Morning Call

0 CommentsThursday • February 18, 2010 • by alwaters

“Advice is judged by results, not intentions.”
to say something”
Cicero
Plato

Morning Call
February 18, 2010

Gold Update

Gold lost some momentum in the early morning hours today as the Dollar moved higher against the Pound and Euro. News of the US’s first budget deficit since 1993 and ongoing concerns in Greece and other Euro nations has weighed heavily on the local currencies.

Another development with potential impact on the gold market is news that the International Monetary Fund will shortly begin selling 191.3 metric tons of gold in the open market under a program launched last year to boost its resources. The IMF said the sales “will be conducted in a phased manner over time.” The fund also kept open the possibility that central banks could still purchase some of the gold directly. So far, India — the world’s biggest consumer of gold — Mauritius and Sri Lanka have purchased a total of 212 metric tons of gold from the IMF.
India’s central bank was the biggest purchaser, snapping up 200 metric tons of the IMF gold over a period of two weeks in October, increasing its gold holdings to the tenth largest among central banks. Depending on who is buying and what the sentiment is at the time, the IMF sale could have an impact. Some analysts believe that the announcement took some wind out of the gold rally, but dismissed concerns that the open-market sales would weigh on prices.

Hot Stocks

The current trend of strength in consumer stocks and, for the most part, the energy sector should remain strong in the coming months. If you back this up with the choice of a stock with a good dividend, you should have a winning trade. In the energy sector, several of the large integrated companies carry a respectable dividend. Chevron (CVX) has held up rather well and has a dividend yield of 3.75%, while BP (BP) includes a yield of 6.15%. In the consumer sector, Coca-Cola (KO) has been on a steady upswing and offers a dividend of just over 3%.

Public Finance Update

The economic downturn is forcing debt-laden cities, towns and smaller taxing districts throughout the U.S. to consider using Chapter 9. As revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds. In Harrisburg, Pennsylvania, the state capital, a March 1st deadline is looming on a payment of $2 Million out of the $68 million due this year for the financing of an incinerator plant. The facility has about $288 Million in overall debt. Some say bankruptcy is inevitable. Last month, Las Vegas Monorail Company, a nonprofit with over $600 Million in municipal bonds, filed for Chapter 11.

In Washington, The Obama administration is facing growing pressure from lawmakers and housing advocates to retool its troubled mortgage relief program a year after its debut as the housing crisis continues to deepen and spreads to more creditworthy borrowers.
The $75 billion program pays lenders to modify the mortgages of troubled borrowers, typically lowering their payments by about $500 a month. Only a small portion of mortgagees have been able to make these changes permanent, however.

In California, the Los Angeles Unified School District, the nation’s second-largest after New York, plans to sell about $1.75 Billion of bonds today to fund what is described as the largest school construction program in the U.S.
More than two-thirds of the offering will be taxable Build America Bonds, totaling $1.25 Billion; making it the largest such sale since the Bay Area Toll Authority sold $1.3 Billion in October.

Market Outlook

The equity markets have flattened out ahead of today’s release of Initial Jobless Claims in the US. In a somewhat volatile day yesterday, the Dow finished higher by only 40 points. This morning, futures have fluctuated near even throughout the morning. Consumer stocks continue to be strong, but the energy index as the Dollar began to rally. Thus far, it does appear that US banks will at least start the day in positive territory.

Overnight in Asia, stocks were also somewhat mixed. The Nikkei climbed almost 30 points higher, but the Hang Seng pulled back by about a half percent. Trading within sectors was very selective as well, with most high volume trades staying close to even on the day.

In Europe this morning, stocks are flat to slightly higher as investors may be riding it out until the jobless numbers come in here in the US. Also weighing on sentiment is word that the UK posted its first budget deficit since 1993 when records began. Government spending exceeded revenue by 4.3 Billion Pounds ($6.7 Billion) last month, although economists had forecasted an optimistic 2.6 Billion-Pound surplus. This news has hurt both the Pound and Euro and given some relative strength to the Dollar. Despite concerns, most European banks have outperformed the market so far today.

The Dollar rally has had a negative effect on commodities this morning, which are mostly lower. Oil has lost a half Dollar to fall just below the $77 mark. Although gold reached a high above $1125 last night, it has since lost momentum; falling sharply to $1106 before leveling off. The Dollar has given back some of its gains against the Yen, but is much stronger on the Pound and Euro.

Besides Initial Jobless Claims, other economic data due today includes the Producer Price Index, Leading Economic Indicators, the Manufacturing Diffusion Index. Earnings reports today will be coming from Apache, Barrick Gold, Avista, CBS Corporation, Dell, Goodyear, Hormel Foods, Intuit, MGM Mirage, Noble Energy, WalMart, and several others.

Today’s’ Initial Jobless Claims will be a determining factor in the direction of the market today. After a slight drop in the Unemployment Rate last week, today’s numbers will set expectations of whether the employment situation will continue to improve or stagnate. Regardless of today’s numbers, we believe that there will still be several bumps in the road ahead.