Wall Street Wrap

With No Particular Place To Go

By Robert Perrego, at 4:51 pm on November 24th, 2009

The shortened trading week took a breather today and consolidated the gains from yesterday’s move as mixed economic reports gave the market no direction.  The S&P Case-Shiller home prices report showed the average home value gained 3.1% over last quarter and Zillow.com reported that last week 30-year fixed mortgage rates fell to their lowest levels since April of 2008.  GDP was revised down, but everyone expected that and Consumer Confidence beat the expected number (49.5 vs. 47).  Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T) were the leaders in a dropping Dow Jones Industrial Average as investors bought dividend stocks after Barron’s ran a piece over the weekend on ten stocks to buy for their yield.

Verizon finished up 1.72% (+$0.54, $31.87) and AT&T gained 1.19% (+$0.32, $27.10)

The Dow Jones Industrial Average spent almost the entire day under water, but staged a 2 p.m. rally that failed an hour later as it finished down 17.24 points (-0.16%, 10,433.71).  The S&P 500 dropped fractionally losing 0.59 points (-0.05%, 1,105.65) and The Nasdaq 100 lost 6.69 points (-0.37%, 1,786.25)

The path of least resistance for gold seems to be up.  On a day the dollar was up slightly, New York Spot Gold managed to gain $5.20 an ounce (+0.45%, $1,169.30, 4:19 p.m.).  For the past few nights, CNBC’s traders on Fast Money have mentioned that it looks like a large short position in gold might be getting squeezed, which could be even more fuel for the recent move higher to continue.  With Goldman Sachs Group Inc. (NYSE: GS) recently upgrading the price target to $1,200/ounce citing central bank buying, it looks possible we hit it before we see 2010.

Oil and gold usually move in concert as both are traded in, and inverse, to the dollar.  While the dollar was up marginally today, Nymex crude lost 1.98% (-$1.54, $76.12) with some sources citing the revision down of the GDP as the reason.  While the dollar is weak, the past eight trading days shows the dollar basically moving sideways, so those long gold or oil specifically on the dollar down trend could be lightening up their positions.  Gold has relative strength while oil does not.  A look at the United States Oil Fund (NYSE: USO) Oil ETF shows that it is breaking down out of the trading range it has been in since October 14th.  Today the USO closed below its 50 day exponential moving average ($38.91) and had its lowest close in over a month ($38.58).

The minutes from the last FOMC meeting were released today stating that the Committee saw the risks as ‘balanced’ with high uncertainty.  In other words, they are not quite sure what is going to happen next.  We could go this way, or that way.  One thing they seem more sure about is that the labor markets will not recover anytime soon.  Looking ahead to the fourth quarter of next year the unemployment rate expected is to be between 9.3 and 9.7 percent.  This means 2010 might create a few jobs but don’t hold your breath and pinch that penny harder if you are out of work right now.

Trading tomorrow should be moderate in the morning and tapering off as traders hit the exits early for a long weekend.  Beware of thin afternoon action.  On the economic front we have Durable Goods Orders (0.5% expected), Personal Income and Outlays (0.2%, 0.5%, 0.2%) and Jobless Claims (495,000) at 8:30 a.m.  Consumer Sentiment (67.0) follows at 9:55 a.m. and New Home Sales (410,000) are at 10 a.m.

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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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Week on Wall Street

Gold Moves Higher, Tech Dips

By Robert Perrego, at 10:44 am on November 21st, 2009

Last week saw gold trade another all time high while the overall market inched higher.  The tech sector, as represented by the Nasdaq 100, performed the worst with a weak day on Thursday accounting for most of the loss.  A downgrade of eight stocks in the semiconductor industry, which affected $126 billion in market cap, caused leader Intel Corp. (NSDQ: INTC) to lose over 4%.  The downgrade came on a day that saw the Mortgage Bankers Association report that 14.4% of all homes with a mortgage were either at least one month delinquent on their mortgage payments or in foreclosure, an all time high.

The Dow Jones industrial Average gained 0.46% this week while the S&P 500 lost 0.19%.  The Nasdaq 100 moved the most, but in the wrong direction, slipping 1.35%.  Gold continued its march higher with a 2.9% gain for the week and an all time high close on Friday.

The week started with Fed Chairman Ben Bernanke speaking to the Economic Club of New York.  The dollar peaked this year as the stock market bottomed in March, but has been dropping steadily ever since.  Bernanke controls short term interest rates and this interest rate has a lot to do with the strength of the dollar as denominated in other currencies.  The Fed is in a tight spot here as unemployment is above 10% and if you have noticed an ‘economic recovery’ you are one of the few.  The stock market has rebounded enough to be put in the same sentence as ‘bubble‘, and GDP stopped dropping like a stone, but for most the country times are tough.  The dollar is inherently political too.  If Bernanke defended the dollar by raising rates with the 2010 elections a year out, any negative effect this could have on the ‘economic recovery’ might get him fired.

Bernanke gave the all clear signal to people shorting the dollar, stating that interest rates were to remain low for the foreseeable future.  The dovish interest rate stance Bernanke gave fired up the bulls and they started shorting the dollar and buying stocks.  The Dow Jones rose 136 points and the market broke out to new 2009 highs.

Tuesday and Wednesday saw little movement in the market indexes as San Francisco Fed President Janet Yellen commented to her audience in Hong Kong about whether or not The Fed should get involved with the financial markets.  Obama’s visit to China, and his pledge to ask that the yuan be appreciated, centers on the dollar again.  There are more than a few Chinese officials that are blaming the very low interest rates here in the U.S. with creating bubbles in real estate and the market IN CHINA!

On Wednesday the Mortgage Bankers Association came knocking with their first set of bad numbers.  Purchase Applications came in below expectations as no houses being sold means no mortgages applied for.  New York Spot Gold traded an all time high of $1,153.90 an ounce.

Before the open on Thursday, Merrill Lynch downgraded the semiconductor sector and the Mortgage Bankers were back with that huge 14.4% number.  The market plunged off the open and by 11 a.m. the Dow Jones Industrial Average was trading 10,256, down over 150 points.  The market crept back and with a spike up at the end of the trading day losses were cut to less than 100 points.  Microsoft came out with an update on Windows 7, stating that sales were at a record pace.  Then something strange happened… on Thursday the dollar rose AND so did gold.

Thursday after the close Dell Inc. (NSDQ: DELL) reported weak earnings.  This added more selling  pressure to the tech sector after Thursday’s semiconductor rout and Friday opened with a gap down in the market.  The market traded lower until about 11 a.m. but then trended upwards for the rest of the day.  By the close of the day the Dow Jones Industrial Index had pared its loss to 14 points .  The dollar rose again on Friday and the PowerShares DB US Dollar Index (NYSE: UUP) gained 0.54% on the week.

This gave gold a 2.9% gain on the week and the dollar tacked on 0.54%.  For the most part, the dollar and gold are inversely related as gold is traded in dollars.  The dollar carry trade has linked gold to the market as the carry trade cowboys are shorting the dollar to buy the market, and to buy gold.  These days if the market is up so is gold and if the market is up the dollar is down.

This week the dollar was up, gold was up and the Dow Jones Industrial Average was up.  The broader S&P 500 was down slightly so the inverse dollar-market relationship held.  Gold moved higher on two days that the dollar moved higher.  Strange things like this can happen when you reach an all time high as it sometimes seems all everyone says is ‘gold, gold, gold’.  While a mania might be building around gold and one of the other things you hear with gold is ‘bubble’ bubble, bubble’, the fact that central bankers from Russia to Mauritania to Chile are buyers tells me all I need to know.  Gold is going higher.

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Wall Street Wrap

Wall Street Wrap – Cisco calls a Bottom, Jobless Claims Down, Hello Dow 10,000

By Robert Perrego, at 5:08 pm on November 5th, 2009

Cisco Systems Inc. (NSDQ: CSCO) reported after the bell yesterday and posted 39 cents per share, beating estimates by 13 cents.  More importantly, CEO John Chambers stated he believes that business conditions have bottomed, and that the customers that have put off large investments as a result of the economic conditions were now starting to buy more of their high ticket items to cope with growing internet traffic.  These comments by Chambers agree with reports that companies are now holding very high levels of cash, most likely as a result of seeing the commercial paper market stumble last year.  Want to scare a CFO to death?  Tell him that the commercial paper market is not working and if he does not jump out a window, he will start hoarding cash to make sure the company can meet its short term obligations.

On top of the good news from Cisco, this morning the initial Jobless Claims numbers declined by 20,000 and the Productivity increase of 9.5% blew away the 6.3% estimate.  Lump all this good news together and we got a 203.82 point rally in the Dow Jones Industrial Average, closing back above 10,000 at 10,005.96 (+2.07%).  The S&P 500 added 20.13 points (+1.92%, 1,066.63) while the Nasdaq 100, on the back of Cisco solid numbers, rose the most in terms of percentage, adding 2.4% or 40.42 points to 1,721.09.

There is good news and bad news about that 20,000 drop.  The good news is that this is a decline in jobless claims, the bad news is that jobs are still being lost.  The productivity number is huge and means companies will be seeing a higher profit margin, but the number got this high by firing people and belt tightening.  If you have a job now you might be working harder to keep it as the work done by your buddy in the next cubicle is now being left on your desk as he sleeps late and collects unemployment.

We are nearing the end of Q3 earnings and the pattern has been that companies are beating their earnings estimates but posting less revenues.  The numbers from the U.S. economy line right up with the company reports, as companies are beating earnings by firing all non-crucial employees.  This raises the unemployment rate and the revenue declines are the losses we saw to GDP.

If Chambers is right and companies start to spend more of that cash hoard the bottom could be in.  When that cash starts flowing freely again, hiring will rise and this country can get back to work.  The problem here is, as in past economic slowdowns, when a company eliminates a position and learns to do without, either through better technological implementation or management techniques, when the hiring starts again it is rare the same number of positions are ‘refilled’.  Detroit is a sparkling example of the permanent job destruction of a slowdown in the business cycle.  When the automakers had to choose between hiring back previously laid-off workers or buying another machine, they bought machines and many of those jobs are never coming back.

Nymex crude dropped 78 cents (-0.97%, $79.67, 4:31 p.m.) and New York Spot Gold lost $1.70 an ounce ($1,090.20, -0.16%, 4:38 p.m.)

Tomorrow we get the October Jobs Report and the unemployment rate is expected to rise from 9.8% to 9.9%.  The consensus is that we lost a net 175,000 jobs in October and we lost 263,000 in August.  This is a 33% drop in jobs lost which is a nice decline.  Should we hit this number, even though the headline 9.9% for the unemployment rate will be a tick up, the market should rally and could even take us to new 2009 market highs.  If that jobs lost number comes in anywhere above 220,000, which would represent a sizable miss, and the unemployment rate jumps to 10%, we could easily give up all of today’s gains.  The charts look bullish for the major indexes, with low and upwards turning stochastics and support at the lows of this most recent pullback put in by the 50 day exponential moving averages.

Tune in tomorrow at 8:30 a.m. for the exciting trading conclusion to the first week of November 2009.

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Wall Street Wrap

Wall Street Wrap – The Dollar Trumps GDP, Markets Drop

By Robert Perrego, at 4:41 pm on October 30th, 2009

Yesterday the Dow jumped 199 points, fueled by the strong GDP number released before the open.  The 199 point rally drove the Dow right back up to the uptrend line that  it had been following since March 9th, and had broken on Monday.  Today what the GDP giveth, the rally in the dollar taketh away.  On the last trading day of October 2009, the Dow Jones Industrial Average dropped 249.85 points (-2.50%, 9,712.73).  The Dow 30 traded right down to its 50 day exponential moving average, where it was down 277 points, bounced, and traded back up into the close.

Uptrend Broken

Uptrend Break Monday, 2nd Close Below Tuesday, Pullback/Retest Thursday, Drop Friday

The S&P 500 lost 29.92 points (-2.80%, 1,036.19) and the Nasdaq 100 gave up 44.14 points (-2.57%, 1,667.13).  In October, the Dow closed up as much as 3.91% (10/19), the S&P 500’s highest close was up 3.86% (10/19) while the Nasdaq 100’s apex close was up 2.57% (10/22).

It took about thirteen trading to amass these gains and then only six to eight trading days to give it all up.  The Dow finished with a 1/2 point gain for the month, and forget the percentage translation, as if you wanted this in change at the market you would leave it in the ‘give a penny, take a penny’ tray.  The end of October does represent the end of the fiscal year for most mutual funds, but hedge funds usually run with the calendar year in order to make accounting consistent for their investors.  Next week there is a meeting of the Federal Reserve, but it is fully expected they will not move on interest rates.

Energy led the sector race lower losing 4.34% with finance dropping 3.93%.  All sectors were in the red with tech losing 2.89% and the industrials dropped 2.85%.

What may be spooking the markets is, if the Fed maintains the current low rates but releases hawkish statements, this could give the dollar rally legs and scare all the carry trade cowboys out of their dollar shorts.  As U.S. interest rates have been historically low for months now, a favored trade has been to short the dollar and take the funds from this short and buy ‘risky’ assets.  These ‘risky’ assets have included commodities, commodity stocks, tech stocks, financial stocks and stocks in the emerging markets.  If the dollar starts to rally and the shorts have to cover, the money that funded investment in stocks will be used in buying the dollar short, causing selling in the stock market to replace these funds.  This is what has caused the unusual inverse relationship between the dollar and The Dow lately.

On October 22nd, the dollar bottomed out with the PowerShares Dollar ETF (NYSE: UUP) closing at a 14 month low at $22.31.  This close coincided with the top in the Nasdaq, and since then the market has sold off as the dollar rallied.  The UUP is 1.75% off its low close while the Dow is 3.91% off its high close.  This gives a ratio of about a 2.23 to 1, dollar gain to Dow loss.  Looking at the UUP chart, the 50 day EMA sits at $22.82, or about 0.53% above the UUP close today.  Using this as a guide to the top in this dollar rally, before it possibly reverses and begins to trade lower, gives us a further loss in the Dow of 1.18%, or another 114 points (Dow 9598).  I see a Dow top support level at about 9580-9600 area, giving guidance as to where you may want to buy this latest pullback.

New York Spot Gold held up surprisingly well, dropping only $1.50 (-0.14%, $1,044.30, 4:25 p.m.) while the dollar (UUP) rallied 0.57% (+$0.13, $22.70).  Commodities always travel inversely of the dollar as they are valued in dollars and Nymex crude got hit harder than gold, dropping $2.87 a barrel (-3.59%, $77.03, 4:17 p.m.)

The Federal Open Market Committee meets next Tuesday and has their interest rate announcement on Wednesday at 2:15 p.m.  Trading should be very interesting with the first trading day of November on Monday and a whole lot of nervous Halloween scared money in the stock market, that is still short the dollar waiting to see if they are going to cover or short more.

One further note on the above chart:  I have seen this pattern many times before as a trend line is broken and is re-tested by a pullback shortly thereafter.  Also, please remember that a break in an uptrend line does not mean a down trend is coming.  It could mean a sideways movement or a reversal into a downtrend.  The market could move sideways for awhile and then resume its uptrend.  We shall see.

Happy Halloween Everyone!

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