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.

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.

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.

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.

Louis Pasteur

Morning Call

August 31, 2010

Off the cuff: How is it that a consumer that is burdened with debt will have trouble getting more credit and will pay more for it, but the government is rewarding for the same with low rates and an ample supply of lenders?

Pick of the Day

Buy CPB: Campbell Soup Company

Despite the name, Campbell Soup Company is actually rather diverse in its offerings. The company is active in sauces, beverages and various snack products. It also completed an acquisition of artisan bread-maker Ecce Panis, which it rolled into its Pepperidge Farms Bakery Division.

Shares carry a 3% yield and have seen a recent pullback, which creates a buying opportunity. The company also reports earnings on Friday. Call options on the stock have soared in the past few days, suggesting a strong belief in the options pits that this stock is heading higher.

Market Update

It was a slow and steady decline for the Dow yesterday, which finished lower by 140 points with banks and energy shares among the worst performers. Yesterday’s data showed personal income growth failed to keep pace with the biggest increase in consumer spending in about four months. Spending increased 0.4% in July, while personal income was only up 0.2%. The combination of the two, of course, means that the savings rate for U.S. households fell in July to the lowest level in three months. The savings rate fell to 5.9% from 6.2% in June, which had been the highest level in a year. The savings rate had averaged only 2.1% in 2007, before the recession. Today we get to see where consumer confidence stands, which will give some insight into how spending will develop in the near term.

Stocks in Asia followed Wall Street’s lead with a sharp selloff, led by a 3.55% drop for the Nikkei; it’s biggest decline in three months. Concerns have grown over a stumbling US economy and investors also doubt whether stimulus measures announced by Prime Minister Naoto Kan and the Bank of Japan will slow appreciation on the yen and foster economic growth.

On a more positive note, India’s economy grew 8.8% in the second quarter from the prior year, after an 8.6% increase in the previous quarter. This is the fastest pace in the past 2 ½ years and may prompt the central bank to step up tightening measures to cool down inflation. This, while the US and other developed economies scramble to avoid dipping back into recession.

Stocks in Europe opened sharply lower, and have since fluctuated slightly, with the major indexes now lower by about 1%. The financial sector is underperforming considerably, while a few technology shares are actually in positive territory. As examples, Allied Irish Banks plummeted 6.4% in Dublin and Barclays fell 2.9% in London. Greek lender Alpha Bank showed a 62% decline in profit as losses on bad loans continued to increase; shares are down 2.2%. A combination of economic worries and a few less than stellar earnings reports have investors increasingly pessimistic.

Business and consumer confidence, however, continued to rise in the 16-nation Eurozone in August, although at a slower level than in July. According to the latest data, the UK recorded the biggest gain of 1.5 on the Economic Sentiment Indicator, which calculates the morale of member countries when it comes to future economic performance. Germany posted the second largest increase of 1.1 but still leads on the confidence scale.

Commodities and Currencies

Commodities are sliding to the downside today as confidence in global demand erodes. Crude oil has turned sharply lower, giving up more than $1 to level off in the mid-$73 range. If anything, oil should be even lower based on demand and inventory levels, but oil traders have been essentially following the lead of the stock market to gauge the economic outlook.

Across the board, distillates fell by most of 1%. Natural Gas is the exception with a sudden jump of nearly 1.5% in the early hours. This may be more of a technical bounce than anything else as prices are very close to their 52 week low; set just last week. Inventories remain too high and analysts forecast very little upside for natural gas for a year or more.

Gasoline prices have been doing something unusual for this time of the year — dropping or remaining stable across the country. The decline likely will mean continued lower prices at the pump leading up to Labor Day weekend, a time when prices usually climb.

Agricultural commodities are all modestly lower, while industrial metals, including copper, have fallen by nearly 2%.

The Dollar is mostly lower this morning with gains only on the Pound. Meanwhile, the Yen and Euro continue to strengthen.

Precious Metals and Gemstones

Gold is basically stuck in a tight range once again, showing a loss of more than $2 this morning at $1234.  Bullion holding funds have been accumulating the precious metal, which has helped support the price level. Such funds are reportedly holding more than 2,075 metric tons, within 0.1% of the all-time high. This is as a whole, however, as it is worth noting that some of the largest holders in the gold trusts, including Soros Fund Management and Astor Asset Management, have recently reduced their positions in gold.

Silver is just slightly lower at $18.90 while platinum has tumbled $14 to $1509.

In the world of diamonds, BHP’s diamond division reported revenues increased 42% to $1.3 Billion and earnings soared 234% to $485 Million.

Diamonds also played a major role in a turnaround for the economy in Botswana which shrank 3.7% last year but, according to the IMF, grew 8.4% this year due to higher diamond demand.

Economy and Earnings

The Chicago Purchasing Manager Index, the Case Shiller Home Price Index, and Consumer Confidence are on the calendar today.

Economists expect home prices climbed 3.5% in June from the same month last year, down from a 4.6% gain in the previous month. Record foreclosures and a drop in sales after the expration of the homebuyer tax credit could put a bigger than expected damper on home prices in the coming months.

Consumer Confidence is expected to remain flat.

Earnings news will be coming from ABM Industries, DSW, Isle of Capri Casinos, and a few others.

Washington and Public Finance

A long battle in Congress over the federal budget could hinder the SEC’s efforts to carry out the duties required by the financial-reform legislation. As part of the Dodd-Frank reform law, the Securities and Exchange Commission is charged with addressing 95 rules and proposals, and conducting 17 studies. Much of that work must be completed over the next 12 months or so. Meanwhile, the chances of the commission getting significant new resources are slim. The Senate Appropriations Committee did approve a $1.3 Billion budget for fiscal 2011, an 18% increase from the regulator’s previous fiscal-year budget, but it may be far short of what will be necessary. Estimates are that the SEC will be bringing in 800 new employees in order to accomplish their goals.

In Summary

The “S” word has been thrown out there a lot lately. The idea of possibly seeing more stimulus spending seems to be gathering a certain level of acceptance even before it has been spoken in Washington.

With the US economy  staring to backfire and blow smoke, it appears increasingly likely that something new will be pulled out of the Washington Medicine Chest and further spending is very possible.

The fact is that the the timing is fortunate for policymakers as the marketplace has driven borrowing costs to record lows. This certainly does leave the door open for Washington to borrow on the cheap and and spend like a drunken sailor.

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.

J. R. R. Tolkien

Morning Call

August 30, 2010

Off the cuff: What if an unemployed homeowner said to his mortgage lender: “I am prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.”

Pick of the Day

Buy CL: Colgate Palmolive

Economic uncertainty remains high and it is consumers that are in the driver’s seat. Budget tightening has become a household mission, but basic necessities are just that.

Colgate-Palmolive Company is, of course a consumer products company which is marketed in over 200 countries worldwide. The Company has many of the basic consumer goods covered including soap toothpaste and pet products.

Colgate reported earnings of $603 Million in the quarter ended in June, 2010.  This was up from $562 million in earnings in the same period a year ago.  The company beat analyst expectations on earnings but revenue came in slightly less than expected, as some currency fluctuations affected results.

Colgate has paid uninterrupted dividends throughout its history and has increased payments to common shareholders every year for 47 years. Shares currently hold a respectable dividend yield of about 3%.

Market Update

It was an all around strong performance for stocks on Friday as the Dow regained the 10,000 mark with a 165 point gain on the session. Energy shares rebounded after pulling back most of the week. Bank stocks also moved comfortably higher and are gaining slightly in the pre-market today. Futures, however, show a relatively flat start for stocks as a whole this morning.

The slight turn in optimism has been largely the result of words and promises of action by central bankers in the US and Japan. The Bank of Japan announced it will expand its program of providing loans to banks by ¥10 Trillion ($116 Billion), to a total of ¥30 Trillion. Federal Reserve Chairman Ben S. Bernanke, meanwhile, promised to safeguard the recovery.

Economists also expect to see an increase in U.S. consumer spending in today’s report.

Stocks in Asia took their cue from Wall Street as indexes across the continent climbed by an average of 1%. Industrial shares essentially led the way, while the financial sector was slightly mixed. The Yen continues to rise, despite a call to action from the Bank of Japan. Investors are speculating that the best efforts of the central bank will not be able to halt the rise of the Yen all that quickly.

In Europe this morning, deal-making activity continues to prop up an otherwise lackluster stock market. As a whole, the major indexes have fluctuated throughout the morning and are just modestly higher.

In Paris, drug maker Sanofi-Aventis publicly announced its offer to buy U.S. biotechnology company Genzyme for $18.5 Billion, or $69 a share. Elsewhere, U.S. chip manufacturer Intel will acquire the wireless business of Germany’s Infineon Technologies for about $1.4 Billion in cash.  In Spain, the nation’s largest lender Banco Santander announced it bought a portfolio of U.S. car loans from HSBC Holdings for $4 Billion.

Economic data is the Euro-zone, however, continues to be mixed. European economic confidence improved its highest level in more than two years according to the latest report. In the U.K., home values dropped 0.3% in August; the biggest decline in 16 months

Commodities and Currencies

A mixed performance for the Dollar and some profit taking has oil pulling back slightly after a recent run-up.  Showing a 0.5% loss on the morning session, Oil is now trading at the high end of $74. Oil traders remain concerned about demand in the U.S. economy, which grew only 1.6% in the second quarter, after 3.7% growth in the first.

Among the distillates, heating oil fell slightly, gasoline contracts jumped higher, and natural gas stayed flat. As for gas prices at the pump, the national average price fell 3.5 cents from last week and 6.3 cents less than a month ago. The average prices are, however, 6.9 cents higher than this time last year.

Copper and industrial metals have risen slightly this morning, but at a much slower pace than agricultural commodities, many of which are 1-2% higher.

The Dollar improved against the Euro, but is lower on the Yen and Pound.

Precious Metals and Gemstones

Gold has fallen of its early morning highs and is now showing a $3 downside at $1235. The World Gold Council reported that physical demand remains relatively strong despite higher prices and that it expects this to remain true for the rest of the year with the Indian marriage season coming up as well as important festivals.

Higher prices have meant a strong rise in production at gold mines and we could see an increase of M&A activity in this sector as well. In one such deal, Newcrest Mining has announced a deal to buy smaller rival Lihir Gold for $9.4 Billion.

Other precious metals, including Silver and Platinum are essentially unchanged this morning after giving back earlier gains. Silver remains a few cents over $18, while Platinum is trading at $1530.

Elsewhere, the government of Zimbabwe has reportedly received $30 Million in dividends from the Canadile and Mbada diamond companies, both of which are currently operating in the Marange diamond fields. The payment was made just two weeks after Zimbabwe auctioned diamond harvested from Marange, after getting a long awaited Kimberley Process permit to do so. The government sold 900,000 carats of diamonds, raising a reported $45 million.

Economy and Earnings

Personal Income data and the Dalls Fed Manufacturing Survey or on the economic calendar today. The consensus is for a 0.3% increase in both income and spending from last month. The core PCE Price Index is expected to increase 0.1%.

Earnings reports are due from China Strategic Holdings, Donaldson, Nexus Energy, Winn-Dixie, and a slew of smaller pink sheet companies.

Washington and Public Finance

After Federal Reserve Chairman Ben Bernanke spoke on Friday, promising to use “unconventional measures” if needed to prop up the economy, municipal yields ticked higher for the first time this month. After a strong run for Treasuries and municipal bonds, some cash finally flowed toward equities as investors reacted positively to Bernanke’s comments.

Municipal Bond Mutual Funds saw another big cash inflow of $728.4 Million last week, but this is slower pace than it has been in the eight straight weeks of positive inflows.

Elsewhere, the Municipal Securities Rulemaking Board has formally sought approval from the Securities and Exchange Commission to expand its board from 15 to 21 members, 11 of which would be independent members not affiliated with any securities firm or bank.

In Summary

So on Friday, the GDP numbers were disappointing but investors shifted focus to Ben Bernanke and his commitment to do whatever. US GDP grew at a 1.6% in the second quarter, less than the original 2.4% estimate. Surging imports and the end of homebuyer tax credits contributed to the change.

Consumer spending, which represents a large and important part of the economy, has risen at slightly for four straight quarters, but the pace remains slower than normal in an economic recovery.

The Federal Reserve’s most recent monthly report showed an expansion in bank credit, so this problem may be starting to ease, but it is still a matter of consumers being too unsure to spend. Yesterday’s pledge of support from the Fed Chairman apparently comforted some investors, but were consumers listening?

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.