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.

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

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