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.

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

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