Morning Call: the Economy and Politics

0 CommentsWednesday • September 1, 2010 • by alwaters

“There are two ways of spreading light: to be the candle or the mirror that reflects it.”

Edith Wharton

Morning Call

September 1, 2010

Off the cuff: Is Washington above tweaking data and selective reporting of facts for the sake of political motives?
Pick of the Day

Buy YCS: ProShares Ultra-Short Yen

The Yen has been on a record run lately on the back of its safety status, which often gives it the advantage even to the US Dollar. The Japanese economy, however, may have a difficult road ahead and the Central Bank has a limited capacity to be able to correct economic turbulence.

Simply put, the Yen is due for a correction as it has been considerably overheated lately.

The currency market, itself, is not for the meek, as the volume of trading is staggering. Currency trading volume has soared to $4 Trillion a day, according to data released by the Bank for International Settlements. Market turnover was 20% higher in April 2010 than in April 2007.

A currency based ETF(exchange traded fund) is a easier way to play the field in foreign exchange. YCS is a double short fund which seeks to leverage downward movement on the Yen versus the Dollar at twice (200%) the inverse of daily price movements.

Market Update

Some buying in several consumer and banking stocks propped up the broader averages yesterday, helping to offset weakness in the technology sector and energy. All told, the Dow fluctuated throughout the day and finished the session just 5 points to the upside. The S&P saw even less movement and the NADAQ actually feel into negative territory. Futures have been steadily climbing this morning after a report showing China’s manufacturing activity picked up in August. Economists had hoped for at least a flat performance in the numbers, so the better-than-expected news gave investors hope that the economy in China was moderating rather than collapsing.

Bank shares are continuing to see some buying in the pre-market today, while technology stocks appear ready to bounce up from yesterday’s lows.

So, on the first day of a historically difficult month for stocks, the Asian equity markets performed rather well. The Nikkei and Korean Topix averaged about a 1% gain, while the upside was slightly less in China. Banks and technology stocks were mostly mixed, while several industrial stocks pulled up the averages.

In addition to positive news in China, another report also showed that Australia’s economy grew at the fastest pace in three years last quarter. The economy grew by a seasonally adjusted 1.2% from the first quarter, and 3.3% from the prior year. Higher household spending and increased mining activity boosted the GDP numbers, while also raising expectations the central bank will need to raise interest rates again.

All of this also slowed some of the momentum for the Yen, which has been an issue for policymakers in Japan. The yen remains, however, close to its 15 year high against the Dollar.

After some fluctuation in the early part of the session, European stocks have begun to gain some upward momentum. In London, the FTSE is the strongest among the European exchanges with a 1% gain, thus far. Buying activity is well distributed among all sectors, although bank shares are among the strongest.

The German DAX is barely in positive territory after a report showed retail sales in Germany fell 0.3% in July. Economists expected to see an increase of 0.5%.

The Euro has also made strong gains this morning but may have reached its peak this week, according to foreign exchange analysts. The Pound, on the other hand, is particularly weak after word that U.K. manufacturing growth fell to a nine-month low in August.

Commodities and Currencies

With a little dose of economic optimism, one might expect to see an uptick in commodities, and that is the case this morning. One of the strongest indicators of sentiment is crude oil prices, which have jumped almost 1% higher to the mid-$72 level.

Yesterday a report from the American Petroleum Institute showed crude-oil inventories increased 4.7 million barrels last week, much higher than the 1.9 million increase analysts had expected. Inventories of gasoline dropped 899,000 barrels, while stockpiles of distillates fell 1.8 million. The more closely watched Department of Energy data is due today.

There is still no end in sight for the natural gas slide. After giving up another 1% this morning, natural gas prices have fallen well below the $4 mark.

Almost without exception, food commodities are comfortably higher today. Wheat and Sugar are among the strong gainers with an upside of about 1.5% already.

Industrial metals have also jumped considerably. Copper, as an example, has gained more than 2% in the early hours and may have more room to move higher. Zinc and Nickel are keeping pace with copper, while aluminum has gained more modest 0.5%. A sign of life in the Chinese manufacturing numbers is a big deal for metals as China is the world’s largest user of metals.

The Dollar is weaker across the board this morning; seeing its biggest decline against the Euro this morning, where it has given up nearly 1%.

Precious Metals and Gemstones

Gold made a strong double digit move last night and continues to trend higher this morning. Gaining another $5 in early trading, gold has leveled off at $1252. Rising industrial demand and a much weaker Dollar has contributed to the re-emergence of gold as an investment of choice. Traders think there is plenty of room to move from here, as he most widely held option on gold futures traded in New York is for $1,500 an ounce by December.

Silver also soared along with gold last night and has settle in at the mid-$19 range. Platinum has added another $10 as well this morning, to move above the $1530 mark once again.

In the world of diamonds and gemstones, India is emerging as a strong contender. Demand revival from the traditional markets of the US and Europe is set to spur export growth, ensuring that the value of exports of gems and jewelry expands by around 25% this year.
Demand from the United States, which accounts for more than half of India’s gems and jewelry exports, has been steady and is expected to be stronger in the coming months. Gems and jewelry exports exceeded $28 Billion in 2009-10, up from $24.4 Billion for 2008-09.

Economy and Earnings

Another busy day for economic data includes Mortgage Applications, Job Cut Announcements, New Motor Vehicle Sales, Cosntruction Spending, and the Purchasing Managers Index.

Economists expect to see a slight uptick in jobs, but a drop inmanufacturing in todays numbers.

On the earnings side, we will hear from Borders Group, Brown-Forman, Collective Brands, Express, Genesco, and a relatively small list of other companies.

Washington and Public Finance

According to new data, tax revenues for states across the country increased by 2.2% in the second quarter, the second consecutive quarterly increase. Sales tax revenues were particularly strong, with a 5.9% increase compared to last year. Revenues still do remain sharply lower than prerecession levels.

Improving revenues and record low borrowing costs haven’t spurred a flurry of activity among issuers, however, as total municipal volume last month fell 25.1% from a year ago. Both the taxable and tax-exempt markets saw a sharp decline.

Elsewhere, Moody’s Rating Service says it sees trouble on the weakening balance sheets of public universities, as state funding as a share of revenues continues to decline.
In Summary

With mid-term elections looming in the US, the economy is likely to become increasingly political. President Obama, last night, tried to steer the general focus away from wars in Iraq and Afghanistan to the economic battlefield at home.

Having just oassed the biggest financial reform in 70 years, Congress now faces the public to see how they will express their view of the results with their vote.

Among the more important races, Republicans will be jockeying for the powerful chairmanship of the House financial services committee held by Barney Frank, the Massachusetts Democrat. Frank’s name is on the reform bill and he was among the more vocal about it. Polls show control of the House of Representatives is too close to call while the Democrats are expected to retain control of the Senate.

In a market that has been keenly sensitive to comments from policymakers, daily data, and the slightest anticipation of change, a political war of words could lead to volatility in the stock markets as investors ponder what is next.

The assembled information disseminated in the Morning Call is for information purposes only, and is neither a solicitation to buy nor an offer to sell securities. All assembled information within the Morning Call is subject to change without notice. The assembled information within Morning Call is based on information believed to be reliable as of the date of the report but no representation, expressed or implied, is made as to its accuracy, completeness or correctness.

Forward Looking Statements:

Information in the Morning Call will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. All readers are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance or portfolio performance is no guarantee of future price appreciation or performance.

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

Tagged with: banks, bonds, commodities, economics, economy, energy, finance, gold, investing, money management, oil, public finance, stocks, wall street