News

Housing and Auto Data Send the Market Higher

By Robert Perrego, at 5:36 pm on February 2nd, 2010

Housing, financial and auto companies blazed the market path lower last year as the poster children for the economic nightmare that took the Dow Jones Industrial Average from its all time high of 14,198 to the low at 6,469.  Today, while Paul Volcker continued beating up on the banks, Ford Motor Co. (NYSE: F), General (Government) Motors and D.R. Horton Inc. (NYSE: DHI) released data giving the market optimism and also 117 points.  Ford reported their January sales increased 25% and GM was up 14% while Toyota and Chrysler dropped.  D. R. Horton actually posted a profit and the Pending Home Sales Index increased by a percentage point on a month-over-month basis, showing a flicker of strength in the housing sector.

The Dow Jones Industrial Average added 111.32 points (+1.09%, 10,296.85) with 28 of 30 companies finishing with gains while the S&P 500 rose 14.13 points (+1.30% ,1103.32).  The Nasdaq 100 lagged behind, gaining only 16.20 points or 0.92% (1,776.92)

Treasury Secretary Timothy Geithner defended the largest budget ever proposed in the history of the world, as Senators grilled him on President Obama’s new $3.8 trillion budget, fully loaded with a $1.56 trillion deficit.  At the same time, Paul Volcker was defending legislation to limit proprietary trading by banks.  Somehow, someone got the idea that proprietary trading caused the credit crisis.  Back when professional proprietary equity trading was taking off (prop day-trading), it seemed every evil deed within 50 miles of Wall Street was blamed on ‘proprietary trading’, ‘fast money trading’ and ‘day traders.’  I was a prop trader for six years and from what I remember, the people that knew the least about trading always blamed trading, even when it had absolutely nothing to do with trading.  “Deja vu all over again.” (Yogi Berra 1960)

New York spot gold added another $8.30 an ounce (+0.75%, $1,113.90, 4:32 p.m.) after popping up $25 yesterday as the PowerShares DB US Dollar ETF (NYSE: UUP) looks like its recent rally is over.  The UUP lost 0.34% today as it closed below its 200 day exponential moving average and also broke below the uptrend line that has been in effect since January 14th.  Nothing moves straight up or down in the financial markets so, while the UUP’s medium term trend is still up, the short term picture is down.  The UUP closed at $23.27 and the 200 day EMA is at $23.31.  The relevant support levels below are $23.16 (top support) and $22.90 (50 day EMA).

Oil is on fire, literally and figuratively, as a cold winter in the United States has propped prices up and Nymex crude gained $2.64 a barrel (+3.55%, $77.07, 4:32 p.m.) for a second straight very strong day.  Strength was seen in most commodities and the record $1.56 trillion proposed budget deficit cannot be ignored here.  If we start running the dollar printing presses like that budget says, while holding interest rates low to create jobs, some very nasty inflation will not be far behind.

PNC Financial Services Group (NYSE: PNC) is going to offer $3 billion of common stock in order to redeem $7.6 billion of preferred shares it gave the U.S Treasury for a TARP loan.  One by one the private firms are paying the TARP back with interest and click here for a great web page that tracks where all the money went.  From what I can see Fannie Mae, Freddie Mac, General Motors, Chrysler and AIG have all our tax money.  I hope Volcker makes sure the auto companies, government sponsored entities (Fannie and Freddie) and insurance companies are not engaged in proprietary trading to protect us from more economic calamities.

We have MBA Purchase Applications reporting at 7 a.m. tomorrow, the Challenger Job-Cut Report at 7:30 a.m., ADP Unemployment at 8:15 a.m., the ISM Non-Manufacturing Index at 10 a.m. (51.0 expected) and the EIA Petroleum Status Report at 10:30 a.m.  Watch the oil market around that EIA report as the 6% gain in crude in the last 2 days will set oil up for a plunge if the numbers do not come in bullish.

Selected earnings estimates for Wednesday, February 3, 2010:

AFFX -0.10 after the close, AKAM 0.43, AMP 0.75 atc, ARW 0.61, AIZ 1.01 atc, BDK 0.77, BRCM 0.44 atc, CSCO 0.35 atc, CMCSA 0.27 before market open, DBD bmo, FNF 0.22 atc, HNT 0.67 bmo, HMC bmo, IP 0.23 bmo, ITT 0.93 bmo, WFR 0.00, MWW -0.01 atc, NOV 0.77 bmo, ONNN 0.14 atc, PFE 0.50, RL 1.01 bmo, RVSN 0.17, R 0.47, SLAB 0.62, SPF 0.02 atc, TMX 0.40 atc, TMO 0.88 bmo, TWX bmo, V 0.91 atc, WWW 0.45 bmo, YUM 0.48 atc.

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Wall Street Wrap

Market Strong on ISM Number

By Robert Perrego, at 5:37 pm on February 1st, 2010

The Dow Jones Industrial Average has lost 6.1% over the past two trading weeks and closed out last Friday right on a support level.  Futures were up in the pre-market and a favorable report from the ISM Manufacturing Index (58.4 vs. 55.0 expected) at 10 a.m. powered the market higher as the DJIA climbed 118.20 points (+1.17%, 10,185.53).  Apple Inc. (NSDQ: AAPL) gained $2.67 (+1.38%, $194.73) after a two day slide at the end of last week that sliced $15.82 (7.61%) off its stock price.  It seems that the sellers in the tech space were busy hitting Amazon.com (NSDQ: AMZN), as the recent dust-up with Macmillan brought the sellers out in force.  The largest online retailers stock was down $11.59 at its low but rebounded to close down only $6.54 (-5.21%, $118.87)

The S&P 500 rose 15.32 points (+1.43%, 1,089.19) and the Nasdaq 100 gained 19.68 points (+1.13%, 1,760.72)

Commodities were strong as the dollar sold off.  What we have most likely been seeing over the last couple of weeks is the unwinding of the dollar carry trade.  The very low short term interest rates in the U.S. right now has made shorting the dollar and using those funds to buy stocks and commodities a very popular, and profitable trade since March 9th of 2009. As the dollar strengthened on gradually improving economic conditions domestically, the shorts started to get squeezed, bought their short positions in and then had to sell some stocks.  As the dollar has reached a short term peak and the technical picture points to it selling off for now, these same ‘carry trade cowboys’ may be once again shorting the dollar and buying into the stock market.

New York spot gold ripped higher by $24.60 an ounce (+2.28%, $1,104.80, 4:40 p.m.) as the dollar declined, optimism rose about the global economy and on comments by St. Louis Federal Reserve President James Bullard that deflation was no longer a risk for the U.S. economy.  Eliminating the possibly of deflation makes the probabilities of the economy experience inflation increase, and many economists have said that keeping the current near zero interest rates this low for long could even result in hyper-inflationary conditions in the next few years.  This is not lost on the investing public as all one has to do to see an example of the belief that gold is an inflationary fighting vehicle, is to turn on any financial television station and count the number of advertisements about buying or selling gold you see per hour.

Inflation expectations also increased as President Obama unveiled the 2011 budget with a whopping $1.56 trillion deficit.  Last week Obama was promising a spending freeze in 2011 during his State of the Union speech and this week we have the biggest spending budget in history and a record projected budget deficit.  There oughta be a law!  Actually I think there is one, but they passed another one exempting all the politicians in Washington D.C. from the first one.

Black gold had an even stronger day than yellow gold as Nymex crude gained $1.97 a barrel (+2.70%, $74.86, 4:35 p.m.) on optimism about the world economy, dollar weakness and cold weather in the United States.  The Market Vectors Steel ETF (NYSE: SLX) rose 6.01% (+$3.28, $57.79) after getting sold off for almost 20% over the last three trading days.  Sugar ticked a 29 year high ($30.40) on the Intercontinental Exchange, the iPath Dow Jones-UBS Copper ETF (NYSE: JJC) was up 2.10% (+$0.87, $42.38), the Market vectors Coal ETF (NYSE: KOL) gained 3.22% (+$1.06, $33.91) and the United States Natural Gas Fund (NYSE: UNG) was up 5.26%, (+$0.49, $9.80)

Tomorrow we get the number for Motor Vehicle Sales (8.37 M expected), the ICSC-Goldman Store Sales at 7:45 a.m., the Redbook at 8:55 a.m. and the Pending Home Sales Index at 10 a.m.  Treasury Secretary Timothy Geithner testifies before the Senate Finance Committee on the fiscal year 2011 budget at 10 a.m. and at the same time Paul Volcker testifies on regulations to limit high-risk bank activities before the Senate Banking Committee.

Selected earnings estimates for Tuesday, February 2, 2010:

A quick scan will show you that we have a decent number of oil companies that are all reporting tomorrow – BP, MRO, SU, TSO and TDW.

ACE 1.93 after the close, AFL 1.15 atc, ADS 1.63, AMB 0.31 before market open, AXE 0.52 bmo, ADM 0.72 bmo, ADP 0.58 bmo, BEAV 0.31 bmo, BP 1.51 bmo, CMI 0.76, DHI -0.14, bmo, EMR 0.42 bmo, ETR 1.55, IRF -0.08 atc, JDSU 0.09 atc, LXK 0.63 bmo, MRO 0.51, MEE 0.27 atc, MET 0.95 atc, NWS atc, PBG 0.43 bmo, PRGO 0.66 bmo, SU 0.36 bmo, TSO -0.92 atc, DOW 0.11, HSY 0.60 bmo, SMG -0.83 bmo, TNB 0.63 bmo, TDW 1.20 bmo, UPS 0.74 bmo, UNM 0.64 atc, VRSN 0.34 atc, WHR 1.32 bmo.

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News

The Fed balance sheet and Inflation

By Robert Perrego, at 2:06 pm on April 24th, 2009

Much has been said about the Fed blowing up its balance sheet in the past months and how it should ‘inevitably’ lead to inflation.  This inflationary threat is what has all the ‘gold bugs’ loading up on gold ETF’s and the stocks of gold mining companies.  I should know – I am in this camp.

Well, today the Fed released its balance sheet and one item shows that the Fed took $74 billion of toxic debt onto its balance sheet from Bear Stearns and AIG and that these assets have already depreciated by $9.6 billion.

This buying of assets by the Fed means they pay out dollar bills into the financial system increasing the supply of dollars in circulation.  This increase in the supply of dollars floating around is what decreases the value of all the other dollars.  This is result of the Law of Supply – as the supply increases, what is out there decreases in relative value.  The gold bugs are saying that with more dollar bills out there that number of dollar bills you trade for an ounce of gold, which is more difficult to put into circulation, increases, i.e. the price per ounce goes up.  This would be true for all purchases made with the dollar.  Voila – Inflation.

The Fed contends that they can control this future inflation simply by selling or removing these assets from their balance sheet in the future at the ‘appropriate’ time.  A recent conference held by some of the Fed policy and decision makers left one guy, who knows a little something about the Fed, a bit confused. This guy was none other than Paul Volcker, one of the most famous inflation fighters of all time.  If what the Fed intends to do to control inflation confuses Volcker as to how well it will work… well, that is a bit scary.

By not taking sides in whether the current decision makers at the Fed can control future inflation through their deft machinations, I have one question;  ‘What about that $9.6 billion?’

Seems to me its gone and the greenbacks are still out there.  The Fed cannot sell the toxic assets to get those dollars out of circulation – that capacity is gone for good.

That my friends feeds inflation right there.

So what else did the Fed buy?  What is it all worth now?  What will it be worth in the future and how many dollars can the Fed pull back in out of circulation when these toxic debts are worth a lot less?

Maybe this is why the worlds largest holder of dollar bills, China, is quietly buying gold.

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