Morning Call

0 CommentsTuesday • December 22, 2009 • by alwaters

“Better a little which is well done, than a great deal imperfectly.”
Plato

Morning Call
December 22, 2009

Gold Update

Gold trading has been somewhat volatile this morning, but prices have begun to stabilize as the morning progresses. Part of what we are seeing is an unwinding of the Gold/Dollar trade for many large money managers. For some time, the long gold-short Dollar trade has been very successful, but there are some fundamental shifts occurring in the markets that may make this inverse correlation less reliable. This is not to say that the gold rally is over. Once large institutions finish rebalance their positions, the long term prospects for gold remain fundamentally strong.

What to Buy

Keep an eye on healthcare shares as the reform movement in Washington moves ahead. In this case, some of the big names in Pharma should benefit the most. Movement has already begun in GlaxoSmithKline (GSK) and Pfizer (PFE). Timing will be critical and a vigilant eye on Washington for small details of a final bill will also be important.

Market Outlook

It bears repeating that there may be a game changing shift occurring in the marketplace. This would be the apparent change in what has been an inverse relationship between stocks and the Dollar. Since before the fall of Lehman Brothers, stocks have been going in the opposite direction from the Dollar; Dollar up, stocks down and vice versa. Right now, equity shares and the greenback have begun to move in tandem, means that the rise in the dollar was not a function of flight to safety but an increased confidence in the US economy leading to rising rate expectations. In our view, the shift in sentiment is premature but it is a very relative factor in determining near term trading strategy. This is based on a growing consensus after recent data that the economy will grow strongly in 2010. Strong growth is good for stocks, of course, since more growth means higher sales and higher sales mean higher profits. Strong economic growth would also bring the Federal Reserve closer to ending current benchmark interest rates near 0%. Stronger economic growth and higher interest rates would both be good for the Dollar.

The Dow held on to an 85 point gain yesterday and futures this morning are pointing modestly to the upside. We also saw a strong day in Asia during the night, with an average upside of about 1%. The Nikkei was the strongest index with a gain of nearly 2%. Industrial stocks in Asia were among the best performers while the banks ran flat. This morning in Europe, equities are approaching a 1% upside as well. Most banks in Europe are higher while several tech stocks are weighing down on the indexes. Pre-market activity in the US shows some strength in bank shares and positive momentum for healthcare stocks as the reform debate in Washington draws closer to completion.

Many commodities are higher this morning with the exception of energy and metals. Oil has fallen by more than half a Dollar at just over $73. Gold has also pulled back by another $8 to $1088. The Dollar is stronger against the Pound and Yen, but is slightly lower on the Euro this morning.

On the economic calendar today are some Retail Sales figures, Existing Home Sales, and revised Q3 GDP numbers. The GDP revision may prove slightly disappointing and put a drag on the upward movement for equities. Earnings news today will be coming from American Pacific, Cintas, Commercial Metals, Micron Technology, Red Hat, and a few others.

Moody’s joined S&P and Fitch in downgrading the government bond ratings of Greece, as the country struggles to emerge from its economic crisis. But, the one-step cut was less severe than the other two agencies – sparking a rally in Greece’s bonds. The less-aggressive move eased concerns that the country’s debt would be ineligible as collateral at the European Central Bank. It is not farfetched to believe that troubles in Greece, Dubai, and elsewhere could be a harbinger of future crisis in Europe and the US.

In the critical housing market, the news is far from rosy, as well. The number of borrowers that fell behind on their mortgages – including the most creditworthy – rose in Q3 as the percentage of current and performing mortgages dropped for the sixth consecutive quarter, a regulatory report said. Those that fell behind on their prime mortgage payments more than doubled to 3.6% from a year ago. Such troubles could mount as banks and thrifts remain unable to match modifications with the number of struggling borrowers who need help. The potential for dramatic losses in the commercial property market remains very concerning as well. From a broad view of ongoing economic data, we continue to receive conflicting numbers that give reason for hope in some cases, and cause for concern in others.

Morning Call

0 CommentsMonday • December 21, 2009 • by alwaters

“No man ever wetted clay and then left it, as if there would be bricks by chance.”

Plutarch

Morning Call
December 21, 2009

Gold Update

This morning we have seen a rare harmony of movement between Gold and the Dollar. Both are rising modestly this morning, as are most commodities and equities. Many buyers of gold today may be looking suspiciously at the Dollar rally, and some may be seeing gold as a commodity that will see increasing demand in a growing economy. Most important, however, is the simple fact that gold has developed a steady trading range above $1100. The Dollar is in vogue, for now, and yet gold has held up rather well. The next rally, as the threat of inflation grows and central banks begin the arduous task of withdrawing stimulus, is likely to be explosive.

What to Buy

As of right now, we are keeping an eye on two ends of the energy spectrum. Fundamentally speaking, natural gas should begin to climb out of its long standing slump. Short term, harsh weather in parts of the US and in China should start to balance the excessive supply that natural gas has faced for some time. Further out, there is likely to be a major increase in demand from China as the economic machine tries to diversify away from its massive use of coal. One solid energy play is Devon Energy (DVN) On the alternative side, we have to like the prospects for solar as the Copenhagen effect takes shape and developing nations look to grow while also minimizing CO2 emissions. We should see an uptrend for the likes of JA Solar Holdings (JASO) and LDK Solar (LDK).

Market Outlook

Futures have been climbing slowly throughout the early morning as US stocks look to add to Friday’s modest gain. The rise in stocks, however modest, is global as investors have seen evidence that the economic recovery is gathering momentum. Europe’s economy may expand by 0.7% next year and by 1.5% percent in after governments around the world provided “massive economic support,” the European Commission said in a statement. There are a couple of factors that are certainly different than has been the case in the recent past. For one, the Dollar is rising in tandem with equities and commodities for the first time since before the collapse of Lehman Brothers. The Dollar, equities and raw materials are on pace for their first simultaneous two-month gain since 2008 as the U.S. Dollar Index rises the fastest in 10 months. The gauge has moved in the opposite direction of either the S&P or the CRB Commodity Index for 15 months straight. Until now, the Dollar would climb when traders sought protection from turmoil created by the credit freeze that started in 2007. It weakened when they took advantage of record-low interest rates by selling the Dollar to finance holdings of higher-yielding overseas assets. The Dollar Index rose 1.6% last week. Its 4.9% rise from this year’s November 26th low is the steepest since a 17-day climb around this time last year. Another interesting fact comes from the M&A market where acquiring companies are paying record premiums on takeovers, suggesting that many stocks are, perhaps, undervalued still. While stocks in the S&P 500 are trading at the most expensive valuations in seven years, Chief Executive Officers appear so sure the economy will keep recovering they’re agreeing to prices that are 37% higher than the average since 2001.

Stocks in Asia were close to flat with the exception of China’s Hang Seng which fell by 1%. Specific trading was mixed within sectors as well. IN Europe this morning, equities have been a little stronger, as the major indexes are higher by an average of 1% at mid-day. Bank stocks in Europe are seeing strong volume to the upside in Europe.

Commodities are mostly higher today, although oil has fallen a few cents lower to a little more than $73. Despite some strength on the Dollar Index, gold has held up with a $2 gain to $1115 in early trading. The Dollar has been strong against the Pound and Yen, but remains on the downside of the Euro.

There is no major economic data scheduled for release today. For earnings news, we will turn to Aspen Technologies, ConAgra Foods, GigaMedia, Jabil Circuit, Walgreen, and a few others.

The latest insider trading data continues to show a big contrast between the buying and selling trends in the marketplace. For the latest week insiders sold $1.4Billion in stocks while insiders purchased just over $83 Million. The low level of buying continues to represent the very weak fundamental background that insiders see at their own corporations. As for the broader economic data that has led many analysts and investors to raise a flag of recovery, it is important to remember just how unreliable these numbers can be. We often don’t even know we are in a recession until well after it arrives. It is all too often that economists look back and release the so-called “revised” figures that tell us, “Hey, we have been in a recession for a year now and the good news is that it’s almost over!” For this reason alone we take all the latest economic data with a grain of salt and let common sense rule. In terms of a sustainable recovery, we are simply not there yet.

Morning Call

0 CommentsFriday • December 18, 2009 • by alwaters

“One swallow does not make a summer.”
Aristotle

Morning Call
December 18, 2009

Gold Update

We have been more than satisfied being on the short side of gold from its peak down to the present level. Prices did, in fact, breach our estimated target of $1105, reaching as low as $1095 during the night. With a $9 upswing this morning, we are now back at $1105. At the present level, we believe a strong buying opportunity exists. Before committing to a new uptrend, we must consider a few facts about the present environment. Being the end of the calendar year, we will have to expect light volume commitment and possible price volatility that comes with that. We also know that a whole world of money managers will be looking to consolidate and take profits, as necessary, to firm up their year-end performance numbers. As such, we will not expect any reliable trends to develop until after the holidays.

What to Buy

Big numbers for Research in Motion (RIMM) last night will send shares soaring this morning. This may also bring some attention to the technology sector as well. We also believe that the long term prospects for Motorola (MOT) are good based on a growing battle for market share in the cellular market. Google’s new Android operating system for mobile devices will likely make a dent in iPhone and Blackberry sales and Motorola will be among the beneficiaries.

Market Outlook

Reports during the night of a possible coup in Pakistan sent Asian markets lower and investors hurried to the safe-haven Dollar. The reports were quickly denied in Pakistan and the Dollar has since pulled back slightly. Asian equities finished just slightly lower with the worst performance on China’s Hang Seng, which fell by almost 1%. In Europe this morning, stocks are running flat and trading within sectors is very mixed. More so in Asia, it was the banking group among the worst performing sector. After a 132 point downside on the Dow yesterday, futures this morning are pointing to a slight rise on the Dow at the opening bell. Other than Citigroup, most US banks appear set to move higher today.

Concerns continue in Europe surrounding the recent credit downgrade for Greece. Technically speaking, Greece stands only one step away from not qualifying for European Central Bank loans. The ECB had modified its qualifying rules during the credit crisis, but had planned to tighten up within the year. This would leave Greece out in the cold, even without further downgrades. Elsewhere, German business confidence reportedly increased to its highest level in 17 months in December as the global recovery sparked a revival in exports and manufacturing growth. Earlier, the Bank of Japan voted unanimously to keep interest rates at 0.1% but did step up its rhetoric against deflation, saying that it wouldn’t tolerate an inflation level below 0%.

In the US, investors are increasingly betting that the Fed will raise rates sooner than has been admitted. Futures contracts on the Chicago Board of Trade show investors see a 41% chance the Federal Reserve will increase borrowing costs by June, versus 36% odds a month ago. Traders also raised bets on inflation to the most in 16 months after reports on retail sales and industrial production showed the economy picked up. Pimco, the world’s largest bond fund, cut its government debt holdings and boosted cash to the most since Lehman Brothers Holdings collapsed in 2008 amid increasing speculation that interest rates will rise. The spread between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for inflation, widened to 2.31% this week, the most in 16 months.
With the Dollar slowly weakening this morning, commodities have begun to erase early losses. Oil has added on more than a Dollar to approach the $74 mark after its recent slump. Depending somewhat on the Dollar’s performance in the coming week, oil should begin to rally somewhat. Reports have shown factories produced more goods in November than anticipated, signaling fuel demand may rise. Below-normal temperatures, which boosted heating demand last week, are forecast from Chicago to New York in the next two weeks. With expectations rising that demand may begin to pick up, oil could approach the $80 mark in the coming weeks. Gold may have found its footing only slightly below where we expected it. After falling all the way to $1095, gold has taken back about $9 to $1105 in early trading. The Dollar remains higher on the Yen, but has now turned negative against the Pound and Euro.

There are no economic reports scheduled for today. For earnings news, we turn to Carnival Darden Restaurants, Porsche, Rosetta Genomics, and a few others.

Today is a Quadruple Witching day which brings the expiration of stock options, futures, futures options and stock futures and can result in higher levels of volatility in an already volatile year. Most December Quadruple Witching weeks have been positive which could cast an upward spin to the market for the week. Regardless of direction, however, we can expect a day of light volume and volatile trading.