A.L. Waters Capital, LLC

Morning Call

0 CommentsThursday • October 29, 2009 • by alwaters

“Making money selling manure is better than losing money selling musk.”

Egyptian Proverb

Morning Call
October 29, 2009

Gold Update

What gold telling is us from an historical perspective is, more than anything, that investors are concerned about inflation. In 1979, gold more than doubled in price ahead of what was to be 15% inflation. This past year, gold has risen from the $750 level last October to well over $1000. The first thing that comes to mind is that a similar move to that in 1979 would lead us to gold reaching $1500 this time around. Depending, of course, on the effectiveness of the Federal Reserve’s withdrawal from the monetary expansion it has created, inflation could be worse than it was then, and gold could move considerably higher than the $1500 mark.

What to Buy

We have mentioned Motorola frequently lately as the company aggressively looks to regain lost market share. With some interesting new product development centered on Google’s Android operating system, Motorola should have some success doing so. After beating estimates in this morning’s earnings report, Motorola’s shares have jumped 7.5% in pre-market trading. Another important point to note is that the volume of contracts traded in VIX futures recently exceeded the level observed during the financial crisis of 2008, indicating that sophisticated traders and investors may be preparing for an end to the recent run-up in equity prices. In other words, investors expect growing volatility, which brings to mind the use of a long straddle on the broad market like, say, the S&P (SPY) or on a specific stock. A straddle is the purchase of a call and a put in which case you are betting on a strong move in either direction. When the move occurs, one can roll out of the losing position or ride it out under the assumption that the two will net out in your favor.

Market Outlook

Another loss of more than 100 points for the Dow yesterday, but futures are pointing slightly higher this morning ahead of the latest GDP report. Analysts are expecting that the US economy may show its first expansion in over a year, signaling the beginning of recovery. The question quickly turns to the sustainability of growth, but for now good numbers sill certainly lighten the mood on Wall Street. In an interesting Bloomberg survey, however, only 31% of investors polled saw buying opportunities in the current market, largely because of the 68% rally in global stocks since the market lows. The poll also showed considerable skepticism for the Dollar with a plurality of respondents saying it will weaken against most other currencies in the next year. Respondents see China, Brazil and India as the markets with the most potential, and commodities as the asset of choice, replacing stocks as the most desirable investment class in last quarter’s survey. Real estate and bonds are out of favor, with 40 percent saying bonds will have the worst returns over the next year. Investors and analysts in Asia are the most bullish, while those in the U.S. are the most cautious. A majority of Asian investors expect their country’s benchmark stock index to rise while a plurality of U.S. and European respondents thought their benchmarks would fall in the next six months.

There was a strong selloff in Asia overnight. The Nikkei and Hang Seng both fell by an average of about 2% despite a strong rally by financial stocks. It was the industrial sector that was among the worst hit during the trading session. Stocks in Europe this morning are running almost perfectly flat; although up off of earlier lows. Similarly, the financial sector is strong in Europe but most other sectors are considerably mixed. There is very little definition in the after-hours market in the US to indicate strength in any one sector.

Commodities are also moving higher this morning, although only modestly. Oil is up by a small fraction at just below the $78 mark. Gold is also recovering from its decline with a gain of more than $5 this morning to $1035. This move will be bolstered by the Dollar’s decline against the major currencies this morning.

The economic calendar today includes the GDP numbers and Initial Jobless Claims. Earnings reports will be coming from Aetna, Allegheny Energy, Apache, Auto Nation, Colgate Palmolive, Eastman Kodak, Expedia, ExxonMobil, Kellogg, MetLife, Motorola, Newmont Mining, Noble Energy, Office Depot, Proctor and Gamble, Sprint Nextel, Waste Management and a wide variety of others.

If, in fact, the GDP numbers meet expectations, the broad slice of earnings reports today will also be a determining factor in whether equities can snap their losing streak. We should see some mixed trading during the day but we would be a little hesitant to expect a strong rally. The broader picture of economic factors is likely to remain mixed for some time and unemployment will be a leading, and not a lagging, indicator.

Morning Call

0 CommentsTuesday • October 27, 2009 • by alwaters

“A desperate disease requires a dangerous remedy.”

Guy Fawkes

Morning Call
October 27, 2009

Gold Update

What we are witnessing is an interesting phenomenon where gold has pulled back, equities are falling and the Dollar remains weak. For gold, it could be a matter of profit taking as there really isn’t any other investment vehicle to which cash is flowing. The last time we saw a period of time during which it seemed everything was falling simultaneously was during the height of the financial crisis when it appeared the whole financial world was deflating. It may be a little early to suggest this is a key sign of an economic relapse, but it is worthy of note. For gold, we see $1035 as a key support level from which it could easily move back to $1070.

What to Buy

Sometimes a pullback is a warning sign and sometimes it is a buying opportunity. Silver Wheaton (SLW) is a very attractive long term prospect that fell off by 6.5% yesterday. Siler Wheaton is in the business of silver mining, but it typically lines up purchase agreements with other miners that are doing the physical mining of the resource. The company has been on an impressive acquisition spree and has made some admirable strategic moves. Silver doesn’t hold the glamorous role that gold enjoys but prices should continue to rise and leave SLW in a good position for strong growth.

Market Outlook

US stocks started the new week of trading the same way it ended last week, with a loss of over 100 points on the Dow. With some key economic news on the agenda today, futures are holding relatively flat this morning as investors try to determine whether the global economy is in recovery or the eye of the storm. The financial sector was the hardest hit during the day and basic materials were not far behind. Pessimism spilled over into Asia overnight as the Nikkei fell by nearly 1.5% and China’s Hang Seng lost almost 2%. Financial and Industrial stocks were among the worst performers in Asia as well. The tech sector was among the few that saw gains by the end of the day. In Europe this morning, stocks have actually turned higher by an average of about 0.5%. Gains on the overall indexes, however, comes as an average of bigger moves in either direction for some sectors. The banks are lower this morning in Europe by an average of 2-3% while some energy stocks have moved higher. The indication from pre-market trading in the US points to further losses in the financial sector, again this morning.

Emerging markets have been sliding lower recently, but nonetheless sights are being set on the possibility of inflation after a global barrage of monetary stimulus. India now joins the ranks of those beginning to take steps to tighten up. India’s central bank increased its inflation forecast and ordered lenders to keep more cash in government bonds, spurring speculation Governor Duvvuri Subbarao will raise borrowing costs by year-end. Norway is expected to become the first European country to raise interest rates tomorrow. Governments around the world have spent $12 Trillion to help end the global contraction.

Commodities are mostly higher this morning but by a small margin. Oil has gained a half Dollar thus far; trading at just over $79. Gold is up by more than $1 this morning after a strong selloff late yesterday. With the Dollar also falling, it would appear that the weak day for gold yesterday may have been the result of profit taking to offset losses in equities. The Dollar is, for now, lower against the major currencies with the Yen being the star performer in the foreign exchange market today.
Today’s round of economic news includes some Retail Sales figures, Consumer Confidence, and the EIA Petroleum Status Report. On the earnings side today we have Acadia Realty Trust, AK Steel Holdings, Apollo Group, Avery Dennison, Bemis Corporation, Boston Properties, Massey Energy, Norfolk Southern, US Steel, Valero, Winn Resorts, and several others reporting.

Several factors are beginning to look and feel a little ominous. First of all, there has been a noticeable spike in insider selling this past week. In other words, insiders continue to exhibit an unusually low level of confidence in their own companies with a threefold rise in shares being sold and only a negligible level of buying. Secondly, a flood of new Treasury notes is about to trickle into the bond market as the government needs to finance its stimulus spending. This will have many possible side effects on the bond and equity markets, but the most important factor may be its effect on rates. The risk of higher yields in the bond market is increasing for a variety of reasons. Growing government deficits are at the top of the worry list in the bond pits. If anything, the possibility of economic recovery could be a counterproductive factor in the long run. If the economy begins to recover, inflation will become a large risk because rates are too low. The Fed may be forced to raise rates as a result, and that would be catastrophic for the banks and their bloated mortgage filled balance sheets.

Morning Call

0 CommentsMonday • October 26, 2009 • by alwaters

“One pound of learning requires ten pounds of common sense to apply it.”

Persian Proverb

Morning Call
October 26, 2009

Gold Update

Sharp volatility within a tight price range tells us one thing about gold; a breakout is likely soon. With that in mind, one would have to ponder in which direction prices will move. With the Dollar moving lower again this morning, and the near term prognosis for the Greenback not improving, the case appears strong for gains in gold.

What to Buy

Positive earnings today from Verizon (VZ) and National Oilwell Varco (NOV) will lead shares higher and we like both for the long term. Also, with a slight hesitation in gold, there is an opportunity to take a position ahead of the next move higher which appears very likely this week. Investors are certainly looking for bargain stocks, so we still like Jaguar Mining (JAG) and Eldorado Gold (EGO). The speculation of higher gold prices has P/E ratios for mining stocks at higher than normal levels which is a consideration. Among the big name miners, Newmont (NEM) is actually running low among its peers in terms of P/E and, as such, would be a good long term position.

Market Outlook

When the future is unclear, investors often show it by taking profits and avoiding long positions going into a weekend. On Friday, the Dow fell slowly and steadily; finishing the day lower by 109 points. This morning, futures are flat as economic conditions are still vague at best. In fact, there is little movement in equities or commodities this morning. In Asia, optimism has been a little stronger as the major indexes finished higher by an average of about 1%. China proved to be the most optimistic with an upside of over 1.7% on the Hang Seng. European stocks haven’t moved much at all with the indexes all close to flat at mid-day. Individual stocks have moved in opposing directions with the banks among the worst performers and some energy and tech stocks in Europe moving slightly higher.

Commodities are mostly mixed as well today. Oil has been running close to even all morning’ a few cents lower but still above $80. Gold has also fluctuated only a few cents in either direction; presently trading at $1054. The Dollar has been falling again and this should translate to gains for gold during the day. The Dollar is quite a bit lower against the Yen, Pound, and Euro. Gold prices have swung back and forth within a $5 range all morning, with rapid trading in either direction. This tight range volatility indicates that we could see a trend begin to develop during the day.

There is little in terms of economic news today to determine market direction. Earnings, however, will take the spotlight with reports coming from Cabot Oil and Gas, Corning, Lorillard, Masco, National Oilwell Varco, Plum Creek Timber, Tellabs, McGraw Hill, Verizon, and a few others. An early release from Verizon beat estimates and, with some aggressive product moves planned, we continue to like Verizon for a long term pick.

The banks continue to be a cause for concern from several viewpoints. The total number of bank failures this year has slowly crept to 106. An even more telling sign is the bankruptcy filing just announced by Capmark Financial. One of the nation’s biggest commercial property lenders, filed for Chapter 11 bankruptcy protection on Sunday night after being hit by souring loans. Capmark was the commercial real estate loan business of GMAC, General Motors’ finance operation, before being bought in 2006 by a consortium led by KKR, Goldman Sachs Capital Partners and Five Mile Capital Partners. We have been concerned for some time with the threat coming from the commercial property market. Many believe that this would be the next shoe to fall and could create a whole new round of distress for the financial sector. Bad commercial property debts have been a significant factor in the demise of many of the 106 small banks that have failed so this year.

US banks hold more than $1 trillion worth of mortgages backed by commercial property. Many banks have so far held off writing down their commercial property investments in the hope that the economy will make a quick recovery, enabling borrowers to increase rents and restructure the loans. With the sustainability of economic recovery in doubt, more and more banks may have to face reality in terms of their losses and this could easily become the catalyst for a strong pullback in the stock market.