Morning Call

0 CommentsWednesday • September 2, 2009 • by alwaters

“Skillful pilots gain their reputation from storms and tempest.”

Epicurus

Morning Call
September 2, 2009

Cash for Clunkers Nation

One of the more precarious situations in the business world may be in the auto industry. US auto sales saw the first increase in about two years as the Cash for Clunkers program lured buyers into the showrooms with deals they couldn’t refuse. The program is being touted as a great success as dealer inventories fell and General Motors even called back 1,350 union workers. We are OK with calling this a success story, but are equally concerned with what happens next. Without the dramatic deals created by government subsidy, consumers as a whole are not showing signs of loosening their purse strings. In fact savings rates are increasing which is an admirable but relevant factor in the economy. The US auto industry has proven itself to be a poor model in the past and will not turn around without dramatic changes. As the dealerships clean up the balloons and confetti after the government subsidized party, we hope that Detroit has its plan for life after Clunkers.

What to Buy

One of the bright spots in the news this morning centers on what is being called a “giant” oil discovery in the Gulf of Mexico by BP (BP). The well is located about 250 miles south east of Houston and may contain about 3 Billion barrels of oil. Needless to say, BP’s shares will rise today as the news circulates. It is also important to note that BP is operator of the project with a stake of 62 percent, while Petroleo Brasileiro (PBR), Brazil’s state-controlled oil company, holds 20 percent and ConocoPhillips (COP) shares 18 percent. As investors determine what the find will mean for BP’s shares, we also believe that Petroleo Brasileiro may be an even better pick. PBR was just upgraded by Credit Suisse and its shares are trading at a P/E of 10 which makes it a better value than the BP shares at a multiple near 14.

Market Outlook

Futures are flat this morning after strong selling left the US equity markets lower by 2% yesterday. All sectors were down and financial stocks were among the worst performers. Day one of September lived up to its reputation as typically a bad month for stocks. Meanwhile, the stage had been set as pessimism grows over the global economy and investors worry that the rally has been overdone. With a 54 percent rally in the MSCI World Index since March 9, valuations are at 26.2 times the profit of its 1,659 companies; the highest level since 2002. Some positive signs have been seen among the leading indicators, but others have suggested that we are in more of a pause than a recovery.

Asian equities also fell by an average of 2% overnight. In Hong Kong, the Hang Seng index fell 1.8 percent. But the Shanghai composite index bucked the trend, gaining 1.2 percent. The Chinese benchmark index has now posted two consecutive gains after a losing streak that took it down 23 percent from its Aug. 4 peak. Japan’s Nikkei fell by over 2% as well. Financials were also among the hardest hit in Asia, as were metals and industrial stocks over concern for weaker demand from China. European stocks are also slightly lower this morning. Energy stocks are mostly higher while the banks are suffering strong losses. It appears that a similar pattern may be seen in the UUS markets today with gains in energy and further downside for the banks.

Commodities are somewhat mixed this morning. Oil has climbed by nearly 1% to just below the $69 mark. The American Petroleum Institute said yesterday that crude supplies dropped 3.19 million barrels last week. A U.S. government report today may also show stockpiles declined. Gains for crude are also supported by reports which showed that manufacturing in the U.S. and China, the two biggest energy using nations, expanded in August. The U.S. and China account for more than 30 percent of global crude- oil demand. It is expected that OPEC will leave production unchanged when it meets in Vienna next week. Gold has fluctuated near even all morning; presently trading at $956. Industrial metals, however, are suffering from economic pessimism. Aluminum, for one, is lower by 9% this morning. The Dollar is relatively mixed this morning, with gains on the Euro, but further downside versus the Yen and Pound.

Another busy news day includes Mortgage Applications, New Motor Vehicle Sales figures, Challenger Job Cut Announcements, Productivity and Costs, and Factory Orders. For earnings news today we will hear from Brown Forman, Martek Biosciences, Synovis Life Technologies, and a few others.

Although futures are holding on thus far, we are concerned that the economic news this morning may sour the mood. There will likely be some glimmers of hope but the general theme will probably support the growing concerns for economic stability. Oil could make a move today, but if the economic reports are disappointing, it could let the air out of the balloon for crude traders. Consumer Confidence held steady in the latest report, which makes four weeks in a row that it, at least, hasn’t grown worse. This important but fragile number will be key in determining the direction of things in the coming months.

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

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