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.

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

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