Morning Call

0 CommentsWednesday • August 26, 2009 • by alwaters

Please note: the next Morning Call will be issued on Tuesday September 1st.

“Men should strive to think much and know little.”

Democritus

Morning Call
August 26, 2009

The Hidden Costs of the Financial Crisis

It can be all too easy to overlook some of the hidden costs of the financial crisis. Public opinion has ranged from disdain for the woes of bankers and other financial institutions, to genuine concern for the impact on working families. Somewhere in between those two extremes are the challenges faced by many state governments and authorities. Job losses and the resultant losses in tax revenues have left many states struggling to balance their budgets while maintaining services. The credit crunch has also made it harder and more expensive to raise money in the capital markets. In fact, even the fees issuers pay to underwriters of municipal bonds has increased to its highest level in eight years. This is reflective of the perception of risk for taking on a municipal issuance and also the result of less competition as some past players are now gone. In any case, this presents a serious social issue on the road ahead. State legislators will face difficult choices and many public services will begin to be under pressure. In any case, this is one area of concern that may not be getting the press it deserves.

What to Buy

If, in fact, the housing market has found some stability, and it certainly has shown some positive indications, then one might wonder how best to play it. One big name that comes to mind is Weyerhaeuser (WY); a forest products company with offices in ten countries. The company also participates directly in the construction industry. Shares of Weyerhaeuser are roughly midway between their highs and lows of the year. The stock has been known to overreact to the broader market, but with sentiment picking up recently, Weyerhaeuser could have a significant upside ahead. Another lower priced option is Louisiana Pacific (LPX) which is engaged in the manufacture of building products. The company showed respectable growth in the past quarter and is still more than 50% off of its 52 week high.

Market Outlook

Once again, much attention is being paid to China. Word that China may seek ways to curb overcapacity in several industries, including steel, cement, and power equipment, has some concerned as to what the broader implications will be. Record credit expansion has fueled continuing growth in China and some have feared that an asset bubble was forming that could eventually lead to catastrophe. Unfortunately, growth in China has also been a bright spot for investors, which are equally unhappy with the prospect of reigning in one of the few global economies still expanding.
Despite this, the Asian markets moved higher overnight. China’s Hang Seng index moved only fractionally upward, but the Nikkei gained well over 1% for the day. Interestingly, many industrial stocks led the way, while the financial sector stayed positive as well. A different story in Europe as equities have steadily declined throughout the morning and the major indexes are lower a half percentage point. Trading has also been rather selective in Europe as there have been winners and losers in each sector. US futures are slightly lower this morning and the aftermarket has shown mixed trading here as well.

Demand from China will be a critical element for commodities looking ahead. For now, commodities are holding up in early trading today. The energy sector, however, has pulled back slightly after mostly positive movement for several days. Oil is lower by a half Dollar to $71.50. Gold is off of its early morning high, but remains on the upside at $946. Relative strength on the Dollar, which is higher against the major currencies this morning, is also weighing on commodities today.

A busy economic calendar today includes Mortgage Applications, Durable Goods, and New Housing Sales. Analysts are expecting to see some signs of recovery in today’s numbers and we expect sentiment to pick up at the official release of figures. The earnings calendar includes DSW, JoAnne Stores, Southwest Water, TiVo, Williams Sonoma, and several smaller companies.

We do concur with expectations that today’s economic numbers should show some positive movement. As such we believe that the hesitation we are seeing in the futures market will be temporary. We may see some volatility today but expect to finish higher on the day. Looking ahead, however, we will continue to keep an eye toward China and their policy moves. Attempts to cool overheating in some sectors of the economy, could contribute to more global market volatility. Commodities, in particular, stand to be deeply affected by any reduction in demand coming from the east.

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

Tagged with: bonds, economy, gold, oil, stocks