Morning Call

0 CommentsTuesday • January 26, 2010 • by alwaters

Morning Call
January 26, 2010

“Fort Main” Capitalism

Attached with this morning’s report is a copy of our latest Quarterly Report. In it we discuss the tide change we are seeing in the US and in the global economy. The financial crisis has made clear that business as usual is no longer acceptable. Main Street wants the Wall Street giants to be accountable for what led us into the crisis, but some believe that the Massachusetts Senate race also showed that the public may have limits to what it will accept from the Federal government as well.

Capitalism is not dead, but how it is conducted will certainly change. The bias in the past was toward a laissez faire approach to the financial markets. Free market capitalism had become a trademark of the American century. This has now shifted however, due to the realization of the damage that can be done by an unbridled financial industry. Public dismay has been global in nature.

The future landscape is more likely to be what we would call fort main capitalism, to coin a phrase meaning strong hand, or guiding hand capitalism. In the foreseeable future, federal governments will surely add layers of regulation and oversight that will effect how capitalism works. Just how strong this hand will be remains to be seen.

Gold Update

Gold prices have slipped again this morning as China’s implementation of a clampdown on lending lifted the Dollar versus the Euro, undermining bullion’s appeal as an alternative asset. Higher-yielding and commodity-related currencies are sensitive to any hints that China may be putting the brakes on its economy. Gold may find some support here, but we wouldn’t be surprised to see more weakness.
Direction will be determined by the outlook for the Dollar, so clearly the U.S. GDP number on Friday will be very important in that regard.

What to Buy

It is not too late to jump on the Apple bandwagon. Morning Call readers will know that we promoted Apple some weeks ago and the tech giant has come out with stellar numbers. Sales were up 32% and net income rose by nearly 50%. Shares jumped by more tan 2.5% yesterday and will likely top that today.

Interest Rate Outlook

Treasury yields fell slightly as investors move slowly toward safety. Municipal yields were somewhat flat, particularly on the long end of the curve.
The Federal Reserve is said to be considering a new benchmark rate on bank reserves. Look for further discussion on this in “Market Outlook.” This policy move would be similar to what the Bank of England does now and would give the Fed more flexibility in controlling inflation.

Public Finance Update

Legislation currently before Congress may lead traditional tax-credit bonds to be replaced by bonds offering Build America Bond-style direct subsidies to issuers. The Jobs for Main Street Act of 2010 recently approved by the House would allow issuers of some tax-credit bonds to receive a direct, BAB-style subsidy from the federal government.

In New York City, Mayor Michael Bloomberg has blasted the State budget, saying that state level budget cuts would cost New York City $1.3 Billion and trigger 19,000 layoffs.

Market Outlook

The Dow bounced along the flat-line yesterday; finishing fractionally higher at the end of the day. As a whole, it was the energy sector that buoyed the rest of the market, although the major integrated companies like ExxonMobil and Chevron feel slightly during the day. Drillers such as TransOcean and Diamond Offshore were much stronger. Futures this morning are pointing to about a 50 point downside at the opening bell. Most of the high volume trading in the aftermarket, however, is flat to slightly higher with several tech stocks moving higher.

Some trouble is brewing in the Asian markets, which fell by an average of about 2%. Once again, China raised its reserve requirements for banks and three major banks in China have suspended lending to try to cool an overheated economy. To make matters worse in Asia, S&P placed Japan’s sovereign credit rating on negative outlook for its long term obligations. S&P cited its concern regarding Japan’s diminishing economic policy flexibility to deal with its growing debt levels and deflationary pressures.

In Europe this morning, the major indexes are now lower by more than 1%. Despite news that German business confidence rose more than expected to an 18 month high and an uptick in growth seen in the UK, several other factors are weighing on market sentiment. The 0.1% GDP growth in the UK was, in fact, less than the 0.4% most economists had expected. Add to that a report from Fitch Ratings which stated that European governments will need to borrow 2.2 Trillion Euros ($3.1 Trillion) from capital markets in 2010. That figure amounts to 19% of GDP. Banks are among the worst performers in the European markets this morning.

Commodities are showing weakness this morning, despite a mixed performance by the Dollar. Concern in the Eurozone has led the Dollar higher against the Euro and Pound. The Yen has fallen off following the S&P announcement but remains higher against the Dollar thus far. Oil has given up most of a Dollar this morning: still above the $74 mark. Gold had moved higher during the night, but with a shift higher by the Dollar, gold has turned negative by about $5 at $1092.

On the economic calendar today we have some Retail Sales figures, Consumer Confidence, the Budget and Economic Outlook from the Congressional Budget Office, and the IMF World Economic Outlook. On the earnings side, we will hear from Altera, Baker Hughes, Corning, DuPont, EMC, Johnson and Johnson, Nucor, Peabody Energy, McGraw Hill, US Steel, Verizon, Yahoo, and several others. Apple continues to rise after posting a 32% increase in sales and nearly 50% jump in net income.
The financial industry may pay closer attention to tomorrow’s State of the Union address from the President than is usually the case. The tone of the speech in regards to Wall Street will weigh heavily in the marketplace. Word is that the President will call for a three-year freeze on spending for many domestic programs as part of his strategy to rein in the deficit. This could add some support to the Dollar as investors have eagerly awaiting some indication of a plan for addressing the growing debt burden. The White House is also backing a $154 billion jobs bill that passed the House last month.

Another potentially dramatic move may come from the Federal Reserve. While no one expects a rate move out of the two day meeting at the Fed, word is that the Federal Reserve may be considering adopting a new benchmark interest rate to replace the one they’ve used for the last two decades. Officials have said they may replace or supplement the Fed Funds rate with interest paid on excess bank reserves. Policymakers are rightly concerned that the Fed funds rate, at which banks borrow from each other in the overnight market, may fail to meet the new target, damaging their credibility and their ability to control inflation as the economy recovers. Taken together, the measures under consideration by the White House and the Federal Reserve are critical factors that will go a long way toward sustainable recovery.