Morning Call: GDP and Ben Bernanke

0 CommentsFriday • August 27, 2010 • by alwaters

“Imagination is more important than knowledge.”

Albert Einstein

Morning Call

August 27, 2010

Off the cuff: Taking bets on Bernanke’s comments today. “downside risk..remains committed…prolonged period ..blah blah..” Expect less clarity than a politician…

Buy Puts on SPY: (Oct 16^th 103 Puts)

The US stock indexes are losing steam. The Dow forfeited the 10,000 mark yesterday and the S&P is likely to lose the 1000 level in the near term. The SPY is an exchange traded fund that tracks the S&P as a whole and its shares run roughly 1/10^th of the index level. In other words, an S&P at 1000 is approximately a share price of $100. Buying a Put Option on the SPY is an inexpensive way of playing a down market and to leverage your bet in a much more effective manner than buying shares directly.

October 16 Puts with strike price of 103 are currently trading at $3.42 per contract. The SPY is currently at 105 and is ready to drop.

Market Update

With a 74 point loss yesterday, the Dow gave up the prized 10,000 mark once again. It isn’t, at this point off by much, but the trend is to the downside and that mark may get further from sight in the coming weeks.

Fewer than expected Initial Jobless Claims last week failed to motivate the markets, yesterday. The number new claims for unemployment benefits fell for the first time in four weeks, down 31,000 to 473,000, according the Labor Department.

Futures are running flat ahead of today’s economic data. Of which, economists expect the Commerce Department will revise its estimate for economic growth in the second quarter downward, almost in half, to a 1.4% annual rate from 2.4%. This would be a sharp slowdown from the first quarter, when the economy grew at a 3.7% annual rate, and the current quarter isn’t expected to be much better, with many economists forecasting growth of only 1.7%.

Among the reasons for the slowdown is the fact that government stimulus spending is having a diminishing impact, while a weak housing market is also dragging on the broader economy. At the height of the housing boom, it made up more than 6% of the economy while it now accounts for only 2.5%.

Stocks in Asia started the day to the downside, but managed to recover and finish nearly 1% higher. One exception was in China where the Hang Seng finished fractionally lower.

The Nikkei in Tokyo was bolstered by some speculation surrounding comments expected later today by Prime Minister Naoto Kan, who is expected to address the strength of the yen, which has hurt Japanese exporters. The fact is that there are few options available to combat the rising Yen and the government may instead, focus on fresh stimulus measures.

New data in Japan showed that deflation remained entrenched last month, with the core consumer price index falling 1.1% from the prior year, its 17th straight month of decline.

Stocks dipped at the opening in Europe this morning as well. After threatening to go even lower, stocks have since come up off their lows, but remain about a quarter point lower on the indexes. For the most part, it is the financial sector that is weighing on the broader indexes in Europe, while some energy shares were also weak.

With US GDP numbers coming out today, a bright spot in the UK headlines was news that the British gross domestic product expanded by an upwardly revised 1.2% in the second quarter; just slightly higher than the 1.1% previous estimate.

Commodities and Currencies

Commodities are somewhat mixed this morning, Crude oil and most of the energy group have pulled back slightly. Oil is a few cents lower at just over the $73 mark, while distillates have given up a slightly higher percentage.

The agricultural group is mostly to the upside, with wheat and sugar gaining most of 1% in early trading. Coffee also continues to rise.

In a true gauge of economic sentiment, however, industrial meals have begun to move lower. Losses are minimal at this point, but if today’s GDP numbers are weak the decline may steepen.

The Dollar, primarily due to its safe haven status, is higher across the board this morning, which will also put downward pressure on commodities.

Precious Metals and Gemstones

Gold has fluctuated throughout the morning, after peaking at $1244 last night. Ticking a few cents higher in the morning session, gold is now at $1236. Prices are likely to stay in a range today as a strong Dollar offsets some buying as a hedge against weakness in equities.

Silver is running flat just shy of $19, but has the highest risk of a pullback. Platinum is in a tight range as well, showing a $1 gain today to $1530.

The drama continues over the so-called blood diamonds in Zimbabwe. The World Diamond Council has cleared diamonds from the Marange mines for sale, but U.S.-based Rapaport Diamond Trading Network, one of the largest buyers of diamonds in the nation, announced it would continue to enforce a ban on purchasing Zimbabwean diamonds.

Economy and Earnings

Besides the US Gross Domestic Product numbers, we will also have Consumer Sentiment on tap. In addition, Fed Chairman Ben Bernanke will speak at the Fed’s Economic Symposium in Jackson Hole, Wyoming.

We suspect that the GDP figures will be dragged down by net trade a larger buildup in inventories than originally expected. Given all the soft data out of the US including labor & housing, consumer sentiment is likley to fall below the expected 69.6.

On the earnings side, we will hear from the National Bank of Greece, Sinopec, Tiffany & Company, and just a few others.

Washington and Public Finance

The Bond Buyer Index of 20-year general obligation bonds has fallen to a 43 year low. Yields fell again last week to 3.88%. Some analysts have been long concerned with the formation of a bond bubble as cash continues to fight for position in the fixed income markets.

Elsewhere, Moody’s Investors Service has decided it wants state and local issuers to agree to indemnify the rating agency for any mistakes it may make in rating on municipal bond transactions.

In other words, if Moody’s applies a rating to an issuer’s securities and there is legal suit brought against Moody’s related to the rating, an issuer would have to pay Moody’s legal costs and possible judgments against it. Interesting concept.

In Summary

The two driving factors in today’s market are GDP and the Fed. Should Ben Bernanke’s speech lack any specific or unusual concepts, and US GDP comes in anywhere near the consensus of 1.4%, watch for the Dollar to suffer and risk-correlated trades (like the Euro) to rally.

It is probably too soon to expect anything market moving out of the Fed, but traders will listen closely. This Bernanke’s first opportunity to comment publicly since the announcement that the Federal Reserve would invest proceeds from its holdings of mortgage bonds to buy more long-term Treasury securities.

With an already near-zero target rate and a strong concern for a deflationary setting, even Fed members are divided on the best way to proceed.