Morning Call

0 CommentsTuesday • September 1, 2009 • by alwaters

“Advice is judged by results, not by intentions.”

Cicero

Morning Call
September 1, 2009

The Dry Bulk Card

We often talk about the Baltic Dry Index and its relevance as an economic indicator. As such, we can’t help but be concerned with what we are seeing in this area. The Baltic Dry Index, already down 26% this month, is likely to fall further during the rest of the quarter as China continues to cut back on commodity purchases. Friday, the index fell 2.6% to 2468, capping a 10% decline for the week and leaving it at a three-month low. The volatile index, which surged in the first half of the year on Chinese demand for iron ore and coal, is still about four times higher than December’s 22-year low. Shipping rates, which already fell 59 per cent from this year’s high, are retreating as the Organization for Economic Cooperation and Development predicts a 16 per cent drop in world trade for all of 2009. China’s State Council called for curbs on steel and cement production last week. Experts predict that rates may fall by another 50% based on the current outlook. As a major indicator of the health of the global economy, this is a factor that cannot be understated.

What to Buy

We discussed Proctor and Gamble yesterday and were pleased with a gain of nearly 1.5% on the day. With the outlook for equities beginning to look a little grim, we are now taking a look again at those with a strong and consistent dividend. Several companies have actually increased their dividends recently. Two that have come on our radar are Altria and MGE Energy. However you may feel about tobacco products aside, Altria Group (MO) just raised its dividend by 6.3%. Share prices have been quite consistent and now carry a total yield of 7.4%. MGE Energy (MGEE) which engages in generating, purchasing, transmitting, and distributing electricity, increased its quarterly dividend by 8%. The company has increased its quarterly dividend for 34 consecutive years. The stock currently yields 3.90%. This stock has also shown price stability despite volatility in the broader market.

Market Outlook

It’s a tale of two worlds as we enter a new trading day. In Asia, equities rose as China’s manufacturing grew by the most in 16 months. Growth in output, orders, and jobs is being seen as a sign that recovery remains on track and that China may be able to meet its 8% growth target. Much of the positive movement, however, is being fueled by record lending and many are concerned that sustainability is an issue. The major indexes in Asia all climbed by a small fraction after a relatively poor performance yesterday. Industrial manufacturing stocks were among the strongest performers. The markets in Europe and futures trading in the US, however, continue to struggle. European equities dropped sharply at the opening and have leveled off at well over 1% down. Trading had been very selective with winners and losers in all sectors. Concern in the west has been largely centered on the view that valuations have gotten ahead of reality in terms of the economic outlook. Also relevant is the fact that UK consumers have repaid debt at a record pace, suggesting that any recovery will be uneven at best. With consumers choosing to “deleverage” their budgets instead of spending, analysts are concerned that true growth will be subdued. US futures are up off of earlier lows but still suggest a modest drop at the opening bell today. Again, most sectors are mixed in afterhours trading with little clear commitment within sectors.

Many are beginning to doubt the credibility of the positive news circulating, as well. For one, research of the jobless claims numbers shows that, if you were to include workers who have given up on finding employment or who have taken part time work out of desperation, the real jobless rate reached 16% in July according to the Department of Labor. Even the housing data may not be as positive as it sounds. Existing home sales rose 7.2% in July, but 31% of this number was deals in distressed and foreclosed properties. Another report shows that the number of existing mortgages that are one or more payments behind rose to a seasonally adjusted record of 9.24% in the second quarter. So much for green shoots.

Commodities, as a whole, are showing weakness again this morning with the exception of energy. Oil has managed to tick higher above the $70 mark again despite some pessimism about future demand. Gold sold off early but has fought its way back to positive territory in the past hour. The precious metal is higher by more than a Dollar at $952. The Dollar is once again lower on the Yen but has made further gains on the Pound and Euro.

An important round of economic news today includes Retail Sales, Construction Spending, the Purchasing Managers Index, Pending Homes Sales, New Motor Vehicle Sales, and the EIA Petroleum Status Report. The earnings calendar is light with China Medical Technologies, iMergent, and Pike Electric among the few reporting.

Up days and down days aren’t the problem. The concern is that there are way too many signs that the market may be ahead of itself in predicting an economic recovery. Commercial mortgage defaults are rising, bank failures continue to stream in, Cities and states are facing shrinking revenues and severe budget constraints, and consumers have made what could very well be a generational change in their spending habits. Current circumstances are beginning to look less like the early stages of recovery and more like the eye of the storm.

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

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