Morning Call

0 CommentsWednesday • November 11, 2009 • by alwaters

“Silence is one of the great arts of conversation.”
Cicero

Morning Call
November 11, 2009

Gold Update

Nothing like waking up to your morning coffee and a new record high for gold. We expect a rather quick move to the $1200 level. Some fluctuation on the Dollar index, may limit the steepness of the move this morning, but as the Dollar begins to pull back later today or tomorrow, expect a sharp move higher for gold.

What to Buy

We will see another strong day for gold and the shares of mining companies such as Newmont (NEM), Eldorado Gold (EGO) and others. It is important to note, however, that many of the miners are running along at seriously inflated P/E ratios based on optimism that gold will continue to climb. Common sense dictates that this may reach a peak where, even with gold climbing, the rise in mining shares will, or should anyway, begin to level off. For, now, we can still expect another 3-5% upside for our favorite miners.

Market Outlook

After a strong day on Monday, we would have to expect a leveling off day yesterday. The Dow did, in fact, swing high and low during the day and finished with a gain of 20 points. Today is really the follow up day to the 200 point upside on Monday and futures suggest that the markets will make another strong move to the upside. The setting this morning is a lot like that of Monday with the exception being that the Dollar is slightly stronger in the early hours. Globally, stocks are trending higher as China’s industrial production soared 16 percent from a year ago and orders for Japanese machinery surged 10 percent from the previous month, signaling the recovery is accelerating in the world’s second- and third-biggest economies. Bank of England Governor Mervyn King stated that he has an “open mind” on further bond purchases, signaling officials aren’t ready to withdraw stimulus yet. King did also go on to say that “We’re not seeing any great expansion of credit. Indeed if we could see credit growing more rapidly that would be a very welcome step. No central bank in the world is saying that it intends to carry on this policy forever.”
Most of the Asian indexes barely moved overnight with the exception of China where the Hang Seng climbed by 1.6%. Most of the high volume trades, however, were to the upside and included a wide variety of sectors, including the banks. Trading in Europe this morning is a little stronger with the major indexes higher by an average of well over 1%. Specific trading, however, has been considerably mixed within sectors. Pre-market activity in the US suggests that it is the financial sector that may lead the way today.

Commodities are also strong this morning. Oil is up by about a half Dollar, well above the $79 mark. Back at $40, we believed that oil would return to the $75-80 range and get stuck there for some time and that certainly appears to be the case. For now, oil traders are forced to work with small moves in either direction. Gold, as expected, to a slight breather yesterday and has, once again, reached new highs this morning. With another $10 gain in early trading, gold is now at $1116. The Dollar is a little more mixed today with gains on the Pound and Yen and a continued slide against the Euro.

Investors will have little in terms of economic news to digest this morning. Scheduled earnings reports will include Applied Materials, Computer Sciences Corporation, Macy’s, RailAmerica, Progressive, and a few others.

Investors appear willing to buy into the rally; at least for a little longer. Several concerns still remain regarding the global economy and joblessness. Banks need to lend, and consumers need to spend, otherwise it is all for naught. World Bank president Robert Zoellick warned Wednesday that untamed U.S. unemployment threatens to trigger loan defaults and drag on consumption, thus hindering the strength of economic recovery. “You’re going to have problems with delinquencies of credit card loans, consumer loans, people won’t be able to pay their mortgages,” he told reporters in Singapore. “Some banks are going to continue to be troubled by bad loans.” While Zoellick concedes government stimulus spending will fuel growth through the middle of 2010, he’s worried what happens afterward: “What’s the other source of demand?” In other words, the Central Banks and policymakers certainly avoided what could have been a much worse scenario during the height of the financial crisis, but it all still caused a fundamental shift in our perceptions. Most consumers still think the worst may be ahead for them and they are, therefore, planning accordingly. Even if the specter of unemployment could be magically lifted, consumers may have learned a lesson that could become a generational shift in how we spend and utilize credit. This creates an entirely new norm for which the global economy may need years to adjust to.

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

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