Wkly Recap & Outlk – 12.18.09

Tower Private Advisors

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Capital Markets Recap

I’m a bit pressed for time today, so you’ll have to put up with a bit of brevity, which should be quite refreshing.  Here’s a look at the markets as of 3:20 pm.

wro2It’s certainly a mixed bag with an equal number of positive and negative benchmark indexes.  The dollar has been strong this week, again, and that has put pressure on the commodities, especially the barbarous relic, which was John Maynard Keynes’ word for gold.  Notice, though, that crude oil has bucked the trend, thanks to Iran’s incursion into Iraq.  Natural gas is marching to its own beat, however, and might be moving solely for technical reasons.  I’d explain but you’d definitely ask to be removed from our e-mail update list.  It had to be helped, however, by news of ExxonMobil‘s purchase of natural gas producer XTO.

The dollar continues to attract attention from all quarters, so here’s a chart updating its action.  I’ve highlighted, with rectangles, each area of resistance that the dollar has worked through.  The green rectangles have each been overcome.  Here are the resistance areas that have been overcome, in order in which they were taken.

  1. Downtrend line (dotted purple)
  2. 55-day moving average (green line)
  3. 117-day moving average (yellow line)

The dollar is now dealing with the 23.6% Fibonacci retracement, which should be doable.  The next resistance will be at the red 200-day moving average.  If that level is overcome, you can expect the tenor of the discussion to change decidedly, to one where folks start to contemplate the damage of a stronger dollar.  At 80–the same level as the 38.2% retracement–folks might go apoplectic, and north of that I run out of adjectives.

gold

Dennis Gartman, one of the more respected names in the business, if for no other reason than he plays both sides of the fence–no, not that fence–in being both bullish and bearish at the right times, made the case this week that a stronger dollar doesn’t have to spell disaster for stocks.  In fact, the long term correlation with the dollar and stocks is quite positive.  It’s only more recently that they’ve begun to move inversely.  Part of the reason is that, as a low-yielding currency, the dollar is a cheap funding source–by selling it short–for investing in risk assets.  A minor reason might be well . . . miner, in that the falling dollar has made commodities cheaper and that has boosted the prospects of the miners and other commodity-related companies.

The dollar has been getting a lot of attention lately, making a bullish dollar trade seem too easy, especially since it’s one we’ve talked about here for some time.  Still, there is a lot of bearishness on the dollar, as there should be over the correct time frame, which is to say longer term.  In the short term, however, sentiment has gotten too bearish.

As the Next Blow-up post mentioned, and which is now old news, there is risk abroad.  Some of it’s sovereign, as in the case of Greece, some of it geopolitical, as in Iraq.  Regardless of your political leanings or what you think of the government printing press, the dollar and the U.S. are safe havens in times of distress.  When that ceases to be the case then the dollar’s hegemony (there, I finally used that word) will be over.  A flight to safety could send the bears running for their caves.

Top Stories

  • Adobe Systems (ADBE) beat profit estimates by cutting its workforce in a declining sales environment
  • Intel was sued by the U.S. for allegedly using its dominant market share position to “stifle chip competition,” in the words of Bloomberg.
  • Research in Motion announced earnings after the close on Thursday that sent its shares north by 10% today.
  • Oracle also beat the consensus estimate of analysts, and its shares rose by . . . 0.38%.
  • Citigroup fell sharply–by about 15% in three days–because Jim Cramer said to buy it after its share offering was priced lower than expected.
  • The Fed, in the statement that accompanied its decision to do nothing–something that Congress should try–about interest rates, hinted that the economy is improving.
  • Time magazine announced that Ben Bernanke was its man of the year.  The applause was as loud as could be expected from a one-armed man.saab
  • GM announced it will shutter its Saab facilities after the latest talks fell through.  Never had one; always wanted one.  Sigh.
  • Bill Gross, manager of the world’s largest bond fund–make that largest fund (we’ll have more to say about this subject next week.)–raised his cash holdings to the highest level since Lehman Brothers defaulted.  Depending on the relative level, that might really be important, as we understand that PIMCO’s chief investment officer (Mohammed el-Arian), after news of the default, told his wife to get as much cash out of the bank as possible.

This Week

The economic news was, in my estimation, mixed this week.  Producer Price Index rose more than expected in all categories, with the biggest surprise being in the headline monthly change, where prices rose by 1.8%, well above the consensus (0.8%) and the previous month (0.3%).  The Consumer Price Index measures were, however, little changed.

While Housing Starts and Building Permits figures rebounded nicely, the sentiment expressed in the NAHB Housing Market Index suggested that builders aren’t feeling the love, falling, as it did, from 17 to 16, below the consensus of 18. 

The Leading Economic Indicators rose again, from 0.3% to 0.9%, above the consensus of 0.7%.  Someone should have informed the folks in New York, however, as the Empire State Manufacturing index dropped like a rock to 2.55, from 23.51 and well below the consensus forecast of 24.00.  The Philly Fed index rose, however, from 16.7 to 20.4, above the consensus guess of 16.0.  Finally, our guess for Initial Jobless Claims beat the economists, both directionally and by magnitude.  Our mindless model said 491,000, while economists said 465,000.  Survey says . . . 480,000.

Next Week

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Tuesday – House Price Index [insert witty comment here]

Wednesday - Personal Income and Spending, University of Michigan Consumer Confidence, New Home Sales [insert witty comment here]

Thursday - Durable Goods Orders, Initial Jobless Claims [insert witty comment here]

Have a great weekend.

Graig Stettner, CFA, CMT  Δ  Vice President & Portfolio Manager  Δ  Tower Private Advisors

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