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.

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

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