A.L. Waters Capital, LLC

Morning Call

0 CommentsFriday • January 29, 2010 • by alwaters

Morning Call
January 29, 2010

Gold Update

The Dollar has been somewhat mixed and the economic outlook has dimmed for many investors. This has left gold in a relatively flat trend recently and that is likely to continue, for now. The support line for gold is somewhere near the $1050 mark and, as such, we still anticipate some downside risk. Back in December, we called for a lengthy sideways trend followed by a sharp rally around the end of the first quarter or early in Q2.
What to Buy

We gave a positive long term outlook for Motorola (MOT) yesterday, while warning of a post earnings pullback. That selling turned out to be a loss of more than 12% yesterday. Shares have leveled off and moving slightly higher in pre-market trading today. We think yesterday’s selling was a bit reactionary and that Motorola will trend slowly higher in the coming weeks.

Interest Rate Outlook

The general consensus for consumer level interest rates is for a slow trend lower. If today’s GDP numbers meet estimates, we could see bump up for equities and, thus, a short term jump in yields in the bond market. That, we believe, will be short-lived and we will see another shift in the coming weeks.

Public Finance Update

Hailing it as a job creation mechanism, President Obama announced that the Federal Railroad Administration will award 31 states with a total of $8 billion of high-speed rail grants. The largest portion of which will go to California, Florida, and the Midwest region.

The municipal market was flat to slightly weaker yesterday, particularly at the long end of the curve, as Illinois came to market with $1 Billion of Build America Bonds.

Meanwhile in Washington, the Senate approved legislation, by a margin of 60-39, to raise the national debt limit by $1.9 Trillion to $14.3 Trillion. The slow moving bill was finally passed after adding a “pay-as-you-go amendment” that will ensure spending increases are offset to ensure budget neutrality. The legislation now moves to the House.

Market Outlook

Investors gave their own opinion of the “State of the Economy” yesterday, the morning after the President gave his State of the Union address. Despite Obama’s well crafted speech, softening the tone somewhat towards the banks and Wall Street, stocks fell sharply yesterday. The Dow finished lower by 115 points after paring some of its mid-day losses. The energy sector was among the worst performers as investor confidence toward economic growth weakened. This morning, futures have hovered near the flat-line throughout the morning. Bank shares and most of the volume trading has been to the downside in pre-market trading in the US.

Stocks fell in Asia last night, with most indexes losing well over 1%. The Nikkei fared worst than the rest with a downside of more than 2%. The major banks in Asia all moved lower in pace with the broader market. Japanese automakers moved higher, perhaps anticipating a benefit from Toyota’s woes. After two days of losses on Toyota shares, the automaker is moving higher in the US pre-market. Options traders, however, continue to pile up Put positions, betting that shares will fall further. Yesterday, Toyota extended its safety recall of millions of its most popular cars to Europe and China. Toyota said it had not yet determined how many vehicles in Europe would be recalled, or when, but media and analysts believe 2 million may be affected on top of some 6 million in North America.

European equities moved higher at the opening this morning, but have begun to give back most of their gains. Most of the volume trading in Europe has been mixed with no clear leaders among the various sectors. European policymakers continue to try and calm fears of a Greek default. Rumors that talks had been held about an EU bailout for Greece have been strongly denied by authorities. Speaking from the economic summit in Davos, Monetary Affairs Commissioner Joaquin Almunia said “Greece will not default. In the euro area, default does not exist.” Greek bonds and credit-default swaps, however, illustrate the fact that investors are starting to doubt that the nation can reduce the largest budget deficit in the European Union without help from outside. Meanwhile, Spanish Finance Minister Elena Salgado will present her plan today for slashing the budget deficit by two-thirds, hoping to avoid the market thrashing Greek debt has received. Some fear that economic turmoil in Spain could be even more threatening to the European monetary union than Greece.

Investor speculation that the world’s central banks will begin to reign in monetary policy, is leading commodities toward their biggest drop in more than a year. Standard & Poor’s GSCI Index of 24 raw materials is down 6.4% this month. Oil is slightly higher this morning, but remains just under the $74 mark. Gold is lower by a little more than $2 at $1082. The short term outlook for gold remains cautious as we expect further downside in the coming weeks. The Dollar is slightly lower against the Pound this morning, but has gained on the Euro and Yen.

Advanced GDP numbers will come out today, as will the Employment Cost Index, the Purchasing Managers Index, and the ever important Consumer Sentiment numbers. For earnings news we turn to Arch Coal, Avery Dennison, Chevron, Dover Corporation, Fortune Brands, Honeywell, NuStar Energy, Paccar, and a few others.

With the markets developing a flat to lower bias recently, we have received more questions regarding the outlook for the coming months. We have warned all along not to read too much into the so-called “green shoots” along the way and that we would see anywhere from a major correction to a complete collapse to past lows. There are now growing signs that we will see at least a correction very soon.

Technically speaking, a look at a chart of the S&P 500 shows a move below the 50 Day moving average and a break from the trend pattern. The volume trend also tells a story as we have seen low volume buying and high volume selling more frequently. Add to that the fact that most factors that have been priced in to share prices, have now peaked. Interest rates are as low as they will go. Enormous stimulus globally is winding down and most central banks are looking at exit strategies. At the corporate level, the automakers received an artificial jump from cash for clunkers and will now have to face reality. The housing market has received as much CPR as policymakers can handle and is still barely breathing. Worst of all, the too-bog-to-fail doctrine is now being applied to sovereign nations as opposed to large corporations.

We have certainly averted the systemic collapse many feared at the height of the financial crisis, but to assume we are past the worst may be unwise.

Morning Call

0 CommentsThursday • January 28, 2010 • by alwaters

Morning Call
January 28, 2010

Gold Update

Gold has firmed up somewhat and the Dollar has eased after President Obama softened his tone on bank restrictions in his State of the Union speech, lifting appetite for risk. The Dollar’s recent run up, particularly against the Euro, has been more of a relative matter versus concerns in the Eurozone regarding Greek and other sovereign debt.

What to Buy

The short side of Toyota (TM) remains a good bet as the automaker continues to struggle with plant shut downs and recalls surrounding a problem with gas pedals in several models. Shares fell by 8% yesterday and are lower by another 2% in pre-market this morning. Motorola (MOT) reports earnings today and will likely show some growth. Analyst estimates may be a little high for now and shares may suffer temporarily. A pullback today, however, will be a buying opportunity for the second quarter.

Public Finance Update

President Obama has proposed a freeze on non-military discretionary spending for three years to save $250 billion over the next decade. The initial reaction might be one of concern for a trickledown effect on public programs, but some state level authorities are seeing a possible benefit. Despite concerns for housing, transportation, and healthcare, other areas will remain a high priority. High-speed rail and other infrastructure projects will continue to receive support and could be very positive for state projects.

Here in Massachusetts, Governor Deval Patrick yesterday released a $28.2 Billion fiscal 2011 budget proposal that includes a plan to restructure up to $300 million of general obligation debt that otherwise would come due in fiscal 2011.

Market Outlook

The momentum has shifted slightly upward as the Dow managed a 41 gain yesterday and futures indicate a modestly higher opening. Sentiment is a little more positive after the Federal Reserve said for the first time the U.S. economy is in a recovery. Fed policy makers yesterday upgraded their economic outlook and pledged to keep interest rates at a record low for an “extended period,” helping offset investor concern this week that China is withdrawing stimulus. Almost 80% of the S&P 500 companies that have reported earnings so far this quarter have beaten analysts’ estimates. Bank shares are moving higher in the pre-market, as well, after President Barack Obama said in his first State of the Union address he isn’t “punishing” financial companies.

Asian equities snapped their losing streak during the night. The major indexes in Asia finished higher by an average of 1.5% although specific trading was somewhat mixed, including the bank stocks. Trading in Europe this morning has brought the indexes to a half percent gain so far. High volume trading in Europe has been mostly to the upside and bank shares have outperformed the market slightly. European confidence in the economic outlook improved for a 10th month in January as reviving global demand helped support exports and bolstered earnings across the 16-nation euro region.

Commodities are mostly higher this morning, despite a mixed performance for the Dollar. Oil has made a modest gain in early trading and is, once again, above the $74 mark. Gold had fallen off during the night, but is recovering this morning with a gain of more than a Dollar at $1088. Natural gas continues to lag behind the other energy commodities; moving a few cents lower again to $5.10. The Dollar has gained ground on the Euro and Yen, but is considerably lower on the Pound.

Another important round of economic data today includes Durable Goods Orders, Initial Jobless Claims, and Money Supply numbers. For earnings news, we turn to 3M, Altria, Amazon.com, American Electric Power, AT&T, Ball Corporation, Bristol- Myers Squib, Celgene, Colgate Palmolive, Consol Energy, Dominion Resources, Eli Lilly, Ford, Lockheed Martin, Microsoft, Motorola, Proctor and Gamble, Raytheon, Time Warner Cable, and a slew of others.

The general tone of the President’s State of the Union speech last night was soft enough to ease some fears among investors that Washington would wage war against the financial sector. Comments from the FOMC after its two day meeting are also being greeted as mostly positive. From the text: “Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating.” The FOMC also maintained its plan to wrap up purchases of agency Mortgage Backed Securities and agency debt by end of the first quarter, ending expectations that it might extend the program.

Morning Call

0 CommentsWednesday • January 27, 2010 • by alwaters

Morning Call
January 27, 2010

Gold Update

The Dollar retreated early in the morning, but is leveling off slightly. As a result, gold has struggled to gain traction. As expected, we have remained in a relatively tight range with gold actually holding well above its resistance level.
India has imported 35-40 tons of gold so far this month which is more than three times the amount at this time last year. Slightly softer prices and, perhaps, anticipating another sharp increase, India has chosen to stock up. China’s gold purchases have also grown 10% from 2008’s record in volume terms, rising 26% by value to equal $13.5 Billion or more.

What to Buy

Big trouble for Toyota, the world’s biggest automaker. Faulty gas pedals have prompted Toyota (TM) to suspend U.S. sales of eight of its most popular models, including the Camry, America’s best-selling car. Last week, Toyota issued a recall for the same eight models involving 2.3 million vehicles. Shares are down by more than 6% in pre-market activity and are likely to slide for several days. Put options are an attractive opportunity.

Interest Rate Outlook

An increase in the use of derivatives to insure against defaults or speculate on government bond prices is spilling over into the corporate debt market, as well. Elsewhere in the credit markets, the extra yield investors demand to own corporate bonds instead of Treasuries held at 164 basis points, yesterday.
The U.S. Federal Open Market Committee is expected to keep its target interest rate for lending between banks unchanged in a statement this afternoon, following its two day meeting. Investors will be paying close attention to any indication that the Fed is considering monetary tightening.

Public Finance Update

Facing all too common fiscal shortfalls, Illinois is about to go to market tomorrow with $1 Billion of taxable Build America Bonds. Ahead of the sale, all three major rating agencies affirmed Illinois’ credit rating. The state’s credit has suffered several rounds of downgrades leaving it among the lowest of states, just above California.

Locally, Moody’s said it has downgraded the rating on the city of Boston Industrial Development Financing Authority’s $33.8 Million senior revenue bonds (Boston Crosstown Center Project) Caa3 from Caa1. The outlook is negative.

In a report released yesterday, the Congressional Budget Office said that Build America Bonds will cost $26 Billion more over the next 10 years than was previously estimated. It is still unclear whether the program will be extended beyond the current year.

Market Outlook

Once again, the Dow finished flat yesterday, giving back its mid-day gains to end the day down by less than 3 points. Futures this morning point to a slightly higher opening, but have proved to be a bit unreliable lately. Generally speaking, sentiment is somewhat negative in the marketplace. Swap trading is rising as concern grows that high deficits in the developed economies will mean trouble ahead. Traders are buying protection against defaults on sovereign debt at more than five times the rate of company bonds. Greece sold 8 billion Euros ($11.3 Billion) of bonds this week at a premium to yields on its outstanding securities in the first issue since the Greece was downgraded last month by Standard & Poor’s, Moody’s and Fitch. Portugal also faces a budget shortfall that’s more than twice the European Union’s limit. Swap activity has also increased on the debt of Italy and Spain.

Stocks have slipped globally as investors are concerned that economic growth will weaken as the Federal Reserve and the European Central Bank curb stimulus measures. Many economists believe that central banks in China, India, Brazil and Australia will begin to push up borrowing costs. Asian stocks fell for the eighth straight day, the longest losing streak since May of 2005. The major indexes in Asia averaged a downside of about 1%. The financial sector was a little more mixed after several days of losing ground. In Europe this morning, stocks are lower by an average of 0.5%. With few exceptions, European banks are underperforming the market with losses of 1-4% at mid-day. It is worth noting that the indexes have come up off of their earlier lows. In the pre-market this morning, US banks are prepared to move slightly higher at the opening bell.

The Dollar has fallen off against all of the major currencies this morning, which has added some support to commodities. Economic pessimism, however, has restrained any real commodity rally. Oil is up marginally at just under the $75 mark. Gold is hovering along, down a few cents at $1096. Natural Gas is the lone energy commodity that is lower; falling by a few cents at $5.43.

On the economic calendar today, we have Mortgage Applications, New Housing Sales, and the EIA Petroleum Status Report. The Federal Reserve also ends its two day meeting on interest rates and the President will give his State of the Union address tonight. Both the Fed and President will be watched carefully for tone more than substance as investors seek clues to what to expect in the near future. For earnings, we will hear from Abbott, Allegheny Technologies, Caterpillar, Citrix Systems, ConocoPhillips, General Dynamics, Hess, Murphy Oil Corporation, Norfolk Southern, Qualcomm, Rockwell, Boeing, Valero, and several others. With some exceptions, corporate earnings have been a little disappointing and today’s list will certainly be a driving force in the markets today.

The President’s State of the Union address will be watched closely by a public looking for hope and a financial sector looking for warning signs. Two expected topics in tonight’s speech will be jobs and a spending freeze to address the burgeoning deficit. According to the Congressional Budget Office, the deficit will come in at $1.35 Trillion in 2010, a slight drop from the $1.4 Trillion deficit in 2009, but still high enough to make the budget outlook ‘bleak.’ Economic growth will remain ‘muted’ for several years and unemployment won’t return to 5% until the middle of the decade. The aggregate deficit projection for the next decade is $6 Trillion.