Morning Call

0 CommentsTuesday • July 7, 2009 • by alwaters

“Never be afraid to try something new. Remember, amateurs built the ark. Professionals built the Titanic.”
Anonymous.

Stimulus II, the sequel? After recent comments from Vice President Biden left the door open for another round of stimulus, Laura Tyson, another economic advisor to the President, also publicly stated that the US should consider another, infrastructure focused, stimulus package. Citing the fact that the first round of stimulus failed to stem the tide of unemployment as the administration had hoped it would do, Tyson insisted that the US could afford the increased spending, even as he current budget deficit soars. Such a move, however, would certainly hinder Obama’s plan to significantly reduce the deficit during his term in office. In any case, should such a proposal be drafted, it will likely face some strong opposition in Washington and the administration would be faced with a delicate PR campaign to gather public support. Meanwhile, the very thought of a second stimulus has some analysts and traders re-writing their scripts for inflation, gold, and the Dollar for the long term.

Equities held up better than expected yesterday, as the Dow and S&P managed to finish slightly in the green; the NASDAQ finished lower. After a weak start, even commodities leveled off later in the day. Asian equities finished only a fraction to the downside, although the banks and some industrial stocks fared the worst. In Europe, equities are mostly higher, and unlike Asia, the banks are performing rather well. The financial sector is seeing some positive movement in afterhours trading in the US as well, despite the fact that futures, as a whole, are pointing to a slightly lower opening.

Commodities are also higher this morning. Oil has gained a few cents to hold above $64 and gold has moved $6 higher to $930. With the Dollar moving lower against all but the Pound this morning, some cash may be moving toward the gold trade today. We will be watching for a more significant move on gold today and tomorrow.

The economic calendar will have some effect on trading sentiment today as we await news on Retail Sales, Job Vacancies, and the EIA Petroleum Status Report. There are no consequential earnings reports scheduled for today.

Sometimes, when market value seems to give little sign of conviction among traders, it is more important to take a look at volume signals. The fact is that the up days have lacked any significant volume while selloffs have had much more momentum. This is yet another reason to be cautious in the present market. Many technical indicators suggest that we are certainly on the edge of a more significant move; most believe this will be strong to the downside. There are ways to play in the current environment, however. One, of course, is to bet on the downside through Puts on the broader market, or in our view, against the financial stocks. Another is to take a long view of commodities. Economic pessimism has frequently pushed commodities lower, but it is also important to consider the effect that a weakening Dollar will have on commodity prices. This is usually a negative correlation where a weaker Dollar leads to higher commodity prices, because of the Dollar’s role as reserve currency. Lastly, we have for some time now pointed to the emerging markets as the most likely strengthen first. For example, two food production based companies in Brazil, Sadia (SDA) and Perdigao (PDA) made significant advances in an otherwise weak market yesterday. For those with some patience and a long term view, equities related to the BRIC countries will likely outperform many others for the remainder of this year.

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

Tagged with: bonds, economy, gold, money management, oil, stocks, wall street