Morning Call: Friday, June 05, 2009
Good morning.
Markets bounced back both for financials and commodities as the "Reflation Trade" was put on again. It was almost as if the market had had the shakeout earlier and we were back on the track again. The persistence has a "Carry" feel to it. The Short on the US$ "Carries" the long on Oil, Base Metals and especially Gold. Carry Trades have been known to last for a decade or more.
We are awaiting the SAAR non-farm payroll and it should be down another 525k jobs. That should bring the unemployment rate from just under 9% (8.9 %) to about 9.25%. That number is understated as well because we've been told of Embassies giving their nationals airline tickets home if their citizens lose their jobs in the US. But all in all we aren't in the worst recession in 50 years. So far we rival the 1982 experience which was bad enough. The actual numbers are 345K jobs were lost which is great and the unemployment rate of 9.4%, which isn’t.
The bad statistics ensure that the FED won't change its stance soon, which leaves the steepest yield curve since Greenspan flooded the system after Y2K. Steep yield curves allow the Banks to earn their way back to solvency and balance sheet respectability. Low rates sustain high dividend stocks and we always have significant growth after steep yield curves. The incredible amounts of money being deployed gives reasonable doubt to the long term value of the US$. The yield curve may promote growth which is good for the demand for oil and commodities and since they're denominated in US$ they benefit from the greenback's decline.
Yesterday's Q3 Auto Production schedule spoke to an unexpected turn in economic activity. Enough maybe to have the GDP come in at a positive number in Q3? This combination of yield curve slope and maybe an economic turn is the basis for the Financials. The Carry Trade on the US$ has commodities moving. Oil actually benefits from both. Thus the counterintuitive market leadership from the banks, oils and commodities. How long can it go on? Well usually for longer than one expects. It doesn't hurt that Goldman is forecasting year end oil prices at $85 this year and $95 next year.
Internationally there is some significant developments. RTZ is backing away from the Chinalco deal to do a $15B rights issue. To make up the rest they're transferring their best iron ore asset into a JV with BHP which BHP will control. No one should complain about selling Alcan for $100B.
Debenhams did a £323mm issue and to make it "Right" gave their existing shareholders the ability to clawback if they buy the issue.
However the UK as a country has a bag of problems that have the potential to play out as a precursor to the US $. An unmanageable fiscal deficit, a possible financing risk and a regime changing Election. On top of that there's a real risk of losing their AAA rating. That would be viewed as possible dress rehearsal for the US$.
Volatility is back and so the trader slang of buy the dips and sell the flips would apply.
But we think……………… invest the money.
The bad statistics ensure that the FED won't change its stance soon, which leaves the steepest yield curve since Greenspan flooded the system after Y2K. Steep yield curves allow the Banks to earn their way back to solvency and balance sheet respectability. Low rates sustain high dividend stocks and we always have significant growth after steep yield curves. The incredible amounts of money being deployed gives reasonable doubt to the long term value of the US$. The yield curve may promote growth which is good for the demand for oil and commodities and since they're denominated in US$ they benefit from the greenback's decline.
Yesterday's Q3 Auto Production schedule spoke to an unexpected turn in economic activity. Enough maybe to have the GDP come in at a positive number in Q3? This combination of yield curve slope and maybe an economic turn is the basis for the Financials. The Carry Trade on the US$ has commodities moving. Oil actually benefits from both. Thus the counterintuitive market leadership from the banks, oils and commodities. How long can it go on? Well usually for longer than one expects. It doesn't hurt that Goldman is forecasting year end oil prices at $85 this year and $95 next year.
Internationally there is some significant developments. RTZ is backing away from the Chinalco deal to do a $15B rights issue. To make up the rest they're transferring their best iron ore asset into a JV with BHP which BHP will control. No one should complain about selling Alcan for $100B.
Debenhams did a £323mm issue and to make it "Right" gave their existing shareholders the ability to clawback if they buy the issue.
However the UK as a country has a bag of problems that have the potential to play out as a precursor to the US $. An unmanageable fiscal deficit, a possible financing risk and a regime changing Election. On top of that there's a real risk of losing their AAA rating. That would be viewed as possible dress rehearsal for the US$.
Volatility is back and so the trader slang of buy the dips and sell the flips would apply.
But we think……………… invest the money.
BDIY Index (Bloomberg): The Baltic Dry Index (replaces the Baltic Freight Index). A composite of Baltic Capesize, Panamax, Handysize and Supramax indices. The index is designed as the successor to the Baltic Freight Index and was first published on 1 November 1999.
Quote of the Day:
“The best weapon against an enemy is another enemy.”
-- Friedrich Nietzsche
Ed Pennock, CFA, Managing Director
416-369-6921, epennock@dominick.ca
Graham Farrell, Institutional Equity Trading
416-369-4208, gfarrell@dominick.ca
-- Friedrich Nietzsche
Ed Pennock, CFA, Managing Director
416-369-6921, epennock@dominick.ca
Graham Farrell, Institutional Equity Trading
416-369-4208, gfarrell@dominick.ca
The above note is prepared by an Institutional Salesperson based on morning meeting comments and general Institutional desk discussion and should not be construed as a research report or a solicitation. For information purposes only. D&D Securities, its clients, and principals may have positions in these securities.
