Insights

Low Priced Retailers and High Priced Gold

The retail space had a lot going on today with earnings from J.C. Penney Inc. (NYSE: JCP) and Abercrombie & Fitch Co. (NYSE: ANF), as well as IPOs from Dollar General (NYSE: DG) and Rue21 (NSDQ: RUE).  J.C. Penney (+$1.82, +6.19%, $31.21) reported 11 cents a share vs. 12 expected and took a 19 cent write down to their pension plan, so operationally they posted 30 cents.  Abercrombie & Fitch (+$3.92, +10.66%, $40.68)  posted a profit of 30 cents a share vs. the 20 cents analysts expected.  Dollar General, which was a publicly traded company before being taken out in 2007 by private equity, got its old ticker back.  DG priced in the low end of its range at $21 a share, opened for trading at $22 and after trading as high as $23.10, closed at $22.73 (+$1.73, +8.23%).  Rue21 was the big winner of the retail space today, pricing at $19 a share, above its range of $16 to $18.  Rue opened for trading at $24 a share, dove down to $22.26 in an immediate shake out, and then traded higher for most the rest of the day closing at $24.30 up 27.89% on the day (+$5.30).

The market for these IPOs was favorable as Walt Disney Co. (NYSE: DIS) reported after the bell yesterday, posting 46 cents a share, a jump in profit of 18%.  The stock traded up to 52 week highs today gaining $1.39 (+4.78%, $30.44).  This news helped power the Dow Jones Industrial Index to a 73 point gain (+0.71, 10,270.47) and the S&P 500 added 6.24 points (+0.57%, 1,093.48).  The tech heavy Nasdaq 100 outperformed again rising 15.47 points (+0.87%, 1,788.61).

The DXY dropped 0.43% and New York Spot Gold traded a new all time high of $1,120.30 an ounce.  Consumer Sentiment was released at 9:55 a.m. and came in sharply lower than the expected 71.0 at 66.0.  This caused a quick sell-off in the market but, as stocks recovered, oil did not.  Nymex crude lost 59 cents a barrel to $76.38 (-0.77%, 4:03 p.m.)

Gold was strong and traded new highs before backing off a bit to $1,119.00 an ounce (+$16.70, +1.52%, 4:18 p.m.)  Most gold miners find copper in the same geological formations, so while all that glitters might be gold, some miners find a significant portion of their revenues from sales of the duller copper.  Today Merrill Lynch upped their estimate for copper to $3.23 a pound in 2010 and $3.63 in 2011.  Not a bad time to be a gold miner, as you have all time highs in gold and then Merrill upgrades copper the same day.

There is a new way to play the gold miners this week.  The Market Vectors Gold Miners ETF (NYSE: GDX) is a good way to diversify away individual company risk and get exposure to the miners.  On Wednesday, the Market Vectors Junior Miners ETF started trading (ARCX: GDXJ).  Junior miners are more volatile and more exposed to exploration as compared to the production of the senior gold companies, and therefore are more risky and volatile.  The Juniors kicked off their trading life at $26 on Wednesday and traded lower until today, gaining 2.37% (+$0.59, $25.43).

As discussed in many of my past posts, the dollar carry trade has been very supportive of the stock market.  As the carry trade cowboys short the dollar to buy stocks, the one thing they have their eye on at all times are the rates that Bernanke controls as the Chairman of the Federal Reserve.  Basically, all these dollar shorts are betting Bernanke will have his hands cuffed as far as raising rates go with unemployment north of 10% right now and no signs of dropping anytime soon.  The Fed Funds futures have been predicting a June 2010 rise in rates.  I ran across an article today pointing to all the resetting residential mortgages and the commercial real estate market in 2010 as prohibitive to an increase in rates.  Rates stay at the current 0-0.25% all next year and that will give gold plenty of time to run a lot higher than it is now.  These low rates will keep the  short-side pressure on the dollar as well as exerting upside pressure to stocks.

Gold and stocks up?  How can that be bad?  Well, this is a nice party, but once the carry trade starts unwinding it will happen quickly and that’s when the hangover begins.

But Hey!  It’s Friday… no need to think of all that now.  Have a great weekend!