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.

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

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