Morning Call: Underemployment and Economic Data

0 CommentsThursday • September 2, 2010 • by alwaters

“An idea is salvation by imagination.”

Frank Lloyd Wright

Morning Call

September 2, 2010

Off the cuff: The latest numbers show underemployment at well over 18% (28% among workers 18-29). Skilled workers, now serving coffee, cannot be called an economic recovery.

Pick of the Day

Buy MOT: Motorola

Timing is important after Motorola shares climbed nearly 3% yesterday. On a pullback, a buying opportunity exists as Motorola should see some strength in the second half.

We have mentioned Motorola more than once in the past for long term consideration.

There are some structural changes occurring at the company as Motorola says it plans to put $3.5 Billion into the mobile-phone and set-top box units that will be spun off together in the first quarter of next year.

Motorola plans to distribute stock in the spinoff to existing shareholders and provide cash to capitalize it. The Motorola Mobility unit is applying for a separate listing on the New York Stock Exchange.

Activist investor Carl Icahn continues to increase his stake in Motorola and has actively pushed for the split. Icahn bought about 14.8 million shares in the past week for $111 Million. Icahn now owns about 250 million shares, or a 10.7% stake.

Market Update

All it took was news that Manufacturing in the U.S. had expanded more than expected last month and it was off to the races for stocks. The Dow finished 254 points higher, with most of the gains made in the first 90 minutes of trading. Futures this morning indicate a flat opening.

The Institute for Supply Management’s factory index jumped to a three-month high of 56.3 from 55.5 in July. Simply put, readings higher than 50 signal growth.  Economists had actually expected the figure to fall to 52.8, so the news was met with great enthusiasm among investors.

It is important to realize, however, that U.S. manufacturers are benefiting from growth in certain overseas markets. Sustainable growth in China and India will, therefore, be important to the economy here in the US. While manufacturing growth is important, the housing market is still dragging on the broader economy. Construction spending fell twice as much as analysts had expected, led by a decline in homebuilding.

Meanwhile, the auto industry posted its worst August in 28 years, as sales at Toyota, General Motors, and Ford, all declined much worse than analysts had expected. Sales at GM fell 25% from last August, although last year’s numbers were artificially propped up by the “cash for clunkers” program anyway. Sales at Toyota, the world’s largest automaker, tumbled 34%, while Ford’s sales fell 11%.

Asian stocks largely followed Wall Street’s lead, although with a little less exuberance. On average, the major indexes across Asia finished about 1% to the upside. Specific trading was considerably mixed within sectors. Although energy shares were strongest as oil jumped higher.  Positive data from the US, a day after figures from China showing manufacturing growth and improved auto sales, have given Asian stocks a two day rally after a difficult month in August.

Optimism simply failed to carry over into the European markets, however. After opening lower this morning, the major indexes have fought their way back to even about three hours into trading. The early decline could very well have been a strong dose of profit taking after a strong day yesterday. Mining and banking stocks, both big gainers in Europe yesterday, were among those showing the biggest drop this morning.

Traders there are also awaiting another key round of economic data in the US, as well as the European Central Bank meeting in Frankfurt.

Commodities and Currencies

Commodities are strong yet again, with few exceptions. Crude is up a small fraction, hovering just below $74. Oil traders shrugged off another jump in crude inventories in yesterday’s Energy Department report. U.S. crude stockpiles rose by a more than expected 3.4 million barrels last week. Analysts believe the rise in inventories is occurring because of overproduction by U.S. refineries rather than weak demand.

Distillates are somewhat mixed. Natural gas and heating oil are slightly lower, while gasoline has ticked higher. The EIA report showed that gasoline inventories fell more than expected by 212,000 barrels.  As whole, distillates supplies, which include diesel and heating oil, fell by 739,000 barrels.

Most of the agricultural group is also strong today, with the exception of sugar and coffee which have pulled back slightly.

Copper is a half-percent higher this morning but is leveling off a bit after a strong rally yesterday. Industrial metals, as a whole, are mostly higher.

The Dollar has made up some ground on the Pound this morning, but continues to slide versus the Yen and Euro.

Precious Metals and Gemstones

Gold gave back about $10 last night as global equities stole the spotlight. This morning, prices have leveled off and begun to tick higher once again; showing a $2 gain at $1246.

In review, Gold registered an unusually strong performance for August, reaching and hovering near record highs.  Now begins what has historically been gold’s strongest period of the year. In a typical year, gold will gain 2.5% in the month of September.  In fact, gold has gained in 17 of the 21 Septembers since 1989. Of course September is usually horrendous for stocks and yet we have started with a two day rally. In any case, the historical trend may be why the gold exchange-traded fund, GLD, has added almost four tons to its inventory on Tuesday and now holds 1,302.5 tons.

Silver is a few cents higher at about $19.45, while platinum has jumped $10 to the upside at $1541 despite disappointing data from the auto industry, where platinum is used for industrial purposes.

Diamond mining company Stornoway Diamond (TSE:SWY) has announced exploration drilling will begin in the fall at its Renard diamond project in Québec, Canada. In general, many diamond miners have ramped up production as prices have begun rising.

Economy and Earnings

Again, economic data will be watched very closely today. On the calendar, we have the Monster Employment Index, some Productivity and Costs figures, Pending Home Sales, Factory Orders, and the ever critical Initial Jobless Claims.

Two weeks ago, new claims jumped unexpectedly, while last week came in better than economists had predicted. This week, the consensus is for a rise in jobless claims to 475,000 compared to last week’s figure of 473,000.

Earnings news will be coming from Aspen Technology, Canadian Solar, Cascade, Del Monte, H&R Block, Jose Bank, TD BankNorth, Krispy Kreme, Take-Two Interactive Software, and several others.

Washington and Public Finance

Harrisburg Pennsylvania the state capital will reportedly miss a $3.29 Million municipal-bond payment coming due in two weeks. It would be the second-largest general-obligation municipal-bond default this year.

The payment is expected to be covered by its bond insurer. This is considered no small problem, although the municipal market is still considered a relatively safe investment. Out of the $2.8 Trillion municipal-bond market, $886 million of general obligation municipal bonds have been labeled with “credit impairments” this year. Out of that, issuers failed to make payments on only $32 million of the total.

A new study released by the National Bureau of Economic Research shows that, while the BABs program has lowered costs to municipalities, traditional tax-exempt bonds still offer a better after-tax yield to individual investors.

In its new issue bond purchase program for housing finance agencies, the Treasury Department has extended its deadline, through 2011, for converting short-term taxable bonds to long-term, tax-exempt, fixed-rate bonds.

In Summary

It appears obvious that the bulls want to buy, as even modestly good data has led to sharp moves in the stock market. Lately, however, a strong day of buying has served as a warning signal that profit taking will lead markets lower, soon after.

Futures have inched slowly higher throughout the morning, but with Jobless Claims due out before the open, anything could happen. At best, we may see some fluctuation and a flat finish today. The data, however, could change the game considerably. Technically speaking, yesterday’s rally has the indexes at their resistance levels.

It is important to recognize that this is a weak market. With volume as low as it has been, triple digit moves in either direction are not necessarily a true indication of sentiment. Weak markets see a lot of emotional and reactionary trading and are not for the faint of heart.

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, economy, energy, finance, gold, investing, money management, oil, stocks, wall street