Morning Call

0 CommentsWednesday • August 19, 2009 • by alwaters

“You can do anything, but not everything.”

David Allen

Morning Call
August 19, 2009

The Baltic Dry Index

This index is one that we watch very closely on a day to day basis. The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the Index tracks worldwide international shipping prices of various dry bulk cargoes. The index provides an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a time charter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.
It is our view that, as the definition implies, the Baltic Dry Index provides a strong indication of shipping activity and, as such, the turning of the wheels of the economy. The average daily spot rate for a medium-sized vessel was just over $19,400 on Monday. That compares with rates of about $50,000 per day a year ago. The index fell drastically as the global economy ground to a halt.
The Baltic Dry Index closed up 22 points, at 2774 on Monday, continuing a trend that began last week on improving European and Asian economies. With recent economic indicators giving mixed signals, this index will be important to watch for signs of economic activity.

What to Buy

If you are looking for upside opportunity today, it will be extremely hard to find. Even though some of the banking stocks remain positive in pre-market trading, we expect the financial sector to lose momentum today as well. This leads us to take a look at a short side opportunity. Citigroup is trading at a multiple well above the rest in its sector despite the fact that it may also have the roughest road ahead. Average analyst estimates for the top six banks for the rest of 2009 put Citigroup second from the bottom; ahead of only Morgan Stanley. Looking ahead to 2010 estimates and Citigroup is last in its class. Buying near the money Puts may be a timely opportunity as the financial sector, as a whole is due for a pullback.

Market Outlook

Trouble in China. That will be a large part of the focus of investors globally. A lot of hope had been placed on China’s shoulders as reports claimed that stimulus spending had taken hold quickly, growth was continuing, and many believed that China might play a role in kick starting other economies worldwide. Then, with a closer look, we began to wonder if some of the numbers were even real, much less sustainable. Common sense also said that an asset bubble was forming and that the Chinese model may have been a house of cards. Now, whether it is a self fulfilling scenario or not, China’s equity markets are beginning to sputter. Falling by as much as 5.1% during the day, the Shanghai Composite formally dipped into bear market territory; which means a 20% downside from its high point. This has added to weakening sentiment elsewhere and will have a damaging effect on commodities as well.

The US equity markets took back about half of the prior day’s losses yesterday, but futures this morning have turned bearish once again. By the opening bell today, we could see a dip of close to 1% on the major averages. The Asian markets fell by an average of 1% overnight; although as mentioned China was much worse off. This has led to some nervousness in the European markets this morning as well, as the indexes are struggling back from a 1% drop at the beginning of the trading day. Generally speaking, the financial sector is no place to be in any of the global markets. Interestingly enough, the tech sector held up rather well in Asia despite the negative atmosphere. In Europe the selling has been a little more widespread. Taking a look at the aftermarket in the US, we actually see some positive movement in some banking stocks such as Citigroup and Bank of America, so it will be interesting to see if the broader market will level off as the day progresses.

Once again commodities have fallen sharply as economic sentiment turns sour. Oil has fallen slightly further to just under the $69 mark; although today’s Petroleum Status Report will have a lot to do with direction later this morning. Gold, after fighting its way back above $940 late yesterday, has since lost momentum and is back to $935. Considering the growing volatility elsewhere, gold and oil have held up respectably for now. Despite growing concerns for the Dollar ahead, it has moved higher on the Pound and Euro this morning. The Yen, however, has been the performer in the currency markets.

Besides the Petroleum Status Report for the oil traders, investors will also pore through the latest Mortgage Applications figures, which showed a jump of 5.6%. This was largely due to an increase in refinancing as rates also dropped slightly. For earnings today, we will hear from Deere and Company, Harman International, Limited Brands, and Yingli Green Energy, among others.

Some of today’s sentiment is also left over from some weak housing market and retail numbers yesterday. Housing starts were lower by 1% from the prior month and retail sales figures were slightly lower than consensus with a drop of 0.7%. This all adds up to a view that things may not be as rosy at many had hoped. Doubts over the health of the Chinese economy could be the most damaging however. This has a lot to do with demand expectations across a broad swath of industries. This could easily be the factor that stalls the recent rally and lead to the correction so many have expected.

Morning Call

0 CommentsTuesday • August 18, 2009 • by alwaters

“The person who reads too much and uses his brain too little will fall into lazy habits of thinking.”

Albert Einstein

Morning Call
August 18, 2009

What to Buy

Today’s trading will be very selective. We do expect to see a temporary shift toward defensive stocks such as healthcare and some others. We see a positive trend for Abbott Labs (ABT) although it is reaching a resistance level and may be a better pick on a small pullback. Comcast (CMCSA) is worth keeping an eye on as well. We do caution that this stock tends to follow the greater market which is a little shaky at the moment. For the longer view however, Comcast has pulled back recently to the $14 range and is valued at $20 or more. The company has taken positive cost cutting measures and has also built up a considerable war chest of cash.

Market Outlook

After a loss of 2% or more on the US indexes yesterday, futures point to a slight reprieve this morning. We had our doubts about the negative atmosphere yesterday, but today’s upswing is not as strong as it should be either. The large volume trades are showing very little price movement, so we are concerned that this morning’s rally could lose momentum rather quickly. Expect to see a move toward more defensive positions during the day. Healthcare stocks, low end retailers, and a select few others will move higher as investors try to get a grip on general market direction.

Equities in Asia managed to move into positive territory overnight but, much like we expect in the US today, trading was selective and in low volume. The European markets are trying to hold on to a slight upside this morning. Most indexes are higher by about a half percentage point with the banks holding up rather well thus far.

Most commodities have settled in after a tough day yesterday. Oil and gold have both taken back at least some of their losses from yesterday. Unfortunately, neither is showing any indications of a strong move and may settle close to even by the end of day. For now, oil is higher by about 1% at $67.50. Gold has moved up off of its early lows and is now higher by about $3 at $936. A bigger than expected increase in German Consumer Confidence and hope for positive numbers on Housing Starts today has led metals higher this morning.

Besides the Housing Starts numbers, we will also have Retail Sales figures, the Producer Price Index, and the EIA Petroleum Status Report. Oil prices held up respectably last week despite indications of growing excess supply. Today’s numbers will certainly be watched carefully by oil traders. For earnings news we will hear from Hewlett Packard, Home Depot, Target, the TJX Companies, and a few others.

Yesterday’s adjustment was a warning sign that investors are concerned. There is a growing sentiment that equities have come too far too fast and that the so called green shoots of recovery may have been premature. We are likely to see a few days of level trading as investors try to make sense of conflicting signals from the global economy.

Morning Call

0 CommentsFriday • August 14, 2009 • by alwaters

“What we think, or what we know, or what we believe is, in the end, of little consequence. The only consequence is what we do.”

John Ruskin

Morning Call
August 14, 2009

What to Buy

Our choice of Eldorado Gold (EGO) yesterday surged higher by as much as 8.5% mid-day before settling down to a gain just shy of 4% for the day. Today we are taking a look at an energy play. We like Linn Energy (LINE) for the long run, although it is likely to see a pullback this morning. An independent oil and gas company, Linn Energy has had a tough year but may be poised for a rebound. Another factor that is quite appealing is its 11.29% dividend yield. While we always like good prospects for growth, we also appreciate a solid yield. Shares have been trending higher for the past five months and, are a good buying opportunity on a 2-3% pullback.

Our Broad View

• China could be the next great Ponzi Scheme
• Jobless Claims remain twice what they were during the post-war recession
• Retail Sales figures still show no sign of consumers reaching in their purses more often
• September is notoriously the worst month of the year for stocks

Chinese assets are largely supported by an appreciation expectation. As one of few to show growth during this economic crisis, China has attracted new investors, with new money, which validates the expectations of those already on the “inside”. Throw in a few exaggerated claims from the central government and the new money arrives hoping for a piece of the action. The bubble inflates further, and thus validates the expectations, and the show goes on. More and more experts and others, even within China, are beginning to sound the alarm that China’s economy may be in for a rude awakening. Martin Hutchinson, of PrudentBear.com stated his concerns very clearly: “Shares are trading at 35 times earnings. Banks in the last six months have lent more than the entire Gross Domestic Product for the period. Interest rates are below the inflation rate, while monetary growth is far above it. The seven largest bond transactions in the world in 2009 were domestic deals in this country. Looks like a bubble to me, and bound to end in tears.”
Here in the US, consumer spending remains a concern. After a momentary uptick in June, nominal sales fell by 0.1% in July (month over month) and quickly deflated any optimism that things had turned a corner. People simply aren’t willing to loosen their purse strings when unemployment has either directly affected their household, or hangs over their head at night. An article on economist Nouriel Roubini’s web page, written by Arpitha Bykere and Christian Menegatti, read as follows: “Looking at the recessions of the post-war period, average monthly job losses ranged between 150 thousand and 260 thousand. Average monthly losses in this recession are still at 350 thousand. For the first four months of the year, the average was at 648 thousand. The improvement with respect to the first part of the year is clear. The improvement with respect to what we are used to seeing in recessionary periods is much less clear cut. Today’s numbers are not exactly what you call good news, at least not in absolute terms. In relative terms, after skirting a near depression, markets seem to consider 247 thousand payroll losses a breath of fresh air.”

As we head towards the infamous month of September, we have to wonder if the rising number of negative commentaries and an expectation of selling in the coming month could become a self fulfilling prophecy. A perfectly normal retraction in the equity markets could gain momentum if investors begin to get jittery.

For now, things are holding up respectably. As we expected, a little downward pressure yesterday morning eased as they day wore on and the Dow finished higher by a small margin. Overnight, the Asian markets also rose by an average of 0.5% with the Chinese markets lagging behind. In Europe this morning, the indexes started strong, but have since fallen back to the flat-line. If anything, the banks appear to be holding up the broader market in Europe as most are higher by 1-2%. US futures point to a slightly lower opening this morning.

A large portion of the commodities market has turned lower as well this morning. Gold and oil are exceptions, for now, but both are off of their earlier highs. Oil is presently just below the $71 mark, while gold is up by nearly $2 at $$958. The Dollar is higher only against the Euro this morning, while weaker against the Pound and Yen. We may have to settle for a relatively flat day on gold and oil.

More economic news today comes from the Consumer Price Index, Real Earnings, Industrial Production, and Consumer Sentiment. For the most part, the economic numbers are likely to be a mixed bag of information and fall in line with expectations. We are, however, watching for any sign of a shift in consumer sentiment.

All told, we do expect that the major averages will finish out the week on an uptick; albeit a small one. Commodities should turn around as the trading day progresses and the financial sector will move higher. Also, despite our generally cautious view toward China, we also expect that their strategic goals will play out in energy and mining as the government is bent on shoring up its assets in this area. Acquisitions and realignments in these sectors globally should make the rest of 2009 interesting in terms of deal making.