A.L. Waters Capital, LLC

Morning Call: Washington and Consumer Spending

0 CommentsTuesday • August 31, 2010 • by alwaters

“My strength lies solely in my tenacity.”

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.

Morning Call: Unconventional Bernanke and M&A

2 CommentsMonday • August 30, 2010 • by alwaters

“Little by little, one travels far.”

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.

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.