Morning Call

0 CommentsWednesday • June 24, 2009 • by alwaters

“I not only use all the brains that I have, but all that I can borrow.”

Woodrow Wilson

Pay raises all around. In an effort to offset limitations put on them in terms of performance bonuses, Citigroup will reportedly raise base salaries for some of its key employees. Salary increases will be as much as 50% and will be most concentrated on investment bankers and traders. This follows in step with similar moves by Morgan Stanley and UBS. This comes as no surprise as the largest financial institutions are concerned with retaining the best and brightest minds in the industry. The long term effects of the new bias towards base pay and away from bonuses will take some time to play out, but one has to wonder whether it will also put a damper on creative thinking and entrepreneurial spirit in the industry. There is no doubt that passing out exorbitant bonuses while a company is losing billions is irresponsible, but performance incentives are also a part of the American way. These bonuses also foster hard work and creativity, while high salaries cut into the bottom line while making no promise of success. Rather than looking at it systemically, one might want to look at it from the perspective of good business practices. If you are owner of a company that is facing high a debt burden and falling revenue, you would be more likely to reduce base salaries and offer incentives for those that produce results or when the company meets certain profit criteria. Instead, largely because of public outrage over bonuses distributed from the deck of sinking ships, we may be going too far in response.

Market View

Traders have become like surfers in a pond lately as they trade on the slightest movement. There has been little in terms of waves as the indexes, as a whole, have seen insignificant movement on most days. Yesterday, the Dow finished lower by 16 points and futures are up by only a modest half point this morning. Technically speaking, sideways movement typically precedes a breakout in some direction, and many are now thinking it will be down. On the bright side, the Organization for Economic Cooperation and Development raised its global forecast for the first time in two years. The details, however, call for a contraction this year of 4.1% among the 30 member nations, and a modest growth of 0.7% in 2010.

Asian equities rode some waves of buying and selling to finish the day near even. One exception was China’s Hang Seng which managed to gain just over 2% on the day. The most active stocks by volume, which included financials and tech stocks, all moved lower by an average of 2%. European stocks have fared slightly better, with the indexes higher by an average of about 1%. High volume trading in Europe has been mixed both in terms of sectors and performance.

Commodities have been mixed in early trading today. Oil has fluctuated throughout the morning; presently down by 1% at just over $68. Gold is higher by $4 at $928. The Dollar is mixed ahead of a Fed statement on interest rates, even though it is seen as a foregone conclusion that there is no change on the horizon for the target rate. For now, the Dollar finds itself higher on the Euro and Yen but down against the Pound. Some positive sentiment for the Dollar stems from a statement from Moody’s that the US credit rating “remains” solid and that the world has “no credible alternative” to the Dollar as an international reserve currency.

This will be an important morning for economic news. Today’s agenda includes Mortgage Applications, Durable Goods Orders, and New Housing Sales. We will expect some flat to positive news from today’s numbers, but remain cautious on the long term view. Earnings reports today will include Bed Bath and Beyond, Darden Restaurants, Monsanto, Nike, and Rite Aid.
Today’s trading should be somewhat positive, although selective. From our view, we like the prospects for some of the alternative energy stocks; including solar. Take a look at Rene Solar (SOL), LDK Solar (LDK), and JA Solar Holdings (JASO). This sector has been severely deflated during the market downturn and has a high upside potential. Being that we always look for opportunities that you can actually hold for a while, we also like the long term prospects as the present administration has shown clear signals that it wants to support alternative energy. Companies with a solid US base and preferably some exposure to the emerging markets could become big winners in the year ahead.

Morning Call

0 CommentsTuesday • June 23, 2009 • by alwaters

“If we had no winter, the spring would not be so pleasant; if we did not sometimes taste of adversity, prosperity would not be so welcome.”

Anne Bradstreet

There was little shelter from the rain yesterday. The Dow fell by 200 points as all sectors finished to the downside. This morning, futures are up slightly but there is little conviction among buyers. The banks, energy stocks, and a select group of healthcare stocks are seeing modest buying in afterhours trading, but the price changes and volume has been less than inspiring. Some stress is building in small and mid-size banks as news has come out that at least three banks that received TARP funds have suspended payment of dividends to the Treasury. This is a stark contrast to the larger institutions that got in line recently to pay back their loans. This is a factor that we do not take lightly as it illustrates the shaky ground that the smaller banks are still standing on.

We will be watching oil very closely this week. Prices have pulled back below $70 again, but it is at this level that we may see some buying again. If this is the case, some of the energy stocks have been oversold in the past few days and will have a notable upside in the coming days. Among them, Marathon Oil (MRO) is at a technical level where we should see an uptrend develop. Marathon fell by just over 6% yesterday but has moved slightly positive in premarket. Watch also for an allocation strategy that appears to be developing among traders. Many have used gasoline and retail as an inverse paring; going long gas and short retail or vice versa. It’s a common sense trade that seems to be a developing trend.

In Asia, equities have followed the downtrend and the major indexes finished lower by 2-3%. In Europe, equities are barely in the green with mixed trading among sectors. The highest trading volume in Europe and Asia has been among the financials, with mixed results.

Following along with the generally lighter mood for equities, commodities have also begun to move up. Oil has been essentially unchanged this morning; holding steady at well above $67. Gold is higher by about $2 at $923. Negative economic sentiment and a fluctuating Dollar have kept gold in check, but we are still confident in the gold trade. Industrial metals have been considerably mixed, with Copper rising and aluminum falling this morning. The Dollar is mixed again; higher against the Pound, but lower on the Euro and Yen.

Economic news will factor in today as we await Retail Sales, Existing Home Sales, a Fed Statement on Interest Rates, and the EIA Petroleum Status Report. Clearly, any surprise on the build in oil supplies could be a factor, but this appears highly unlikely. On the Earnings Calendar today, we will hear from Jabil Circuit, Oracle, The Kroger Company and a few others.

Because we believe that the markets are going to stay in a very tight range for some time, we expect that we may take back a good portion of yesterday’s losses. What we will see is exactly what we have seen, a few days of little movement then impatience kicks in and traders sell off to take some profit. After this the bargain hunters show up and drive stocks back to the same level, but no higher. This could go on for some time. We are hearing more frequent references to a W-shaped recovery, which as the name suggests, would suggest another sharp drop in the major averages ahead. We do agree with the idea of another strong leg down in the coming months, but we tend to disagree with the idea that it will be sharp but brief. More likely, we could revisit or surpass the lows before the clouds begin to break.

Morning Call

0 CommentsMonday • June 22, 2009 • by alwaters

“Hard times will make a monkey eat pepper”

Marion Waters (Arnie’s father)

Three more banks were closed by regulators on Friday, bringing the year total to 40. The three banks, based in Georgia, North Carolina, and Kansas, will cost the FDIC a total of $363 Million. As concerning as this fact is, we are not sure the worst is yet over for some of the regional banks that may be most deeply exposed to commercial real estate loans. Meanwhile, the World Bank cut its forecast for the global economy; predicting a worse slump this year than previous estimates, and a weaker recovery next year. The statement also expressed concern that a flight of capital from emerging markets will lead to further distress in the developing nations. All of this has contributed to the steady slide in US futures this morning which are approaching a downside of 1%. Our big Pharma picks from Friday finished modestly higher, but afterhours trading suggests that even the healthcare sector may face some selling today. We also suggested some of the big names in tech last week and the sector was among the winners on Friday. Apple and Microsoft both gained 2-3%, while Research in Motion was punished for mixed opinions over first quarter report. All signs this morning suggest there may be few winners in today’s markets.

In Asia, the indexes managed to stay in positive territory, by only a slight margin. In Europe, on the other hand, the major averages are all down by over 1%, although trading has been very selective within sectors. Despite the occasional green shoot, the general sentiment for the economy has deteriorated.

This negative view has also led commodities lower this morning as concerns mount for a demand slump. Oil has sold down by well over a Dollar’ falling to $68. The pullback for gold has also been stronger than expected; losing nearly $10 this morning to $926. Part of this, once again, has been a show of strength for the Dollar which remains down on the Yen, but has moved up on the Pound and Euro. Many concerns still exist for the Dollar, but currencies are a relative matter and, as such, the Dollar is looking better than its European counterparts.

Although investors will watch this week’s economic news very closely, today is void of any major announcements. On the earnings front, Walgreens is the only major company to release a report today.

Today and tomorrow, the FOMC is holding a meeting on interest rates. While no one is expecting a change in interest rates, investors will be looking for a definitive statement regarding the Fed’s commitment to holding rates low for the foreseeable future. As several other Central Banks have begun discussing when they might change course as economic conditions improve, the pressure is on the Fed to be specific. While there is concern that the Central Banks withdraw soon enough to avoid inflation, there is also fear that doing so too soon could negate the progress made so far. Of course, all of this may be an overdone reaction to the so-called green shoots that many economists have pointed to lately. The important question may not be when to raise rates and withdraw liquidity, but what to do next if conditions worsen.