A.L. Waters Capital, LLC

Morning Call

0 CommentsMonday • February 8, 2010 • by alwaters

“Wisdom begins in wonder.”

Plato

Morning Call
February 8, 2010

Gold Update

The ebb and flow between gold and the Dollar trade continues. The fact is that much of the Dollars occasional strength is mostly relative to weakness elsewhere. The case for gold, however, is relative to all global currencies and, as such, will reach new highs throughout the year as currencies settle their relative differences. A sharp rally during the early hours brought gold higher by more than $10, but momentum has shifted and brought gold back toward even on the session.

What to Buy

We see a good long term prospect in Walter Energy (WLT). Walter is a producer and exporter of United States metallurgical coal for the global steel industry. Although the broader economic prospects remain difficult, Walter is currently trading at a strong value and offers great upside potential as the year progresses.

Interest Rates

Corporate borrowing costs are rising at the fastest pace in more than two months on concern that worsening government finances, particularly in Europe, will slow the global economy and make it harder for companies to meet debt payments.
The extra yield investors demand to own corporate bonds instead of government securities widened 4 basis points last week to 169 basis points.
Elsewhere in credit markets, emerging-market bond spreads are the widest since November, the cost to insure corporate debt against default is near the highest in two months.

Mortgage rates, across all maturities, fell slightly last week.

Public Finance Update

Leaders at G7 meeting failed to reach an agreement on financial regulation. Treasury Secretary Timothy Geithner said there was agreement on general principles for revamping financial regulation, noting it should be done “in ways that don’t undermine prospects for recovery.” G-7 leaders said they would continue providing support to their economies until the financial recovery has taken firm hold.
States and municipalities in the Northeast sold more than $115 Billion of debt in 2009, a 3.3% increase above the region’s issuance in 2008. Taxable Build America Bonds helped boost volume in 2009. Expensive liquidity facilities made it difficult for issuers to use short-term debt. Variable-rate debt with a short put dropped 73.9%. Variable-rate debt with no put increased by a whopping 260.6%.

Market Outlook

The Dow fought back to a 10 point gain on Friday, but futures are set to move equally lower this morning. The entire market is noticeably indecisive in the early hours, as most sectors are mixed in pre-market trading. Equities, commodities, and currencies have all shifted during the morning. At the end of the trading day in Asia, most major indexes were lower by about 1%; slightly less in China. In high volume trades in Asia, bank shares fell, as did technology and industrial stocks. A similar story in Europe this morning, as stocks have given back early gains to fall slightly to the downside at mid-day. Here too, the financial sector is weighing down the broader averages, while some technology and healthcare shares are rising. In Europe, sentiment is largely negative from ongoing concerns for sovereign debt. Deficits in Greece, Portugal and Spain continue to haunt investors as several EU nations struggle to cut their budgets.

Commodities are mostly higher this morning, although many have pared earlier gains. Oil is up by a small fraction at slightly higher than $71 thus far. Gold jumped sharply higher during the night but has lost its momentum as the morning progressed; showing a Dollar gain at $1067 on the session. The Dollar has shifted higher against the major currencies, which has taken some wind from the sails of the gold trade.

With the calendar essentially void of economic data, investors will look for clues in today’s earnings reports. Scheduled today are reports from CVS Caremark, Electronic Arts, Harman International Industries, Hartford Financial, Hasbro, Loews, Lorillard, Vulcan Materials, and a few others.

Although the unemployment rate fell from 10% to 9.7% in the latest report, analysts are concerned that the momentum will stall later in the year. Small businesses, which have typically led the way out of recession, continue to cut capital spending and dismiss workers, eliminating 3,000 jobs in January. Much of the improvement we have seen in the U.S. economy has been stimulated by government programs which have helped larger companies without trickling through to smaller ones, particularly those in the housing and construction industries, which will be critical toward sustainable recovery.

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

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