Morning Call

0 CommentsFriday • February 5, 2010 • by alwaters

“I have no special talent. I am only passionately curious.”

Albert Einstein

Morning Call
February 5, 2010

Gold Update

There is a safe haven bias in the global markets which, at the moment, is benefitting the Dollar considerably. As such, gold has pulled back close to the $1050 mark that we consider to be an important support level. There is a general bias toward selling in essentially all asset classes. We will watch closely to see if gold can stabilize itself despite increasingly negative sentiment in the marketplace. This is an important price level which will determine the trend over the next several weeks.

What to Buy

There really is no positive movement anywhere in the equity markets for now. A put option on the S&P 500 ETF (SPY) is the most attractive bet to profit from what is likely to be a prolonged pullback for stocks. Individual puts on bank shares is also very likely to pay off in the coming weeks.

Public Finance Update

As details from the President’s budget proposal become more clear, the costs of the Build America Bonds program may not cost as much as first thought. Municipalities have issued $71.7 billion in BABs since the program launched last year. The question is whether taxes recouped by the federal government will offset the cost of the subsidy.

In other news, Moody’s Investors Service yesterday downgraded bonds sold to finance the New York Mets Major League Baseball stadium to junk status. Moody’s also assigned a negative outlook to Hawaii’s Aa2 general obligation bond rating.

Market Outlook

For all intents and purposes, the market correction we have been expecting may, in fact, be underway. The Dow made a slow and steady decline toward a 268 point loss yesterday. In terms of percentage loss, the MASDAQ and S&P fared slightly worse. This morning, after trying to hold on in the early hours, futures have begun to decline once again. The primary concerns weighing on sentiment are sovereign debt in Europe and unemployment in the US. The cost of credit-default swap insurance against a default by Spain, Greece and Portugal rose to a record yesterday, amid concerns that huge deficits in these member nations will threaten the EU and the Euro. In the US, Initial Jobless Claims rose unexpectedly last week to 480,000. Further details of the job market are on the agenda today and are unlikely to brighten the mood.

Stocks fell dramatically in Asia last night as well, with a downside of about 3% for both the Nikkei and Hang Seng indexes. The selling was widespread and included the banks and industrial stocks. Stocks in Europe this morning fell sharply at the opening bell; down by an average of 2% across the continent. Understandably, bank shares in Europe, along with some industrial shares, are among the worse with losses averaging 4-5%. Most bank shares in the US feel by about 5% yesterday and are lower by 1-2% already in today’s pre-market.

As one would expect with economic sentiment weakening, commodities are mostly lower this morning. Oil has fallen just below the $73 mark; a loss of about 0.5% on the session. Crude stockpiles showed an unexpected increase this week and this, along with concerns for the economy, has weighed on market prices. Gold has fallen another $7 in early trading to $1055. Concerns for the Euro and the economy as a whole has investors running to safety which, thus far, has brought the Dollar index higher. The Dollar is higher against all of the major currencies this morning and has thus drawn attention from gold.

The economic data coming out today includes Average Weekly Hours and Earnings, Non-Farm Payroll, the Unemployment Rate, and Consumer Credit Outstanding. Most expect little movement in the unemployment rate from the 10% level but the slightest tick in either direction could lead to a strong market reaction. For earning today, we turn to Aetna, Allegheny Energy, Kimball International, Pinnacle Entertainment, Simon Property Group, Tyson Foods, and a few others.

The banks remain at center stage with doubts about the stability of their balance sheets and public furor over bonus payouts. Now the scrutiny over behind the scenes deal making during the early stages of the financial crisis begins. New York Attorney General Andrew Cuomo filed a civil fraud case yesterday against former Bank of America CEO Ken Lewis as well as CFO Joe Price and against BofA itself. The lawsuit, if nothing else, will likely give the public an inside look at what went on behind the scenes during the crisis.

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

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