A.L. Waters Capital, LLC

Morning Call

0 CommentsWednesday • December 30, 2009 • by alwaters

“What you are doing does not matter so much as what you are learning from doing it.”

Egyptian Proverb

Morning Call
December 30, 2009

An Important Turning Point

History is full of critical crossroads where a series of smaller events, when linked together, leads to major changes in the world as we know it. Many have tried to draw comparisons between the present financial crisis and that of the 1930s, while in so many ways it is significantly different. One key factor that we believe to be extremely relevant is the present reality and threatening possibilities surrounding sovereign debt defaults.

Iceland imploded, Ireland teetered on the edge, Dubai is at risk, and Greece has been downgraded. In all honesty, it appears that the US and England may be spared downgrades based more on long term reputation than current reality. A question to ponder at length is just what it will mean if multiple governments domino their way into default? One instinctual thought is about the public sector that relies on its government for certain services. A less likely realization might be just how many people rely on their governments for employment. More people depend on the government for employment than those who provide it with the money the state needs to meet its promises. Most of Europe long ago passed the 50% threshold with more people depending on government than the private sector, but even in the United States – long reigning as the bastion of capitalism, free-markets and limited government – 58% of the population derives their income from government at some level.

Beyond this, we also ponder what default means for the currency at risk. The fiat money system as a whole is risky at best and this leads us to view gold and energy commodities as having extreme upside potential in the years ahead.

What to Buy

Independent oil and natural gas company Stone Energy (SGY) had strong third-quarter 2009 results and was upgraded by some analysts. Shares are approaching their 52 week high near $20 and could reach about $28 in the coming year. Another stock we have followed for some time is an alternative energy play by the name of Energy Conversion Devices (ENER). The company manufactures products in support of alternative energy generation. Shares are wallowing around near their low for the year and most analysts have written ENER off for 2010. We believe that a turnaround will occur sooner and that shares will rebound by the end of Q1.

Market Outlook

Rapid selling at the end of the day yesterday left the Dow near flat on the day; down by little more than a single point. Futures this morning have deteriorated slowly throughout the morning to suggest a 50 point drop at the opening bell. Commodity producers, the leading industry in the past year, are leading the global markets lower as we head toward the last day of trading for 2009. Most Asian indexes fell overnight, the Nikkei among the worst with nearly a 1% downside. China’s Hang Seng was close to even while the Shanghai Composite was among the few winners, with a 1.6% gain. Negative sentiment in South Korea was a leading cause of stress in the Asian markets as a whole. Kumho Asiana Group, one of the biggest conglomerates in South Korea, agreed Wednesday to sell a controlling stake in its construction business to a state-owned bank for $2.5 billion to cope with a cash shortage. The group, whose businesses include petrochemicals and an airline, also put two other units under creditor-led restructuring. The moves constitute one of the most high-profile debt restructuring proceedings in South Korea since the years after the 1997-98 Asian financial crisis. Shares of Kumho Industrial, which focuses on construction, and Kumho Tire, the units placed under debt restructuring, tumbled by the daily limit of 15%, while local banks also dropped on fears of losses from their exposure to the conglomerate. Stocks in Europe are also sliding this morning, with an average downside of 0.5% on the major indexes. Banks in both Europe and Asia were among the biggest losers in trading. US banks look like they will continue the trend when trading begins in New York today. It was also announced that GMAC Financial Services is close to receiving a third round of bailout funds from the U.S. Treasury Department, according to a published report.

Commodities are beginning to turn lower as the morning wears on as well. Oil had actually made a modest move higher in the early hours but has since fallen to the downside slightly; still well above the $78 mark. Inventory numbers will be released today and traders are cautious about expectations that the report will show stocks of crude oil have fallen by 1.7 Million Barrels. If the numbers hold up, we may see a modest rise later this morning. Gold is down by about $3 at $1093 which, we believe, will create some buying pressure back towards $1100. The Dollar has fluctuated slightly throughout the morning, but has now turned positive on all of the major currencies.

The Purchasing Manager Index and EIA Petroleum Status Report are alone on the economic calendar today, while the earnings calendar is virtually empty. Later this afternoon, we will also get the results of the Treasury’s auction of 7 year Notes. U.S. bonds were little changed on the day before today’s sale of $32 Billion in seven-year debt, the last of three auctions this week totaling $118 Billion. The Treasury sold a record-tying $42 Billion of five-year securities yesterday and $44 Billion in two-year notes on Dec. 28th. U.S. government securities have fallen 3.6% this year, the worst annual performance since at least 1978. U.S. marketable debt increased to a record $7.17 Trillion in November from $5.80 Trillion at the end of last year. The long term implication of the debt explosion remains to be seen.

Morning Call

0 CommentsTuesday • December 29, 2009 • by alwaters

“I think in terms of the day’s resolutions, not the year’s.”

Henry Moore

Morning Call
December 29, 2009

Gold Update

Big daily gains are always more exciting, but the sideways trend for gold is actually a healthy sign for the long term. The first two rallies above the $1000 mark were followed by a sharp decline as investors simply were not convinced that gold above that mark was the new reality. This time around, gold has built a strong base near the $1100 mark and this will prove to be a good starting point for the next rally. Fundamental supply and demand balances will begin to shift in the first half of 2010 and gold’s appeal as a safe haven against the Dollar will also increase after the present rebalancing among currencies plays itself out.
What to Buy
Even on a day when oil and natural gas are slightly lower and trading volume is expected to be relatively light, we still like the prospects for Devon Energy (DVN). Share in Devon are basically trading at their 52 week high and are climbing slowly in pre-market activity.

Market Outlook

According to futures, yesterday’s modest gain on the Dow will be followed up by an equally small increase at the opening bell. Again, any move in equities this week will be taken lightly as most of the key institutions are out of the game between holidays. Consumer Staples and Energy stocks were the biggest winners yesterday. This morning, it looks like Retail stocks and the financial sector will open lower. Very moderate gains were seen in Asia overnight. Most bank shares were down by about 1% and the airlines were hit hard over concerns following a failed terrorist plot on Christmas day. In Europe this morning, stocks started off rather sluggishly but have since picked up and the indexes are now up by an average of about one half percentage point. Bank shares have actually outperformed the broader market in Europe and, in general, buying has been seen across most sectors.

With some exceptions, commodities are weakening this morning. Crude oil has slipped slightly but remains solidly above the $78 mark. Gold sold down from a high near $113 during the night and is showing about a $1 loss in today’s trading at $1106. The Dollar is a bit mixed with gains on the Yen and Pound, but falling further on the Euro.

There will be some Retail Sales figures, Consumer Confidence, and the Case Shiller Home Price Index released today. Property values in 20 metropolitan areas probably fell 7.2 percent in October from a year earlier, the smallest 12-month drop since 2007, according to analyst estimates. On the earnings side, Onstream Media and a small list of Asian companies are among the few scheduled reports today.

Bank of America’s short interest soared more than any company on the NYSE in the two weeks following its announcement it was repaying U.S. bailout funds. Bank of America’s short interest jumped by 165 million shares, or 218%, for the two weeks ending Dec. 15th. Outstanding short interest on Bank of America surged to more than 240 million shares, or about 2.42% of the total shares outstanding, up from about 76 million or 0.88% at the end of November. Among large financials, Citigroup also stood out as a major target for short sellers in the first half of December. Citigroup saw a nearly 30% increase in outstanding short interest during the two week period, and its 65 million increase in short interest was the third-largest total on the NYSE. Bank of New York Mellon also continued to be a short seller target, seeing a nearly 23% rise in short interest after a jump of almost 18% at the end of November. MetLife has also seen a rise in short interest of more than 22% through Dec. 15 compared to the previous two week period. In some cases this may be because of a flood of new shares in the marketplace as several financial institutions have increased their float to raise capital and exit the TARP umbrella. This level of short selling, however, says a lot about investors’ outlook for the banking system in the year ahead.

Morning Call

0 CommentsMonday • December 28, 2009 • by alwaters

“The crafty rabbit has three different entrances to its lair.”
Chinese Proverb

Morning Call
December 28, 2009

Gold Update

We are not expecting any dramatic moves for gold in the coming weeks. We, instead, would be more satisfied seeing the development of a strong base above $1100. Gold added more than $7 this morning to move to $1112 and that may be about all we can expect throughout the day. The Dollar is enjoying some relative strength against some more worrisome currencies, but will have its own concerns in the year ahead. After the currency markets adjust themselves according to troubles in Greece, Dubai, Ireland, and elsewhere, we will expect a shift back toward gold by the end of the first quarter of 2010.

What to Buy
Airline shares are expected to fall off considerably following the foiled terrorist plot on a Detroit bound Delta flight. If the sell-off is severe it may actually create a few bargain opportunities when the dust settles. For now, we also like the prospects for some of the natural gas plays as this sector is likely to climb in the coming weeks. One stock that has exposure to natural gas exploration and development as well as shipping is Devon Energy (DVN). Shares are rapidly approaching there 52 week high, so it may be worth a little patience to see if Devon can make a move above this mark.

Market Outlook

The markets are likely to remain limbo this week as most of the big players will be on the sidelines between holidays. Without major economic data scheduled this week, any price movement in equities will not be a reliable gauge of market sentiment. Volatility may be high, but volume will be low. The emerging markets are rising on news that China’s economy grew faster than expected. Analysts also expect the US economy to turn in its best performance since 2004. The only thing less realistic than the US numbers has been that of China, which many believe to be considerably exaggerated at times.

Stocks throughout most of Asia rose by an average of 1% during the night. China’s Hang Seng was among the only losers with a modest loss on the trading day. It was property companies that dragged down the Hang Seng after a large property auction in Hong Kong fell short of expectations. In Europe this morning, stocks are also approaching a 1% upside having surged at the opening bell. In a contrast between continents, baking shares were lower in Asia but have led the way higher in Europe. US banks look like they will open to the downside this morning, although futures indicate that the indexes may open a few points higher.

Commodities are mostly higher this morning, mostly on the back of some economic optimism rather than as a reflection of a weak Dollar. The Dollar, in fact, is higher on the Yen and Euro, but remains slightly lower against the Pound. Oil is up slightly once again at just above the $78 mark. We spoke recently about the likelihood of oil returning to near the $80 mark, so there may be a little more room for the oil rally, but we would be cautious of a move above $80 should it occur. Gold is also holding its own with a $7 move to $1112. Natural Gas is also up by nearly 3% and could have a strong upside in the coming weeks.

The economic calendar is empty today and earnings news will also be light this week. Bridgeline Software and Cal-Maine Foods are among the few reporting today.

Generally speaking, what led us into the financial crisis remains the biggest concern as we look ahead: real estate. Easy money and speculation led to an inflated housing market and it was only a matter of time before the bubble burst. Now, the economic downturn is putting pressure on commercial property and we believe its effects are only beginning to be felt and will hurt the small bank balance sheets in the year head. We are also skeptical of the perception of progress as some economic news has suggested that things are turning around in the housing market. One has to remember that any upswing in this market has come from extensive policy measures that are unsustainable and will, if anything, hurt the sector in the long run. The question of when the Federal Reserve will raise its target rate remains open, the question of if is more easily answered. Government-sponsored mortgage lender Freddie Mac says it’s time to lock in mortgage rates. Once the Fed halts its program to soak up mortgage-backed securities, private buyers are going to demand a higher rate of return, which will drive 30-year fixed rates above 6% by the end of 2010, if not sooner. A modest recovery in the housing market, therefore, may be short-lived and another downturn could be more damaging than the first. With a majority of homeowners upside down on their mortgages because of a severe drop in the value of their homes, experts in the field expect a growing number of them to walk away from their mortgages in 2010; even those that are able to keep up with payments.