Morning Call: Gold, Coal, and Jobs

0 CommentsFriday • September 3, 2010 • by alwaters

“Well begun is half done.”

Aristotle

Morning Call

September 3, 2010

Off the cuff: Unemployment has not peaked but bottomed. Double digits again before it gets better.
Investment Idea of the Day

Buy YZH: Yanzhou Coal Mining

The coal industry should get some renewed attention in the coming months. China has been moving to consolidate smaller coal mines into 13 large-scale bases nationwide by 2015. The government has also issued pricing policies ordering companies to maintain stable prices.

While this may limit the upside for Chinese coal companies, stability can also be a good thing as companies can plan accordingly.

Yanzhou Coal Mining, engaged in the mining, preparation and sale of coal, reported a 34% increase in first-half net profit to 2.72 Billion Yuan ($397.5 Million), compared to 2.03 Billion Yuan in the same period last year. Revenue increased 65% during the first half to 15.22 Billion Yuan from 9.25 Billion Yuan a year earlier.

Yanzhou plans to increase its coal output in the next five years, and is exploring acquisition opportunities in both domestic and overseas markets, including in Australia.

Shares are trading at a much lower multiple than its peers and should gain momentum in the second half.

Global Markets

It took some end of day buying to lift the Dow to a 50 point gain yesterday, after staying close to even most of the session. The S&P, NASDAQ, and Russell 2000 all actually outperformed the Dow with an average gain of 1%. Consumer stocks and transportation boosted the broader indexes, although all sectors finished in positive territory. While futures this morning indicate a slight uptick at the opening bell, some stocks, particularly among the banks, are seeing some profit taking in the pre-market.

Economists are expecting a shaky employment report today.  The consensus is that today’s numbers will show private employers hired about 40,000 workers, but total U.S. employment probably dropped for a third month in a row. The unemployment rate is expected to climb to 9.6% from 9.5%.

A separate report today is also expected to show that services, the largest part of the economy, is beginning to slow from its recent expansion.

Yesterday’s data actually turned out better than expected. Pending sales of existing homes had reached a record low in the previous report, but unexpectedly rose 5.2% in July. Initial jobless claims also decreased by 6,000 to 472,000 last week, while continuing claims fell 23,000 to 4.46 Million.

The upward momentum for stocks carried over into Asia as well, where the indexes all rose by 0.5%. Industrial and, to a lesser degree, technology stocks were among the leaders.

After a slow start, European markets have begun to rise with the indexes now higher by at least 0.5% mid-morning. Banks are having a tough morning, but technology and industrial stocks are seeing some positive movement. Positive economic data from the US and China has traders relatively optimistic, for now, but this morning’s employment data from the US will drive stocks later in the day. Carmakers, such as Daimler and Volkswagen are also on the rise.

Energy and Commodities

Commodities are mostly higher this morning, although the upward trend has begun to slow. The energy sector, for one, has flattened out after some strength during the week. Crude oil is a half-Dollar lower in early trading to settle into the mid-$74 range. Inventories have been stubbornly high, but steady prices have also led to increased refinery production, so most oil traders are not concerned about high stockpiles.

Meanwhile, the national average for a gallon of gasoline is $2.676. That marks a 5 cent decrease from a month ago, but prices remain 7.4 cents higher than a year ago. Tight consumer budgets essentially erased what should have been the peak season for gasoline, which means we may see some downward pressure in the coming months.

Natural gas prices fell after inventories increased by 54 billion cubic feet to about 3.106 trillion cubic feet last week. This morning, prices have stabilized and ticked a few cents higher.

The agricultural group is mostly higher, while industrial metals are slightly lower. If today’s economic data satisfies commodity traders, we should see a move to the upside among base metals.

Global Currencies

The Dollar is slightly higher on the Yen at about 84.46, although many believe Japanese policymakers may have a hard time intervening in the record rise of the Yen globally. The Yen remains near a 15 year high as it has become the center of attention in a flight to safety.

Yosuke Kondo, parliamentary secretary for the Ministry of Economy, Trade and Industry in Japan, described the current range of the Dollar/Yen trade as “abnormal”, but he also said he doubts the Bank of Japan can do much about it on its own. Typically, a coordinated action in the market place is more effective in manipulating a currency exchange.

It is a major concern for Japanese corporations; particularly exporters. A survey by the ministry showed two-thirds of Japanese companies expect the strong Yen to cut into profits and 40% of those surveyed said they will shift production overseas if the Yen remains at present levels.

The Dollar is lower on the Euro once again, but has fluctuated versus the Pound throughout the morning.

Gold Prices and Precious Metals

Gold prices have stayed rather level in the early hours. Showing an upside of $1 on the morning session, gold is presently trading at $1252. Gold gained 5.6% last month, the biggest increase since April, and September is typically a positive month for the precious metal as physical demand is typically high. Gold will likely be affected by today’s economic data as well, heading much higher if the numbers turn out to be any worse than expected.

Silver has run flat all morning and will have an opposite reaction from gold to the economic news. Whereas gold could benefit from a negative report as a safe haven, silver could fall drastically in the same scenario.

Platinum has made a strong gain in the early part of the day; gaining $18, already, to reach $1561.

In South Africa, mining giant Xstrata is expected to make an investment decision on the Garatau project, operated by platinum developer Nkwe Platinum, by the end of the year. Xstrata holds the option to acquire a 50% equity stake in the 14-million ounce platinum group metals (PGM) Garatau project by fully funding the development cost of the project.

Economy and Earnings

A full round of employment data will be out early this morning. Average Weekly Hours and Earnings, Non-Farm Payroll, and the Unemployment Rate, will all be released before the opening bell. Also on the calendar is the Non-Manufacturing Index.

Economists predict that today’s numbers will show private employers hired about 40,000 workers, but total U.S. employment fell for a third consecutive month. The unemployment rate is expected to climb to 9.6% from 9.5%.

A separate report today is also expected to show that services, the largest part of the economy, is beginning to slow from its recent expansion.

A relatively light earnings calendar includes Campbell Soup, OceanFreight, Highlands Pacific Lumber, a very few others.

Washington Regulation

Municipal advisers will now have to register with The Securities and Exchange Commission by October 1^st according to a newly adopted rule. The rule is part of complying with the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act.

The new rule will apply to all municipal advisers providing advice to state and local governments and entities involved in the issuance of municipal securities. This would include any advice on derivatives, investment strategies, or the issuance of municipal securities. The definition specifically includes financial advisers, third-party marketers, placement agents, solicitors, finders, and swap advisers. The SEC estimates about 1,000 municipal advisers will be required to register.

In Summary

Trading volume will continue to be relatively light and price movements will, therefore, be less indicative of an actual trend. We could see some volatility, particularly if the employment data misses the mark in either direction.

The fact is, that the equity markets have been a bit emotional and reactionary to data anyway. A tick up in the housing market was taken as a relief, but it is important to realize that this was a bounce off of a record low the prior month.

Jobless Claims have missed expectations in both directions in past weeks, but the moving average is showing a painfully slow downward trend in weekly filings. That is just fine, but it does mean a long road ahead to recovery.

If economists are correct, we could see an uptick in the overall unemployment rate which has been holding steady at 9.5%. The possibility of this number rising above 10% again appears all too likely.

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.

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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, coal, commodities, economics, economy, energy, finance, gold, investing, money management, oil, public finance, stocks, wall street