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.

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

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