Archive for July, 2010

China Becomes Second Biggest World Economy

Friday, July 30th, 2010

China has overtaken Japan to become the world’s second-largest economy, the fruit of three decades of rapid growth that has lifted hundreds of millions of people out of poverty. 

Depending on how fast its exchange rate rises, China is on course to overtake the United States and vault into the No.1 spot sometime around 2025, according to projections by the World Bank, Goldman Sachs and others. China came close to surpassing Japan in 2009 and the disclosure by a senior official that it had now done so comes as no surprise. Indeed, Yi Gang, China’s chief currency regulator, mentioned the milestone in passing in remarks published on Friday.

China, in fact, is now already the world’s second-largest economy.

Cruising past Japan might give China bragging rights, but its per-capita income of about $3,800 a year is a fraction of Japan’s or America’s. China is still a developing country, and we should be wise enough to know ourselves. This will probably bring on the seculators that the yuan is to become an international currency.

Can It Be Sustained?

China’s economy expanded 11.1 percent in the first half of 2010, from a year earlier, and is likely to log growth of more than 9 percent for the whole year, according to Yi. China has averaged more than 9.5 percent growth annually since it embarked on market reforms in 1978. But that pace was bound to slow over time as a matter of arithmetic, Yi said. If China could chalk up growth this decade of 7-8 percent annually, that would still be a strong performance. The issue was whether the pace could be sustained, Yi said, not least because of the environmental constraints China faces.

In an assessment disputed by Beijing, the International Energy Agency said last week that China had surpassed the United States as the world’s largest energy user. If China can keep up a clip of 5-6 percent a year in the 2020s, it will have maintained rapid growth for 50 years, which Yi said would be unprecedented in human history. The uninterrupted economic ascent, which saw China overtake Britain and France in 2005 and then Germany in 2007, is gradually translating into clout on the world stage.

China is a leading member of the Group of 20 rich and emerging nations, which since the 2008 financial crisis has become the world’s premier economic policy-setting forum. In one important respect, however, China is still a shrinking violet: anxious to shield itself from the rough-and-tumble of global markets, it does not permit its currency to be freely exchanged except for purposes of trade and foreign direct investment. And Yi said Beijing had no timetable to make the yuan fully convertible.

“China is very big and its development is unbalanced, which makes this problem much more complicated. It’s difficult to reach a consensus on it,” he said. In the same vein, China was in no rush to turn the yuan into a global currency.

China would stick to the principle of holding its $2.45 trillion of official reserves in a mix of currencies and assets. The stockpile — the world’s largest — was so big that it was impossible to adjust its currency composition in a short space of time: “We won’t be particularly bearish on the dollar at a given time or particularly bearish on the euro at another time.”

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GDP Disappoints While Consumer Sentiment Is Low

Friday, July 30th, 2010

The DJIA 10,457, -10.45, -0.10%) fell as much as 120 points soon after the open, though the blue-chip average pared losses to recently trade at 10,457, down 11 points, or 0.1%. Still, stocks are set to close out a particularly strong month on Friday. The Dow average and the S&P – SPX 1,102, +0.80, +0.07%) are on pace for their first monthly gains since April and their biggest monthly increases since July 2009.U.S. stocks fell Friday after government data showed economic growth slowed in the second quarter, though they regained some lost ground after better-than-expected reports on consumer confidence and manufacturing. 

 A survey by Reuters and the University of Michigan showed consumer sentiment fell in late July to 67.8 from 76 in late June, still better than an earlier reading and economists’ estimates. A separate report on Chicago manufacturing showed a surprise strengthening in the region.

The government’s estimate of U.S. gross domestic product, or the value of all goods and services produced, having risen 2.4% in the second quarter, down from its latest estimate for first-quarter GDP of 3.7%, follows a recent trend of weak economic data.

And while corporate results have largely been beating analysts’ estimates this earnings season, Merck and Chevron both posted revenue below expectations Friday morning, adding to investors’ concerns.

The declines came after the Commerce Department said U.S. gross domestic product, or the value of all goods and services produced, rose at an annualized seasonally adjusted rate of 2.4% in April to June, smaller than the 2.5% growth that was expected. The report showed growth was lifted by business investments and exports while consumer spending, a key growth engine for the U.S. economy, made a smaller contribution to growth.

In the first quarter, the economy grew by 3.7%, revised up from an originally reported 2.7% increase. But growth estimates all the way back to the start of 2007 were revised lower.

Separate data released Friday showed a weak economy held down U.S. wages and salaries in the second quarter as high unemployment curbed workers’ abilities to push for larger pay packages. The employment cost index gained 0.5%, in line with expectations.

The dollar strengthened against the euro, which slipped to $1.3006 in recent trading. However, the yen rose to a 2010 high against the dollar. The U.S. Dollar Index, which tracks the U.S. currency against a basket of six others, edged up 0.3%.

Treasurys were also higher, pushing the yield on the 10-year note below 3% to 2.92%

If my advice was taken from earlier posts, you could have scalped SPY puts with a gain of 140% and sold!!

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Markets Recover From A 110 Loss But Bears Win

Thursday, July 29th, 2010

It was a wild day, but in the end the bears have made it two in a row.  Amid a mixed bag of earnings and economic news technicals will rule, as the S&P (SPX) peaked near its 200-day moving average. It was a roller-coaster day for the equities market, as traders considered a fresh onslaught of corporate earnings, economic data, and Fedspeak.

Exxon Mobil (XOM) and Colgate-Palmolive (CL)sparked early anxiety by falling short of Wall Street’s second-quarter revenue expectations, but the Labor Department helped offset some of those concerns with its weekly report on jobless claims. The number of first-time filers for unemployment benefits dropped by 11,000 last week, marking a steeper-than-anticipated decline. However, St. Louis Fed President James Bullard spooked investors by warning of potential “Japan-style” deflation if interest rates remain perpetually low. Not to be outdone, Dallas Fed head Richard Fisher warned of a “slow slog… out of a hellish downturn” for the U.S. economy, and added that “further monetary accommodation” would be tantamount to “pushing on a string.”

The Dow Jones Industrial Average (DJIA – 10,467.16) rebounded from a 110-point intraday deficit to settle on a more modest decline of 30.7 points, or 0.3%. Nineteen of the 30 blue chips ended lower.

The S&P (SPX – 1,101.53) also clawed back from its session lows, managing a photo finish above the round-number 1,100 level. The SPX shed just 4.6 points, or 0.4% but again the SPX is still battling pressure from its 200-day moving average.

Tomorrow News about Q2 GDP, most likely revised downward. Hope you protected your gains with Puts.

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Markets Hit Technical Top: 200 Day MA

Thursday, July 29th, 2010

The DJIA was up more than 60 points this morning, after snapping a four-day winning streak on Wednesday. As the day progressed markets fell into negative territory. What’s the cause of the sudden drop? I’ve noticed the 100 day Moving average is sitting above the 200 day Moving Average. Technically if the bull trend were to continue the 100 must be below the 200 day MA pointing upwards. In this case we’re seeing a downward sloping 100 day moving average which suggests to me we topped out in the interim. It’s still premature to say whether we’re heading back down. As I had indicated earlier all bets are off if we cannot break above 1120 mark in the S&P. I would suggest to protect your assets by buying puts for the downside. If my analysis holds true and we continue our current trend, we’re heading towards 980 for the S&P.  

In other News:

New U.S. claims for unemployment benefits fell slightly more than expected last week, offering a ray of hope for the anemic labor market recovery.  Initial claims for state unemployment aid dropped 11,000 to 457,000, the Labor Department said on Thursday. Analysts polled by Reuters had forecast claims slipping to 459,000 from the previously reported 464,000 the prior week, which was revised slightly up to 468,000 in Thursday’s report. The four-week average of new jobless claims, seen as a better measure of underlying labor market trends, fell 4,500 to 452,500. 

Jobless claims have not fallen much this year and remain above levels that analysts say are consistent with sustained jobs growth.

Sluggish jobs growth remains the biggest obstacle to the economy’s recovery from its longest and deepest recession since the 1930s, which showed signs of slowing down in the last couple of months. With unemployment high, consumer spending has been tepid and home foreclosures remain elevated as people find it hard to pay their mortgages. Foreclosures rose in three of every four large U.S. metro areas in the first half of this year, likely ruling out sustained home price gains until 2013, real estate data company RealtyTrac said on Thursday.

The government is expected to report on Friday that growth slowed to a 2.5 percent annual rate in the April-June period from a 2.7 percent pace in the first three months of the year.

In the week ended July 17, 4.57 million people were still receiving benefits after an initial week of aid, up 81,000 from the prior week. The continuing claims data covered the survey period for the government’s July household survey from which the national unemployment rate is derived. Analysts polled by Reuters had forecast so-called continuing claims increasing to 4.55 million.

The insured unemployment rate, which measures the percentage of the insured labor force that is jobless, edged up to 3.6 percent in the week ended July 17 from 3.5 percent the prior week. The number of people on emergency unemployment benefits fell to 3.3 million in the week ended July 10.

But that number is set to rise after benefits were restored last week to about 2.5 million unemployed Americans after Congress ended an impasse on how to cover the $34 billion cost of extending aid through November. The benefits had lapsed in May. In normal times, benefits expire after 26 weeks, but the severity of the recession prompted Congress to expand the program to cover up to 99 weeks of benefits.

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Stocks End Streak: California $19b. Budget Deficit

Wednesday, July 28th, 2010

Stocks snapped their four-day winning streak Wednesday after the Fed’s latest “beige book” report pointed to a sluggish recovery and earnings from Boeing disappointed. 

The DJIA fell 39.81, or 0.4 percent, to close at 10,497.88, after logging four straight gains. The S&P 500 shed 0.7 percent but finished above the key 1,100 mark. The CBOE volatility index, widely considered the best gauge of fear in the market, was above 24 at the closing bell.

Boeing (BA  67.32)was the biggest drag on the Dow, down 1.9 percent, after the aerospace giant reported its profit fell in the latest quarter amid lower commercial-plane deliveries and defense revenue and higher taxes. The company also issued a disappointing outlook. Alcoa (AA  11.04) declined 1.5 percent a day after Fitch gave Alcoa’s latest debt offering an investment-grade rating but said it’s keeping its “negative” outlook for the company amid pressure on the aluminum market.

The Fed’s latest “beige book” report, named for the color of its cover, indicated that while economic activity in some areas of the country increased, a few districts still saw some signs of softening. “Among those districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two districts, Atlanta and Chicago, said the pace of economic activity had slowed recently,” the Fed said. Last week, Fed Chairman Ben Bernanke called future growth “uncertain,” which led to a selloff in stocks and worried investors who look to Bernanke for reassurances that a rebound is underway. 

Earlier reports showed investor confidence among the wealthiest investors fell to its lowest level in nearly a year, durable-goods orders unexpectedly fell 1 percent in June and mortgage applications fell 4.4 percent last week.

California

California Governor Arnold Schwarzenegger declared a fiscal state of emergency Wednesday, requiring most state employees to take three days of unpaid leave per month until a new budget is enacted.  Schwarzenegger said the state, which faces a budget deficit of 19 billion dollars, is on the verge of a “fiscal meltdown” and could be forced to issue IOUs starting in August to avert a new cash crisis.

“Our cash situation leaves me no choice but to once again furlough state workers until the legislature produces a budget I can sign,” he said in a statement. He said the state has already taken “extraordinary measures to conserve cash,” such as deferring payments to schools and other local governments but that the crisis is deepening with no state budget for the 2010-2011 fiscal year expected soon. The “furlough Friday” starting in August requires state employees to take three Fridays per month off without pay until the state gets a new budget and the state’s finance officials certify that it has enough cash to meet its obligations.

Exempt from this are employees in agencies involving public safety, including the California Highway Patrol and Department of Fire and Forestry Protection; and in revenue generation, including the Franchise Tax Board, which collects tax receipts. With the most populous US state hit hard by the economic crisis and lower tax revenues, Schwarzenegger earlier this year proposed a budget that would call for spending cuts of 12.4 billion dollars and sharply reduce funding for services designed to help the state’s poor. Schwarzenegger said the cuts were necessary to close a huge projected deficit for the fiscal year starting July 1.

The former actor-turned governor has refused to raise taxes to narrow the shortfall and described his proposed cuts to spending as “painful” but essential. A budget crisis last year pushed California, which would have the world’s eighth largest economy if it were a country, to the brink of bankruptcy, sending the state’s credit-rating plunging and forcing it to start paying bills with IOUs. Analysts and legislators say California’s seemingly eternal fiscal gridlock is a consequence of the state’s constitution, which requires a two-thirds majority to pass a budget or raise taxes.

Well Ladies and Gents -the budget shortfall will be back stopped by government intervention and tax-payer dollars. This will eventually push Gold values even higher.

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Durable Goods Orders Stays Weak

Wednesday, July 28th, 2010

New orders for long-lasting U.S. manufactured goods unexpectedly fell for a second straight month in June, posting their largest decline since August, further evidence economic growth cooled in the second quarter.  The Commerce Department said on Wednesday durable goods orders fell 1.0 percent after a revised 0.8 percent drop in May.

Analysts polled by Reuters had forecast orders increasing 1.0 percent in June from May’s previously reported 0.6 percent fall. Durable goods orders had been expected to rise based on the fact that Boeing (BA) // received 49 orders for civilian aircraft in June compared to only five in May. But non-defense aircraft orders tumbled 25.6 percent in June after falling 30.2 percent the prior month. Overall orders were also pulled down by bookings for computers and electronic products, which saw their largest decline since October.  Orders for machinery recorded their biggest decline in 14 months, while those for primary metals fell by the most since March 2009. Durable goods orders are a leading indicator of manufacturing, which in turn provides a good measure for overall business health. Manufacturing is leading the economy’s recovery from the most brutal downturn since the 1930s as businesses replenish inventories drawn down to record lows during the recession, but has shown some signs of exhaustion in recent months.

New durable goods orders excluding transportation fell 0.6 percent last month after increasing 1.2 percent in May. Analysts polled by Reuters had forecast new orders excluding transportation gaining 0.3 percent from a previously reported 1.6 percent increase. In a positive sign, non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, rose 0.6 percent in June after increasing an upwardly revised 4.6 percent the previous month. Markets had expected a flat reading. Durable goods inventories rose 0.9 percent, increasing for the sixth straight month. Shipments, which go into the calculation of gross domestic product, fell 0.3 percent in June after sliding 0.7 percent in May. Unfilled orders were flat after increasing 0.3 percent in May.

The number was weaker than expected and it could add to the idea that the economy is slipping into a double dip recession. Data ranging from consumer spending to manufacturing have suggested the recovery from the longest and deepest recession since the 1930s took a step back in the past few months.

The government is expected to report on Friday that growth slowed to a 2.5 percent annual rate in the April-June period from a 2.7 percent pace in the first three months of the year, according to a Reuters survey.

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S&P Holds Key 1100; But Markets Flat

Tuesday, July 27th, 2010

Stocks didn’t stray too far from breakeven today, as the latest round of earnings and economic reports launched a session-long battle between the bulls and the bears. In the optimists’ corner of the ring was blue-chip chemical company DuPont (DD), which reported solid second-quarter earnings and lifted its full-year forecast. In addition, the S&P/Case-Shiller home price index rose 1.3% from April to May, echoing Monday’s upbeat housing stats.

On the flip side, the bears came out swingin’ after a steeper-than-anticipated dip in the Conference Board’s Consumer Confidence index, which fell to a five-month low of 50.4 in July. Nevertheless, by the time the closing bell sounded, it was essentially a wash. Given we’ve just had three straight 100-point gains, today’s flat market has to be considered a victory for the bulls.

The S&P  (SPX – 1,113.84) wasn’t as fortunate as its blue-chip brethren, giving up 1.2 points, or 0.1%. Nevertheless, the SPX maintained its perch atop the 1,100 level, and is now virtually neck-and-neck with its 200-day moving average.

Gold futures erased early gains to finish lower today, as a softer dollar negated the metal’s allure as a safe-haven investment. In addition, gold’s intraday breach of $1,175 an ounce triggered a slew of sell-stop orders, exacerbating bullion’s slide. Taking a cue from the oil pits, August-dated gold futures succumbed to their steepest single-session dip since July 1, surrendering $25.10, or 2.1%, to settle at a three-month low of $1,158 an ounce. This is a leading indicator as Risk trade into equities is back on.

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US Home Prices Rise For May

Tuesday, July 27th, 2010

U.S. stock futures climbed Tuesday morning after data from S&P/Case-Shiller showed U.S. home prices rose in May, while another round of strong earnings also gave the market a boost.  The S&P Case-Shiller home-price indexes released Tuesday showed home prices were boosted in May by seasonal factors and the residual impact of the now-discontinued first-time home buyers’ tax credit. The Case-Shiller 10-city index rose 1.2% compared with April; the 20-city index rose 1.3%. Adjusted for seasonal factors, both increased 0.5%. From a year earlier, the 10-city index rose 5.4%, and the 20-city reading climbed 4.6%.

Still, cautioned David M. Blitzer, chairman of S&P’s index committee: “While May’s report on its own looks somewhat positive, a broader look at home price levels over the past year” doesn’t show that the housing market “is in any form of sustained recovery.”

Dow Jones Industrial Average were up 65 points at 10522, while the S&P climbed 8 points to 1117. Prior to the housing data, Dow futures had been up 56 points, while S&P 500 futures rose 6 points and Nasdaq futures climbed 10 points. Changes in stock futures do not always accurately predict early stock moves after the open.

Earlier gains in stock futures had followed strong earnings from Dow component DuPont as well as European banks UBS and Deutsche Bank. DuPont’s shares climbed 4.9% in premarket trading as the chemical giant’s second-quarter profit almost tripled, while revenue increased more than expected on improved volume and higher selling prices.

American depositary shares of UBS jumped 8.1% and Deutsche Bank advanced 5.8% premarket. UBS posted a far better-than-expected second-quarter profit as its investment bank held up better than rivals and further stanched withdrawals at its private-banking arm. Deutsche Bank, meanwhile, posted a 6.2% increase in second-quarter net profit, aided by a sharp drop in its provision for bad loans, gains from its acquisition of ABN Amro’s commercial banking assets in the Netherlands and lower valuations of Deutsche Bank’s own debt.

Among other stocks in focus, BP’s shares fell 1% in London, while its U.S. shares flitted between small gains and losses in premarket trading. The company posted a $17.15 billion loss for the second quarter as it made provision for $32.2 billion dollars in costs related to the Gulf of Mexico oil spill. Meanwhile, the oil giant launched a radical shakeup, including plans to sell around $30 billion in assets, replace chief executive Tony Hayward with Bob Dudley, and alter the way it does business.

The euro rose to an 11-week high against the dollar following the bank earnings as well as encouraging euro-zone economic data, with the monthly Confederation of British Industry’s Distributive Trades Survey’s headline U.K. retail-sales balance soaring to +33 from -5 in June, the highest level since April 2007. The euro was recently trading at $1.3015.

The U.S. Dollar Index, reflecting the U.S. currency against a basket of six others, slipped 0.1%. Treasurys also slipped, lifting the yield on the 10-year note up to 3.04%. Gold futures fell, while crude-oil futures rose above $79 a barrel.

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S&P Hits 200-Day Average Amid Light Volume

Monday, July 26th, 2010

The S&P settled just above its 200-day moving average after FedEx raised its forecast and new home sales figures for June proved better than expected. Trading volume was light, though.

FedEx (FDX 83.39, +4.43) helped improve the mood of market participants this morning when it added $0.20 to its first quarter earnings per share outlook. The global shipment company now believes that profits for its first fiscal quarter will range from $1.05 to $1.25 per share, which exceeds the consensus call of $1.01 per share. While the broader market showed a positive response to the announcement, gains were much more pronounced among industrial plays (+1.7%).

A near 24% month-over-month surge in new home sales increased interest in stocks. The stronger-than-expected spike in sales took the annualized rate to 330,000 for June. New home sales had been expected to hit a more modest annualized rate of 310,000 units after they recorded record lows in May. That helped the homebuilder ETF (XHB 15.82, +0.40) outperform.

The positive headlines helped drive stocks higher, but resistance at the S&P 500’s 200-day moving average kept a cap on gains until another round of buying helped the broad market measure settle above the key hurdle for the first time in one month.

Some market watchers will no doubt be quick to point out that participation was modest and that light volume can exaggerate the stock market’s moves – hardly 1 billion shares trading hands on the NYSE. The lack of volume suggests that many investors prefer to remain on the sidelines amid uncertainty over whether stocks will hold recent gains or if the global economy’s recovery effort is strong enough to warrant those gains in the first place.

There weren’t any major earnings announcements for traders to digest this morning, but Genzyme (GENZ 67.38, +4.86) continues to find itself in the center of ongoing takeover chatter.

In other news, Tony Hayward, current CEO of embattled BP (BP 38.65, +1.79), will resign his position as company head in October. Speculation on the matter had started to intensify during the weekend.

The euro had a strong session. Specifically, the currency climbed 0.7% against the greenback to settle near $1.30, which puts it within striking distance of its two-month high. Conversely, the Dollar Index dropped 0.5% to set its lowest level since early May.

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Morning Trade: A123

Monday, July 26th, 2010

A123 Systems (AONE) shares are gaining ground this morning after Barclays Capital analyst Vishal Shah raised his rating on the stock to Overweight from Equal Weight, with a new price target of $16, up from $14. Shah notes that the battery maker’s shares are down 60% year to date, due to “diminishing investor interest” in the battery sector and a lack of near-term catalysts. But he thinks successful ramps at electric car start-up Fisker and heavy-duty customers and favorable electric vehicle legislation can provide a boost to the stock.

Shah says his checks suggest Fisher could start commercial production of 100-200 vehicles in December, ramping to 1,000 units a month by the end of February 2011, a rate he says is ahead of investor expectations. He also says the company is track to supply batteries for 200 vehicles to Navistar in the second half.

AONE this morning is up  13.5%.

The brokerage firm also hiked its price target on AONE from $12 to $14, implying expected upside of nearly 49% to Friday’s close at $9.42. The analyst community maintains a moderately skeptical opinion of AONE, with Zacks reporting eight “buy” or better ratings, along with eight “holds” and one “sell.”

During the short term, heavy overhead call open interest could help to reinforce this existing technical roadblock. AONE’s out-of-the-money August 10 strike is home to peak call open interest of 2,571 contracts, which could exert options-related resistance as expiration draws closer.

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