sales. For earnings reports we will hear from AutoZone, China Sunergy, Polo Ralph Lauren, Staples and several others. An early release from AutoZone saw the auto parts company beat earnings estimates by a solid $0.24.

In Detroit, the least you can say is that things certainly are progressing rapidly. It is now being said that Chrysler could emerge from bankruptcy protection as early as next week. Chrysler’s sales in May were even with April’s numbers suggesting the proceeding hasn’t caused buyers to avoid the brand any more than they used to. This is also seen as a positive development for General Motors, believed to be days away from bankruptcy itself. A quick turnaround for Chrysler may boost confidence in GM’s ability to do so as well.

In the financial sector, Bank of America, Citigroup, Morgan Stanley and others are all said to be moving toward raising base salaries for investment bankers in a move to offset bonus restrictions. So let’s review this for a moment. Performance bonuses were believed to have encouraged excessive risk taking. Risk taking is accused of being a factor in the financial crisis, so regulators move to limit performance bonuses. In order to retain the best and brightest, the banks want to increase the base pay instead. So, fewer bonuses but more base pay leads to what? Lethargy? This is a fine line to walk.

Posted in: Morning Call: Daily Analysis of the Global Markets and Economy

Tagged with: economy, stocks