Morning Call

0 CommentsThursday • October 22, 2009 • by alwaters

“All are not cooks who walk with long knives.”

Russian proverb

Morning Call
October 22, 2009

Gold Update

Our analysis of the options market shows us that investors expect gold to reach $1200 by the end of the year. More important than the daily price of the precious metal, is the signs of accumulation. From Dubai to China, there has been a growing urgency to stockpile gold. This is likely to be a combination of speculation as to the future value of gold and ever present concerns for the long term value of paper currencies, globally. Remember the golden rule.

What to Buy

We are seeing some activity in the dry shipping sector once again. The primary reason appears to be value. This often volatile sector has lumbered along at low earnings multiples as investors wondered if and when the global economy might begin to show signs of life. Although that question remains somewhat unanswered, investors do see signs of growth coming from China and other emerging markets. This seems to be drawing attention to the world of shipping which relies on the movement of goods. We expect to see some positive movement in the dry bulk shipping sector in the coming weeks, as a result. Eagle Bulk Shipping (EGLE), DryShips (DRYS), and Excel Maritime Carriers (EXM) are among those to watch.
Market Outlook

The Dow sold off sharply late in the day yesterday to finish down by nearly 1%. A large part of the shift in sentiment came from a downgrade of Wells Fargo to “SELL” coming from analyst Richard Bove of Rochdale Securities. Despite the fact that Wells Fargo beat estimates for earnings, Bove said earnings were boosted by mortgage-servicing fees rather than improving business trends. Bove said the “most disturbing” thing about Wells Fargo’s results is that loan losses seem to be accelerating. Assets no longer collecting interest climbed 28 percent to $23.5 billion from the second quarter. Quite frankly, we singled out Wells Fargo months ago as perhaps among the most concerning banks based on the realities of their balance sheet. The housing problem continues to worsen and Wall St refuses to accept it. They continue to obsess about a recovery when in fact there isn’t one. The fact is that the banks are sitting on foreclosed homes rather than facing reality and accepting the losses. Wells Fargo admitted to $23 Billion in losses, while the fact is that this number is likely much higher. Elsewhere, Fifth Third Bancorp said on Thursday that its third-quarter loss nearly doubled, driven by credit losses in areas like commercial, mortgage and construction loans.
Futures this morning have been running flat ahead of another big day for earnings and economic news. Asian equities sold off by an average of 0.5% during the night. Trading was somewhat mixed with some industrial and technology stocks moving higher, but the banks weighing down the indexes. European stocks are also lower this morning by an average of nearly 1.5%. The story is much the same as in Europe with the financial sector bringing the indexes down despite some gains in other sectors. Premarket trading in the US is gaining some positive momentum and some banks, such as Bank of America, are moving higher despite concerns elsewhere in the industry.

Commodities are also lower once again. Oil rose quickly above $81 but has since fallen off by nearly 1% on the day, but remains above the $80 mark. With the Dollar moving higher this morning, gold has forfeited about $6 to $1058. The Dollar is higher against the major currencies today.

The economic calendar today includes Initial Jobless Claims and the Leading Economic Indicators Index. For earnings news today we will hear from 3M, Amazon, American Express, AT&T, Bristol-Myers Squibb, Broadcom, Capital One, Celgene, Consol Energy, Diamond Offshore, Goodrich, McDonalds, Merck, Nucor, Philip Morris, and many others. The sheer volume of major companies reporting today and the diversity of sectors represented will have investors digesting information throughout the day.

Perhaps even bigger than the downgrade for Wells Fargo was the suggestion from Moody’s that the U.S. could lose its AAA rating if it fails to reduce its deficit over the next 3-4 years. Earlier this year, the markets suffered after the S&P cut its outlook on Britain to Negative from Stable. It’s clear to us that the global economy will take some time to truly recover. Financial institutions will eventually have to face reality regarding the value of assets on their balance sheets. The Picasso in your garage is only worth what you can actually sell it for, and not what you think it should be worth. Generally speaking, we still have a long road ahead. For those that were shouting about the so called green shoots of economic recovery may now wish they also saw the potential for a late season frost.

Morning Call

0 CommentsWednesday • October 21, 2009 • by alwaters

“A fool looks for dung where the cow never browsed.”

African Proverb

Morning Call
October 21, 2009

Gold Update

Some volatility in the currency market has gold on hold this morning. Having traded flat during the night, gold pulled back slightly in the early hours. Still, prices are holding up respectably near the $1050 mark. We have expected a consolidation phase at this point, but all indications still pint toward another leg up for gold in the near term.

What to Buy

The only sector that has held up rather well over the past few days is technology and even here the trading has been somewhat selective. On a down day for the indexes, our recent pick of Virgin Media (VMED) managed to gain 1.39% yesterday. This one remains a good long term opportunity. Today, the healthcare sector should also see some positive movement. Some positive numbers from Elan (ELN) have shares up by well over 4% in premarket trading.

Market Outlook

The Dow fell by more than 50 points yesterday and futures indicate another 50 point drop this morning; essentially wiping out the gains made on Monday. Earnings optimism hasn’t been enough to hold up the broader market, although the tech sector continues to move higher after several positive results. Stocks in Asia finished almost perfectly flat overnight with technology stocks higher and banks pulling the market down. European equities fell sharply off the opening bell and the major indexes are all lower by an average of 1% or more. The dynamic in Europe is similar to Asia with tech stocks gaining and the financial sector losing ground. It looks like a mixed day for the banks in the US with selective trading occurring in pre-market trading.

With Bank of England Governor Mervyn King hinting at a rate hike in the not-too-distant future, the Pound has made gains after being one of the weakest currencies in the past week. More than $2 trillion in stimulus packages and rising demand in Asia are helping to haul the world economy out of its first recession since World War II. This month, the International Monetary Fund raised its forecast for global growth next year, predicting 3.1 percent expansion, compared with a July forecast of 2.5 percent. The U.K. economy will increase 0.9 percent, up from an earlier forecast of 0.2 percent, the IMF said. All of this has served to draw the attention of central bankers to begin thinking about pulling back in time to avoid a spike in inflation.

Commodities are suffering somewhat this morning as the Dollar strengthens slightly and some doubts remain about the sustainability of economic growth. After threatening the $80 mark, oil has fallen off by more than a Dollar this morning; falling below $78 in early trading. Gold had been trading close to even overnight, but began pulling back at 4 AM and is now down by $4 to $1050. The Dollar has been slowly shifting its momentum and this has put some pressure on gold. In the early hours the Dollar was higher on the Yen, but lower against both the Euro and Pound. As the morning progressed, however, the Dollar managed to turn higher on the Euro as well.

There are no economic reports due out today so attention will focus on earnings. Reports coming out today include Allegheny Technologies, Altria, Ameriprise Financial, Amgen, Citrix Systems, eBay, Eli Lilly, Freeport-McMoRan, Genzyme, Morgan Stanley, Northrop Grumman, Boeing, US Bancorp, Wells Fargo and many others.

Considerable attention is still focused on the financial sector, and much of it is not good. Bank of England Governor Mervyn King stepped up his call to break apart Britain’s largest banks, saying more stringent capital requirements won’t shield taxpayers from having to bail out more too-big-to-fail banks in the future. In the US, of course, the big banks are under scrutiny for what some consider excessive bonus payouts considering the current environment. Meanwhile State Street is has its own concerns as The California Attorney General’s office has charged State Street with fraud, accusing it of bilking the state’s two largest pension funds of $57M, and seeking $200M in overcharges and penalties. Generally speaking, this adds to our view that the banks are still too risky a proposition.

Morning Call

0 CommentsTuesday • October 20, 2009 • by alwaters

“The nature of man is always the same; it is their habits that separate them”.

Confucius

Morning Call
October 20, 2009

Gold Update

Gold has begun to trend higher once again. The charts suggest that prices are consolidating a base above $1060. If we see stability at this level, expect a move to new highs in the coming days. The Dollar is still showing signs of weakness, but hasn’t been falling apart either so there hasn’t been a dramatic shift toward gold. We will expect a tight range for now but could see a sharp turn toward news highs for gold by the end of the week.

What to Buy

The technology sector is getting a lot of attention after strong earnings news from Apple and others. We still have to lean towards Google’s aggressive move into multiple markets and believe that this will eventually take a bite out of Apple. One of Apple’s strongest products has been the iPhone and Google is looking to take on the giant with their new Android operating system. Rather than taking on the iPhone with one product, the Android system will be featured in several models by several manufacturers. One benefactor may be Motorola, which will soon release an Android based smart-phone through Verizon. This may be just what Motorola needed to renew its credibility and could lead shares higher. Motorola (MOT).

Market Outlook

Following a strong 1% gain on the Dow yesterday, futures are pointing higher once again this morning. It is all about earnings right now and some key reports have, indeed, been positive. Apple, Caterpillar, DuPont, and Texas Instruments all beat analyst forecasts and shares have all climbed higher as a result. Corporate earnings have been watched closely for signs of recovery and are the biggest single factor in investor sentiment right now. Apple, maker of the iPhone and Macintosh computers, rose 5.9 percent in pre-market trading and Texas Instruments, the second-largest U.S. chipmaker, climbed 2 percent. DuPont, the third-biggest chemical maker, advanced 2.5 percent in Germany after posting positive earnings. Analysts are also expecting some positive news on the economic calendar today.

Stocks in Asia gained a similar 1% overnight. Despite some positive sentiment for US tech stocks, the technology sector in Asia was mostly mixed. Banking stocks, on the other hand, outperformed the broader market with many moving higher by 2-4%. European stocks fell early in the session but have since recovered to just above even, so far. Tech stocks are performing strongly in Europe but the financial sector is considerably lower. It appears that US banks will stay positive to start the day but only by a small margin.

Commodities are a telling sign for economic sentiment as most have moved lower this morning. Oil has given back a few cents this morning, but remains strongly above the $79 mark. Many analysts have expressed a similar view that $80 is the top end of the price scale and that oil is likely to level off over the coming weeks. Gold has been trending higher once again, adding a few Dollars this morning to move to $1066 in early trading. The Dollar continues to be strong against the Pound, but is lower again against the Yen and Euro.

Today’s economic calendar includes Retail Sales figures, Housing Starts, the Producer Price Index, the EIA Petroleum Status Report, and the Fed Beige Book. Other earnings reports due today include Biogen Idec, BNY Mellon, Coach, Forrest Labs, Gilead Sciences, Lexmark, Lockheed Martin, Peabody Energy, Pfizer, SanDisk, Sherwin Williams, State Street, Coca Cola, Western Union, Yahoo, and many others. Generally positive numbers from a majority of this broad swath of companies could lead to a strong move in the markets today.

Some interesting things are taking shape with the Central Banks. Just recently, the Reserve Bank of Australia became the first to pull the trigger and raise rates. The RBA stated that it believes that the risk to global economic growth is passing, and that the bigger threat is now inflation. “Keeping interest rates at very low levels for an extended period could therefore threaten the achievement of the inflation target over the medium term,” according to minutes from its Oct. 6 meeting, released Tuesday. Yesterday, the US Federal Reserve confirmed that it has begun experimenting with “tri-party” reverse repo agreements, but says their actual use is not imminent. In a reverse repo, the Fed pledges mortgage-backed securities and Treasuries it bought as collateral for short-term loans, thereby draining cash from the financial system. Reverse repos are normally the domain of the 18 primary dealers; the experiment involves extending that to deals with the $2.5T money-market mutual fund business.

Having averted what many believed could have been a worse systemic meltdown, the global central banks now face a critical timing decision to tighten monetary policy before inflation takes hold. Rampant inflation would be devastating to the economy, but so would tightening too soon.