Wall Street Wrap

Wall Street Wrap – The Fed Stands Still, Gold Trades $1,099

By Robert Perrego, at 5:25 pm on November 4th, 2009

As widely expected, The Federal Reserve Open Market Committee maintained its target for the federal funds interest rate at 0 to 0.25% today stating that it “continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”  This caused the dollar, which had been selling off before the announcement, to drop even farther with the PowerShares DB US Dollar Bullish Fund (NYSE: UUP) dropping 0.88% on the day (-$0.20, $22.48) and propelling New York Spot Gold to trade as high as $1,099.  This maintenance of low interest rates caused a rally in the home builders with Pulte Homes Inc. (NYSE: PHM) +3.46%, Lennar Corp. (NYSE: LEN) +3.43% and D. R. Horton Inc. (NYSE: DHI) +3.12%, all gaining on continued low mortgage rates.

Click here to read the full FOMC Statement

The Dow Jones Industrial Average, which had been up all day and traded its highest level a half hour after the announcement at 9928, got sold off into the close dropping 113 points within the last hour of trading.  The Dow 30 closed up 30.23 points at 9,802.14 (+0.30%) with the S&P holding onto gain of 1.09 points (+0.10%, 1,046.50).  The Nasdaq 100 also barely managed to finish positive 1.47 points (+0.08%, 1,680.67).

With the low interest rates and the dollar getting hit left and right, the commodity space has been red hot.  Looking at various commodities and the dollar exchange traded fund, the vehicles the common investor can use to most easily invest in, we find the following returns for 2009 thus far;

  • Market Vectors Coal ETF (NYSE: KOL) +114.5%
  • iPath DJ AIG Copper ETN (NYSE: JJC) + 109.6%
  • United States Gasoline (NYSE: UGA) +88.8%
  • Market Vectors Steel ETF (NYSE: SLX) +79.6%
  • SPDR Gold ETF (NYSE: GLD) + 23.8%
  • United States Oil Fund (NYSE: USO) +22.8%
  • Dow Jones Industrial Average +11.7%
  • PowerShares DB MS Agriculture ETF (NYSE: DBA) +0.2%
  • PowerShares DB USD Dollar ETF (NYSE: UUP) -8.83%
  • Unites States Natural Gas (NYSE: UNG) -57.8%

The Dow Jones Industrial Average is included here as lately it has traded much like a commodity.  With the current U.S. interest rates so low, the dollar is being used to fund the carry trade and is shorted to provide funds to invest in other ‘risky’ assets (for more on this see my Wraps from 11/1, 10/31, 10/30).  This use of the dollar in the carry trade has established an inverse relationship between the dollar and the stock market, much like commodities.

Looking at these returns we can see that the good news is food is not seeing much inflation and if you heat your home with natural gas this may be a cheap winter.  The bad news is gasoline has almost doubled so you will have to stay home and eat in.

Much speculation has been running around the financial community about whether or not a commodity bubble is forming.  Just looking at absolute returns does not give enough information to define a bubble, as these different commodities are influenced not only by a diving dollar, but by things such as economic activity (coal, copper, steel, oil), inflation expectations and currency diversification needs (gold), consumer income and purchasing patterns (gasoline, food) and the simple supply of the commodity (natural gas).

I do not think we are into a commodity bubble as there have been a series of positive economic numbers out of China (remembering commodities are a global situation) which directly influences the demand for, and price of oil, copper, coal and steel.  The United States economy has also improved as evidenced by the 3.5% GDP report from last week.  Judging from the Fed’s statement today, interest rates will be kept very low for awhile in order to juice job creation and this will keep the dollar weak and the commodity run up will continue.  Also, the overall market; commodities, stocks and bonds, all dropped for a ways before the start of 2009 so rising from a lower starting point makes the run up percentage numbers look larger.  With the specter of a trillion dollar health care reform and cap and trade costs looming in the United States political future, along with the current budget deficit, I do not see the dollar strengthening appreciably anytime soon.  There longer term outlook for commodities remains positive.

Nymex crude rose 80 cents today (+1.01%, $80.18, 4:50 p.m.) regaining the $80 level.  Gold has been the market darling lately trading an all time high of $1,099 an ounce today and was last seen at $1,091.80 (+0.69%, 5:00 p.m.).  Yesterday’s move by the Reserve Bank of India of buying 200 tonnes of gold from the IMF shows the argument why gold may be nowhere near a top.  The inflation/deflation arguments about gold will mean nothing if the offshore assets denominated in dollars start to diversify into gold.  Of all the major currencies of the world gold has the smallest market by far.  Were Russia, China, Japan, India and the Middle East dollars to all diversify to just 5% of foreign reserves into gold, the price could top $2,000 easily.

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News

Wall Street Wrap – Dollar Down, Gold and Everything Else Up

By Robert Perrego, at 5:10 pm on October 6th, 2009

This is the bookend piece for my “Dollar Up, Just About Everything Else Down” Wall Street Wrap published on September 24th.  The dollar got hit this morning on a story that the Arab States, China, Russia, France and Japan had been having secret talks about no longer using the dollar as the exchange currency for oil.  Gold exploded early taking out the all time high at $1,033 before the U.S. markets even opened.  Commodity stocks were up across the board, the market rallied broadly with all 30 Dow Jones components positive on the day and Alcoa Inc. (NYSE: AA), a commodity stock due to report earnings tomorrow, was the largest gainer up 3.27% (+$0.44, $13.86).

The Dow was up over 170 points but closed up 131.50 (+1.36%, 9731.25) giving a two day jump of 243 points (+2.5%).  The S&P 500 added 14.26 points (+1.37%, 1054.72) and 29.51 points for the two day rally (+2.9%).  The Nasdaq 100 was up 29.61 points today (+1.76%, 1705.25) and up 42.76 points (+2.6%) to lead the three indexes on this two day rally.

Energy led the sector race up 2.75% helped by rising oil with tech coming in second up 1.62%.  Recently hot finance lagged near the back of the pack up only 0.77%.

The ‘secret meeting’ news story was quickly refuted by officials from those countries thought to be involved, which helped the dollar strengthen a bit, but the damage was done.  If you think about it, the Saudis have their dollar pegged to the U.S. dollar and they also hold a whole boat load of U.S. Treasuries.  If the Saudis decoupled the dollar from oil and it dropped, not only would their dollar holdings be worth less but their domestic currency would get hit, making this a very unlikely move.

In my Wrap on September 24th, I discussed the reverse correlation the dollar now has with the Dow.  The dollar has a history of trading inversely with gold, and now gold is positively correlated with the Dow through the dollar.  Dollar down – everything else up.  The PowerShares Dollar ETF (NYSE: UUP) was down 0.43% while the Dow was up 1.36%.

Gold was the star today, with the New York Spot trading as high as $1,044.80 an ounce and currently seen trading close to that high at $1,040.90 (+$23.70, 2.44%, 4:32 p.m.)  It was not just the ’secret meetings’ news story that sparked the dollar drop as The Reserve Bank of Australia raised their interest rate by a quarter of a percentage point.  Australia’s economy is heating up as they are basically China’s commodity 7-11 corner store, being rich in natural resources and close geographically.  This raise in rates reminded traders that as other countries economies recover and raise their rates, the dollar would continue to fall against them if the United States did not follow suit.  With unemployment at 9.8% and expected to go higher here at home, and 2010 elections staring the Democrats in the face, the political will to raise U.S. rates and possibly slow job growth is very questionable.  This means a weaker dollar relative to other currencies.

In September of 2005, gold broke out of a sideways trading pattern it had been in for a few years.  By May of 2006, gold climbed 60%.  Between may of 2006 and September of 2007 gold traded sideways in a consolidation pattern once again.  In late September of 2007, gold broke out again and rose 41% by March of 2008.  Since then gold has been trading sideways.  It is early October and if this past pattern hold true once again, we are looking at anywhere between $1200 (+20%) and $1600 (+60%) gold by late winter, early spring.

Tomorrow after the close we get the earnings announcement from Alcoa to officially kick off the Q3 earnings season.  This is a good bell-weather on the economy as Alcoa makes aluminum, which goes into everything from soda cans to aircraft to home building.  Alcoa has missed earnings 3 of the last 4 quarters it has reported, with the lone upside beat being last quarter (-$0.26 vs. -$0.38 expected).  Alcoa has not posted positive earnings since reporting in September of 2008 and missed earnings that quarter ($0.37 vs. $0.50 exp.)

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News

Wall Street Wrap – Goldman upgrades the Big Banks, Dollar Down, Gold Up

By Robert Perrego, at 4:53 pm on October 5th, 2009

Goldman Sachs Group Inc. (NYSE: GS) upgraded Wells Fargo & Co. (NYSE: WFC) and Comerica Inc. (NYSE: CMA) to buy this morning and added Capital One Financial Corp. (NYSE: COF) to its conviction buy list, sparking a rally in the financial and banks and the market as a whole.  Not all banks are a go for Goldy as they are recommending people steer clear of the regional banks and buy the big banks on a valuation basis.  This bullish turn by Goldman comes right at the kick-off of Q3 earnings season, and the big question is whether or not top line revenue numbers will increase or if earnings will hold just by firing more people.  Capital One jumped 8.25%, Wells Fargo was up 6.88% and Comerica added 4.16%, while Goldman, which pretty much helped itself by upgrading the sector they are in, gained 3.81%.

Overall the Dow gained 112.08 points (+1.18%, 9599.75) with the S&P 500 the strongest index up 15.25 points (+1.48%, 1040.46) while the Nasdaq 100 brought up the rear adding 13.15 points (+0.79%, 1675.64).

The G7 finance ministers met in Istanbul and what was surprising is not what they said, but what they did not say.  Over the past few months everyone from the Chinese to the Russians to the IMF have called the dollar out on weakness, massive U.S. budgetary deficits and high debt levels.  The sudden silence about the dollar was deafening.

Looks like the finance ministers have decided to stop bringing up the dollar subject and hope no one notices it drop or pile on the short side of that trade.  All these world leaders and officials do is keep complaining about a weak dollar and all that does it make it weaker, and make dollar shorts a lot of money.  These financial super-brains may now have decided that the ‘ostrich’ approach will do better than the whining and complaining approach.  Complaining doesn’t seem to do any good when the Administration in the White House seems to do nothing but stay up late at night thinking up ways to spend even more dollars they do not have.

Strangely enough, our market rallies when the dollar drops as a massive game of ‘beggar thy neighbor’ is about to start in worldwide trade.  There is going to be a huge fight for customers worldwide and a cheaper dollar puts us back in the game.  This is how international finance and currency markets work to balance out problems like, say, the Chinese and Japanese having trillions and trillions of our dollars.  The dollar drops and they buy more stuff from us and we get the dollars back.  Then of course there is that one nasty problem with a weak dollar… commodity inflation!

New York Spot Gold was up $14.50 an ounce trading at $1,016.80 at 4:12 p.m (+1.45%).  Looking at the gold charts you see a breakout waiting to happen.  Looking at the PowerShares DB Dollar Bull ETF (NYSE: UUP) chart and you see weakness and the dollar rolling over after hitting resistance.  The dollar chart looks ready to break down. The dollar cracks, and it could this week, and gold is going to take out the all time highs in a flash.  Gold is 1.7% from its all time high while the dollar ETF is 3.4% from its all time low.  This means the dollar does not even have to make a new low in order for gold to take out the highs.  If the dollar does make a new low, look out.

Other commodities: Oil ETF (NYSE: USO) up 0.86%, copper ETF (NYSE: JJC) up 1.98%, steel ETF (NYSE: SLX) up 3.83%, natural gas ETF (NYSE: UNG) up 6.23%, coal ETF (NYSE: KOL) up 3.67%, agricultural ETF (NYSE: DBA) up 1.01%.

What will impact the market now?  Some bad economic numbers and job losses you say?  We got those all week last week and the market rallied today.  The market is getting numb, even to watching a couple hundred thousand jobs walk out the door every month.  The story will be in the dollar and the top line revenue numbers during this earnings season.  Alcoa, Inc. (NYSE: AA) is the first Dow component to report on Wednesday.  They are expected to lose 12 cents a share on revenues of $4.46 billion.  My guess is they miss both numbers.

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News

Wall Street Wrap – No Change from the FOMC

By Robert Perrego, at 4:39 pm on September 23rd, 2009

The Federal Reserve Open Market Committee announced no change in interest rate policy today and extended their quantitative easing policy through the first quarter of 2010.  The overall size of the quantitative easing debt purchasing program has not been increased, just the date of its completion extended.  The vote to leave interest rates unchanged was unanimous.

The text of The Fed Statement can be found here.  For a full collection of up to date stories involving The Federal Reserve, or the FOMC, check out RakedIn’s Federal Reserve page.  Like our other company pages, this page collects information, news and data on the people, policies and all things pertinent to The Fed in one easily accessed place.

The market reaction to the release of this statement was to climb initially, with the Dow Jones Industrial Average jumping from 9858 to trade its 2009 high of the year at 9917, a thin 83 points from Dow 10,000.  After trading that high the index rolled over and closed down at 9748.55 (-0.82%), accelerating its losses into the close for a loss of 81.32 points.  The S&P 500 closed down 10.79 points (-1.00%, 1060.87) and the Nasdaq 100 lost 9.82 points (-0.56%, 1724.27).

The sectors leading the decline were energy down 2.38% and finance down 2.17%.  Anyone following the sector moves has seen that the energy and finance have been the most volatile sectors for 2009.

New York Spot Gold spiked to $1,019.10 on the Fed announcement but also reversed just as the market did, to trade down to $1,007.20 an ounce (-$7.40) at 4:01 p.m.

Crude oil on the NYMEX dropped by 3.92% or $2.79 a barrel to $68.42 (4:15 p.m.) while natural gas was up 25.1 cents today at $3.86 per 1,000 cubic feet.  When natural gas bottomed out on September 3rd, the spread between natural gas and oil in terms of BTU’s had grown to a factor of 5, and has now dropped to 3.06.  For more information on this subject, click this link.

Google Inc. (NSDQ: GOOG) CEO Eric Schmidt stated today that the company will start  considering strategic acquisitions again.  This is one sign that at least he is starting to see the economy on the comeback.

Tomorrow the G-20 meeting in Pittsburgh starts with the release of Jobless Claims at 8:30 a.m. (550K expected) and at 10:00 a.m. we get Existing Home Sales (5.35M exp.).  Fridays 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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News

Wall Street Wrap – Proctor and Gamble, E-Trade catch Upgrades

By Robert Perrego, at 5:27 pm on September 18th, 2009

E-Trade Financial Corp. (NSDQ: ETFC) caught an upgrade from Goldman Sachs Group Inc. (NYSE: GS) today and Citigroup Inc. (NYSE: C) upgraded Proctor & Gamble Co. (NYSE: PG) stock and raised its price target to $66 from $54.

E-Trade has been having a solid few weeks as in late August a large debt-for-equity swap caused S&P to upgrade the companies debt.  Two days later, Citadel, E-Trades largest shareholder, canceled plans to sell up to 120 million shares of the company, causing the stock to jump from $1.44 to $1.76 and trade as high as $1.94.  On Monday, Citigroup upgraded E-Trade to buy from hold.  Tuesday, E-Trade reported their August trading volume was up 18.3% from July and up 37% year over year.  It did not take long for more upgrades after that.  Give Citigroup credit for getting out in front of the trading update and today Goldman Sachs not only upgraded E-Trade to a buy, but they recommended selling one of their largest competitors, Charles Schwab Corp. (NSDQ: SCHW).  All in, E-Trade is up 26.8% since the debt for equity swap and was up 8.23% today, adding 14 cents a share and closing at $1.84.

Proctor & Gamble gapped up this morning on their own Citigroup upgrade rising $1.79 today (+3.22%, $57.32).  P&G is a member of the Dow Jones Industrial 30 and approximately each $1 move in a Dow component translates into about 7 points on the index.  The Dow closed up 36.28 points today and P&G chipped in for about 12.5 points, or one third of today’s market move.

The Dow gained 36.28 (+0.37%, 9820.20) and closed above 9,800 for the first time since October 10, 2008.  The S&P 500 rose 2.81 points (+0.26%, 1068.30) while the Nasdaq 100 added 4.15 points (+0.24, 1725.24).

Consumer cyclicals were up 0.92% followed by finance up 0.72%.  Energy fell 0.37% as oil dropped dropped 43 cents a barrel or 0.6% ($71.80, 4:37 p.m.).

New York Spot Gold is still hovering just above the $1,000 watermark after losing $5.90 an ounce today.  The yellow metal was last seen trading $1,006.40 (4:53 p.m.) after trading as high as $1,018.70.  While many may be afraid of buying into gold at this ‘high’ level, the question is whether it is in a consolidation or distribution phase.  As gold has risen to approximately this level multiple times in the past, a break higher from here would provide technical chart support at $1,000, setting up a  move many analysts see to as high as $1,250.

Natural gas had a strong day with the United States Natural Gas ETF (NYSE: UNG) jumping 3.19% (+$0.36, $11.64).  UNG has been in hot water lately as it has traded at a premium to its net asset value as a result of the options and futures strategies the fund employs.  The confusion about how these ETFs affect the actual trading of their commodities and the complicated strategies that are needed to model the price action of the underlying index or commodity, have attracted the eyes of the SEC and CFTC, only making potential investors less likely to buy.  Well, UNG has popped from $9.01 to $11.64 in the past two weeks (29%) so an iron stomach and taking on risk has paid off for anyone that got in recently.

Next Wednesday there is a meeting of the Federal Reserve Open Market Committee with a rate decision announcement at 2:15 p.m.  There is no expectation of a rate raise as most economists agree that the tepid economic recovery should not be subjected to rising rates.  Other than The Fed meeting, we have Jobless Claims and Existing Home Sales on Thursday with Consumer Sentiment, Durable Goods and New Home Sales on Friday.

Have a great weekend.

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