Archive for the ‘Morning Call: Daily Analysis of the Global Markets and Economy’ Category
Morning Call: Gold, Coal, and Jobs
“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 1st 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.
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.
Morning Call: Underemployment and Economic Data
“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.
Morning Call: the Economy and Politics
“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.
Market Data
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