Wall Street Wrap

Russian into Gold, Bullard Latest to Speak

By Robert Perrego, at 4:47 pm on November 23rd, 2009

Yesterday in an interview with Dow Jones, St. Louis Federal Reserve President James Bullard stated that the U.S. central bank should continue purchasing mortgage backed securities longer than is currently planned.  Bullard, long regarded as a hawk on inflation, becomes a voting member of the FOMC next year and his comments sent the dollar plummeting and stock futures soaring.  Then at 10 a.m., the Existing Home Sales report was released and easily beat expectations (6.10 million vs. 5.70).  This unexpected beat in the weakest sector of the economy further boosted buying enthusiasm, powering the Dow Jones Industrial Average to trade its day high of 10,495.61 at 10:05 a.m.

The Dow Jones Industrial Average added 123.79 points (+1.28%, 10,450.95) while the S&P 500 rose further up 14.86 points (+1.36%, 1,106.24).  The tech heavy Nasdaq 100 was the percentage winner, jumping 28.55 points (+1.61%, 1,792.94)

This dollar plunge caused the carry trade cowboys to start buying everything, most importantly commodities.  Here is a simple example of how the carry trade works for these guys; a cowboy has a million share short position (44,563 shares) in the PowerShares DB US Dollar Index (NYSE: UUP) and the pre-market shows it trading down 20 cents.  On the market open the cowboy makes $8,912 on the 20 cent drop and he now takes that money and buys stocks, so up goes the market.  The price of gold goes up through this same mechanism and also because gold is traded in dollars and regarded as a currency, so a weaker dollar means more of them to buy gold.

The Dollar ETF (NYSE: UUP) dropped 0.75% today with the other widely watched dollar index, the “Dixie” (.DXY) dropping 0.65%.  The longer running DXY is at 75.12 with a 52 week low of 74.68.  Analysts and traders are watching any breach of the 75 level, and then possible new yearly lows below 74.68, as sell signals.

New York Spot Gold traded a new all time high price of $1,174.60, up $23.70 an ounce but settled back to $1,164.80 (+1.21%, +13.90) at 4:20 p.m.  Of the major gold companies by market cap, Agnico-Eagle Mines Ltd. (NYSE: AEM) gained the most, up 3.58% (+$2.18, $62.99) with IAMGOLD Corp (NYSE: IAG) placing second, up 3.43% (+$0.65, $19.58)

Russia’s central bank stated that they had increased their reserves of gold 18.9% since the beginning of the year.  This brings the share of international reserves that Russia holds in gold to 4.7% from 3.4%.  Each week the list of central banks known to be buying gold gets longer.  Sparked by the 200 tonne purchase by India, other central banks have released news or made open market purchases that has shown that the decades of selling by governments is over, and that now they are buyers.  Mauritania bought two tons of gold, Russian reserves are up, China has long been known to be slowly adding to their gold reserves and even openly encourages their citizens to do so.  As the Fed Presidents keep coming out and telling us that interest rates are not going anywhere anytime soon, this gets the cowboys in on the gold buying game too.

Nymex crude traded in a range from $77.15 a barrel to $79.92.  Oil gapped up early but sold off steadily all day finally trading $77.68 at 4:21 p.m.

Tomorrow in our Thanksgiving shortened trading week, we get the GDP report (2.8% expected) and Corporate Profits at 8:30 a.m.  At 8:55 a.m. the Redbook report is released followed by the S&P Case-Shiller home price index.  Consumer Confidence (47.0) is out at 10 a.m.

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Wall Street Wrap

Helicopter Ben at the Controls, Dollar Drops, Market Pops

By Robert Perrego, at 10:46 pm on November 16th, 2009

Federal Reserve Chairman Ben Bernanke spoke to the Economic Club of New York today about the dollar, unemployment and the economic recovery.  Nicknamed ‘Helicopter Ben’ after a speech he gave on deflation, which cited a statement by Milton Friedman about using a ‘helicopter drop’ of cash, Bernanke appeared none too optimistic on the economy and stated exceptionally low interest rates would be needed for an ‘extended period’.  Then, to make the bulls and the carry trade cowboys break out the champagne, Bernanke said “It’s extraordinarily difficult to tell, but it’s not obvious to me … there are any large misalignments currently in the U.S. financial system.”

In plain English, Helicopter Ben does not see any bubbles.  This type of statement basically supercharges any asset class that is currently thought to be in ‘bubble conditions’, such as stocks, bonds and commodities, as now the world’s most powerful central banker is on their side.  As a result, we got 2009 highs in the market indexes, all time highs in the price of gold and a confirmation signal of a bull market from The Dow Theory.

The Dow Jones Industrial Index ran up 136.49 points (+1.32%, 10,406.96) and the S&P 500 broke 1,100 and rose 15.82 points (+1.44%, 1,109.30).  The Nasdaq 100 broke 1,800 gaining 18.95 points (+1.05%, 1,807.56).  All three of these indexes closed at 2009 and 52 week highs.

One of the signals of a bull market from Dow Theory is that one average confirms another.  The two averages used here are the Dow Jones Industrial Average and the Dow Jones Transportation Average.  The Industrial Average has been ahead as of late, setting new highs as recently as November 9th, while the last time the Transportation Average set a new high was October 20th.  Today, both the Transportation and Industrial Averages closed at 2009 and 52 week highs when the Transports closed at 4046.30.

A stock in both these averages, Boeing Co. (NYSE: BA) did not sell any airplanes over at a Dubai airshow, but they made some noise by signing a development deal with Abu Dhabi’s state investment vehicle Mubadala Development Co., to help the country diversify away from the oil patch and build an aerospace industry.  Boeing was the biggest gaining component of the Dow Jones Industrial Average up $1.80 (+3.55%, $52.48).

New York Spot Gold traded up as much as +25.80, at all time high of $1,144.40 an ounce.  At 12:15 p.m., gold was up about $17 an ounce when Bernanke started speaking.  Ben’s first comments seemed pro dollar strength and the PowerShares Dollar ETF (NYSE: UUP) spiked higher on heavy volume immediately.  At the same time gold and all three of the market averages started dropping as dollar shorts were bought in and long stock positions liquidated.  Fifteen minutes later the plunge reversed, gold bottomed out up about $11 an ounce and then took off for another $15 an ounce to trade $1,144 at about 2:30 p.m.  New York Spot Gold settled up $20.20 an ounce (+1.81%, $1,138.70, 4:08 p.m.)

Nymex crude went down on Friday while the rest of the market enjoyed an up day on a bad Consumer Confidence number.  Today, oil made up for lost time gaining $2.55 a barrel (+3.34%, $78.86, 4:17 p.m.) on a weakening dollar.

Economic reports this week may make the market seem like topsy-turvy world.  Right now the market run is being fueled by a dollar carry trade, so any reports that the economy is weak means interest rates (and the dollar) will remain low.  Tomorrow we get the Producer Price Index at 8:30 a.m. (0.5%, ex. food and energy 0.1% expected) and then Industrial Production at 9:15 a.m. (0.4%, 70.7%).  Wednesday bring the Consumer Price Index (0.2%, 0.1%) and Housing Starts (600K), both at 8:30 a.m.  and Thursday is good ole Jobless Claims (504k) at 8:30 a.m. and Leading Indicators (0.4%) and The Philly Fed Survey (12.0) at 10 p.m.

With the CPI and PPI, low numbers means no inflation so no need to raise interest rates.  This is bullish for the carry trade cowboys.  On the other hand, high numbers that indicate inflation will bring more pressure to raise rates and cause the shorts to get nervous.  This is the same in one way or another with all the releases coming out this week.  If all of a sudden we get a large drop in Jobless Claims, this too would also build pressure for a rise in rates.

Welcome to investing and trading 2009, where because of the dollar carry trade, down is up.

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News

Wall Street Wrap – Dollar Up, Just About Everything Else Down

By Robert Perrego, at 5:10 pm on September 24th, 2009

The companies in the Dow that were up the most today were McDonald’s Corporation (NYSE: MCD) +1.04%, and Proctor & Gamble Co. (NYSE: PG) +1.03%, with P&G trading up to within 35 cents of its 2009 highs.  McDonald’s and P&G are considered consumer non-cyclical plays and safer stocks to shift into if you think there could be weakness ahead in the market.

After weeks of getting pummeled, the dollar bounced back sharply today with the dollar index future, the DXY,  gaining 82 cents or 1.08% to $76.88.  This dollar strength drove commodity stocks down across the board.  The Dow Jones most economically sensitive commodity stock, aluminum producer Alcoa Inc. (NYSE: AA) was the biggest loser today, dropping 4.45% or 63 cents to close at $13.51.

The dollar has had a negative 0.32 correlation with the market over the last 120 days meaning that they move in different directions.  As the interest rates in the U.S. are now the lowest of all major currencies, the dollar is now being used to source the ‘carry-trade’, as opposed to the yen, which the world has used for decades.  This selling of the dollar is what is forcing it down and some of that money is being put to use in the stock market.  When the dollar starts to rally and the people that put the carry-trade on need to cover their dollar short, they sell stocks to buy the dollar causing the inverse relationship.

As the dollar and commodities (and commodity stocks) have a strong inverse correlation, when the mindset gets widespread and whole groups of traders short the dollar and buy oil, coal, copper, gold stocks, etc… these trades being put on employ a little more leverage in moving the trades in the desired directions.  The problem here is that when it becomes a ‘crowded trade’, as many people are thinking the same thing, last one out is a rotten egg.  This will cause more volatility as traders basically play chicken with each other.

The Dow has now broken its most recent uptrend line and is looking weak, losing 41.11 points today or 0.42% to close at 9707.44.  The S&P 500 got hit a lot harder dropping 10.09 points or 0.95% to close at 1050.78 with the Nasdaq 100 dropping 14.51 points or 0.84% to 1709.76.  The next two support levels for the Dow are at 9580 and 9380.  The S&P 500 has strong support at about 1030 with a top support level intersecting its still unbroken uptrend line.  The next support level after this one is 1010, which has a top support here and is approximately where its 50 day exponential moving average is right now.

New York Spot Gold was hit on the dollar strength losing $15 an ounce and dropping below the $1,000 level to trade at $993.20 at 4:36 p.m.  Black gold, or crude Nymex oil, got clocked for $3.08 or 4.45% to trade $66.10 a barrel, a 2 month low.  Keep an eye on Exxon Mobil Corp. (NYSE: XOM) as it is just breaking down out of a symmetrical triangle, which is indicating another $6 to $8 loss in the stock.

Finance led the losers in the sector race dropping 2.07% with energy a close second dropping 2.05%.  The industrial sector was also weak, dropping 1.48%, with all three of these sectors dropping more than any of the big three market indexes.

Tomorrow’s economic numbers include Durable Goods orders at 8:30 a.m. (1.0% exp.), Consumer Sentiment at 9:55 a.m. (70.2 exp.) and New Home sales at 10:00 a.m. (445K exp.)

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