Thursday, October 8, 2009

GLOBAL OUTLOOK OCT 8: Risk Assets Continue Rise, AA Announcement Good?!


- Stocks: Wednesday: Asia, Europe, US up, Thursday morning Asia, Europe up

- FX: Higher equities, AUD rate rise brings bias against safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD down against most riskier majors, JPY, this trend continuing today.

- Main events today: AUD: Employment Change, Unemployment Rate, EUR: German Ind. Prod., Min. Bid Rate, ECP Press Confr. GBP:Asset Purchase Facility, MPC Rate St., Official Bank Rate, CAD: Housing Starts, USD: Unemployment Claims

- Big Theme: Rising risk appetite, continued USD weakness, first high profile US earnings report from Alcoa spurs optimism & rally despite data that suggests otherwise (see Report Below)


Leadership from the financial sector helped stocks log their third straight gain after they spent most of the session chopping along in negative territory amid a moderately stronger U.S. dollar. Though the greenback's gains weighed on the stock market and many commodities, it didn't deter gold from extending recent gains.

Stocks spent most of the session trading listlessly as the Dollar Index recovered from losses in the past three sessions to advance 0.2% Wednesday. However, bank stocks emerged with strength after struggling to find direction in the early going. With banks finishing strong, the KBW Bank Index netted a 1.2% gain and the broader financial sector settled at session highs with a 1.0% gain.

The energy sector was the next best performing sector. It finished 0.6% higher even though oil prices closed pit trade 1.7% lower at $69.66 per barrel. Oil prices were hampered by bearish gasoline inventory data, which overshadowed news of a 978,000 barrel draw in crude oil. The consensus had called for a build of 2 million barrels of crude.

Monsanto (MON 74.33, -1.04) was also a drag on the materials sector. The company posted better-than-expected adjusted earnings of $0.02 per share, but reaffirmed downside guidance for fiscal 2010.

Other earnings announcements were generally positive as Yum! Brands (YUM 34.37, -0.49), Costco (COST 59.00, +1.07), and Family Dollar (FDO 28.21, -0.27) each bested earnings expectations for the latest quarter.

Leadership from the financial sector may have led the S&P 500 to a strong finish, but it couldn't prevent the telecom sector from logging an outsized loss of 2.9%. Weakness among integrated telecom giants AT&T (T 26.18, -0.56) and Verizon (VZ 29.38, -0.31) kept the Dow from making a gain of its own.

Special Report: Q3 Earnings Season Highlights: BS From AA?

Alcoa was the first high profile name to report this Q3 Earnings season. If they are representative of what's coming from the other "big name announcements," then expect Q3 to be very much a repetition of Q2: Bad results portrayed as good ones based on beating low estimates, profits from unsustainable cost cutting outpacing badly declining revenues.

Media Spin

Here's an excerpt from a typical article, by Daniel Lovering of AP.

source: [;_ylt=AurNNqSOXrpWrjIWZTIAE_m7YWsA;_ylu=X3oDMTE2ZG41bTh1BHBvcwMxMARzZWMDdG9wU3RvcmllcwRzbGsDYWxjb2FyZXR1cm5z/* ]

Painful cost-cutting and rising sales to automakers helped the nation's largest aluminum producer return to profitability for the first time in nine months.

Alcoa Inc. on Wednesday also forecast an 11 percent increase in worldwide aluminum demand in the second half of the year, fueled partly by robust growth in China. The lightweight metal is used in everything from airplanes to cars to houses.

Even though Alcoa reported a 71 percent drop in third-quarter profit from a year earlier, the results were a relief after three straight quarterly losses.

"We do clearly see growth, substantial growth ... in China," Alcoa CEO Klaus Kleinfeld told analysts and reporters after the company reported results. "(The) second half of the year is clearly better than the first half in many industries and many regions."

The Pittsburgh-based company said rising demand from several industries, especially automakers, lifted its revenue compared with the prior three months. Sales to automakers jumped 21 percent from the second quarter.


Looking at their financial statements we see:

Evidence of Unsustainable profits. On the line "other expenses" in income statement, Alcoa add 123m as income in 3Q09 vs. 15m as expense in 3Q08. Net $138m towards income in 3Q09. All net income $77m in 3Q09 come out from this unknown source and still short of 51m. Cost cutting: SGA was 234m in 3Q09 vs. 275m in 3Q08, save 41m; R/D, 39m vs. 61m, save 22m; total 63m. That mysterious 123m other expenses-turned income was the major contributor to 3Q09. What is this? A negative cost as income reported among expense items suggest exactly that, a reversed expense, typically a one time event like a reimbursement or reversal of a contingency that never occurred.

From a YOY perspective:

q3 revenues (- 40%)

q3 eps (-90%)

q3 tonnage (-9%)

How has the market valued AA?

share price October 8 2008 $14.71

share price October 7, 2009 $14.20 (after hours $14.99)

[see: for details from AA website]

The comparison looks even more ridiculous when you add the facts that during that time period AA diluted shareholders by issuing 150 million shares of common stock at $5.25/share, $.28 above the 52 week low and $500 million of convertible bonds at the same time. In the last 12 months they've also cut the quarterly dividend from $.17 to $.03 per share.

If this is any indication of how Q3 will go, expect stocks to continue to rise irrationally. It can continue, but the higher it goes, the harder the fall when/if reality dawns.

Separately, Treasuries made solid gains. The benchmark 10-year Note settled some 22 ticks higher, which pushed its yield back below 3.2%, following strong results from a $20 billion auction of 10-year Notes.

Advancing Sectors: Financials (+1.0%), Energy (+0.6%), Tech (+0.5%), Consumer Staples (+0.3%), Materials (+0.2%), Health Care (+0.2%), Consumer Discretionary (+0.1%)

Declining Sectors: Telecom (-2.9%), Industrials (-0.3%), Utilities (-0.2%)DJ30 -5.67 NASDAQ +6.76 NQ100 +0.3% R2K unch% SP400 unch% SP500 +2.86 NASDAQ Adv/Vol/Dec 1300/2.23 bln/1319 NYSE Adv/Vol/Dec 1567/1.09 bln/1384

FYI: Think the good times will continue? Consider the following article, which essentially claims that once US QE ends in October, demand for US bonds could collapse and force an interest rate rise that could potentially threaten the US banking system. See:

Asia: Up on optimism from US markets, commodity stocks lead.

Europe: Up following US, Asia



ASIA- UP N225I +0.18% HS +1.87 % SSEC +0.90% FTSTI +1.09% AORD +0.39 %

EUROPE - UP FTSE +2.26 % DAX +2.70% CAC +2.59 %

US- UP S&P +1.37% DJIA +1.37% NASDAQ +1.37%



N225I +0.34% HS +1.18 % SSEC +0.90% FTSTI +0.85% AORD +1.44 %


FTSE +1.05 % DAX +1.47 CAC +1.61%

COMMODITIES: Though a stronger dollar likely added to oil's woes this session, it didn't derail gold from continuing its ascent. Gold futures closed at $1044.70 per ounce, up 0.5%, but had been as high as $1049.70 per ounce in overnight trade. Small-cap gold stocks and precious metals stocks of a lower quality benefited most from gold's gains as momentum money trickled into the group. That helped the materials sector (+0.2%) offset general weakness among commodities-related stocks and basic materials stocks that stemmed from a 0.4% decline in the CRB Commodity Index.

Oil: oil prices in US trade Wednesday closed 1.7% lower at $69.66 per barrel. Oil prices were hampered by bearish gasoline inventory data, which overshadowed news of a 978,000 barrel draw in crude oil. The consensus had called for a build of 2 million barrels of crude.

Oil rebounded above $70 a barrel on Thursday, clawing back some of the previous session's losses, amid the market's exuberance over a global economic recovery getting underway, while a weak U.S. dollar also lent support. Oil settled down nearly 2 percent on Wednesday after U.S. government data showed larger-than-expected supply increases in gasoline and distillate fuels last week. "Alcoa's results seem to have increased optimism that we might see some strong numbers coming out of the third-quarter results reason," said one trader. (Really see AVAFX special report: BS from AA? Data suggests was poor results and the co. is far overvalued -- could the report and positive news spin suggest more of the same for the Q3 season in general?)

Gold: Gold futures ended Wednesday's trading at a new record high above $1,040 an ounce, as investment demand rose and as the U.S. dollar remained relatively weak.

"The driving force for gold's rally is the declining confidence in the dollar, which helped elevate gold's stature, along with the explosive growth in gold-backed exchange-traded funds which broadened the investor base for bullion," said Shuji Sugata, a manager at Mitsubishi Corp Futures & Securities.

"Technically the market is very much in favor of the bulls as nobody can complain about gold prices rising, so barring profit taking that may cap prices for a short time, the market looks set to test fresh highs," he said.

The near-term target is likely $1,050 per ounce, but the $1,040 level offers good profit taking opportunities and may prove to offer resistance that market players need to clear first, he said.

"We're seeing a period of consolidation below $1,040 an ounce. Importantly, gold does not appear to be finding support from Tokyo, which is the key region in our time zone," said Nigel Moffatt, head of treasury for the Perth Mint.

CURRENCIES: Rising stocks and AUD rate hike give strong bias to risk currencies, boost commodities

USD: The U.S. dollar was again on the defensive on Thursday, after Alcoa Inc. posted a surprise profit and supported overall bullishness about a global recovery. USD expected to weaken as long as risk appetite improves. Protectionist tensions with China could hurt the USD if markets see a threat of China cutting back on US bond purchases.

5 Reasons the USD Could Fall Further

Last week, we talked about the 5 Reasons Why the Dollar Could Fall and here is a quick update on our points:

1. Don’t Expect a Fed Exit Anytime Soon – The decision by the Reserve Bank of Australia to hike interest rates last night highlights the sharp divergence between the growth and monetary policy of countries like Australia with that of the Federal Reserve. Recent comments from the Fed suggest that they intend to keep Quantitative Easing in place for as long as they can. Over the past few decades, the Fed has never raise interest rates before the unemployment rate has peaked. With the recent uptick in unemployment, there is a good chance that the Federal Reserve could be one of the slowest central banks to tighten monetary policy and the slower they are, the fewer reasons for investors to own dollars.

2. Reserve Diversification – Although not directly related to reserve diversification, speculation that the Gulf States, China, Russia and Brazil are holding secret meetings to establish non-dollar denominated oil contracts contributed to the weakness of the dollar. Qatar and Saudi Arabia denied the speculation but this should remind traders that many non Anglo-Saxon nations have a long standing desire to reduce their dependence on the dollar.

3. Strong Q3 Earnings – To get a sense of how currencies could impact earnings, just listen to the complaints coming from Japan. Toyota warned that for each one yen appreciation against the dollar, operating profit is cut by 35 billion yen or $390 million. For Canon, each one yen appreciation hurts their bottom-line by more than 4 billion yen or $45 million. No U.S. corporation will be that specific, but from these statistics, we can gage the positive impact that a weak dollar may have for U.S. exporters. Alcoa reports on Thursday so watch for more discussion about currencies and their impact on earnings

4. Twin Deficits – The U.S. trade deficit is due for release on Friday. The twin deficits have long been a drag on the dollar.

5. Price Patterns – So far, price patterns are holding. At the beginning of September we talked about how the price action of the EUR/USD and USD/JPY this month could set the tone for the rest of the year. At that time, we showed two tables illustrating how in 7 out of the last 10 years, the EUR/USD moved in the same direction between October and December as it did in September. For USD/JPY, the odds were even higher with the currency seeing follow through 8 out of the past 10 years. Therefore based upon past price patterns, we have more reasons to believe that the dollar will fall against the euro and Japanese Yen over the next 3 months.

There are no major U.S. economic reports until Friday.

EUR: The euro advanced to $1.4705 in Asia, from late New York levels of $1.4681 on Wednesday when it fell to as low as $1.4649. Gains could be limited on some squaring up of positions ahead of the European Central Bank (ECB) meeting later in the day, traders said.

The ECB is expected to keep rates unchanged, although its head Jean-Claude Trichet might warn investors against high hopes of a speedy economic recovery. [nL7664834]. There is also speculation that he might complain about the euro's strength.

"We do not expect any fireworks from Trichet, although the market will remain sensitive to any comments from him regarding the exchange rate," said Matthew Strauss, senior currency strategist at RBC Capital.

JPY - The dollar bounced from 8-½ mth lows against the yen, rising to 88.60 yen , although gains are seen capped at around 90.13 yen.

Despite the dollar’s recovery against other major currencies, it remains weak against the Yen which suggests that the market is still bearish dollars. As the currency pair continues to fall, the market will increase its focus on comments by Japanese officials. Finance Minister Hirohisa Fujii’s is at it again - the incoming administration’s rules about foreign exchange intervention seem to change day by day. Mr. Fujii explained that while he does not believe governments should intervene, there are certain exceptions to the rule. In the cases where currency fluctuations are “outrageously reckless” authorities will need to take appropriate measures. However, he does not regard the yen’s strength as being “extremely abnormal.” In an attempt to keep the dollar from falling too far, Fujii mentioned that he does not expect to reduce the level of dollars in Japan’s reserves. These latest comments are on the back of signs of distress coming from Sony Electronics. The company predicts that the yen will continue to strengthen, giving them “no moment to breathe”.

GBP: Consolidating against the USD ahead of Thursday's BoE meeting, gaining against the EUR in Wednesday trade. Traders will watch for the possibility of lowering the banks' deposit rate (another form of stimulus)

AUD: Australian economic data continues to outperform, adding validity to the Reserve Bank of Australia’s decision to hike interest rates earlier this week. Construction sector PMI jumped from 42.4 to 50.8, putting the index into expansionary territory for the first time since February 2008. Home loans continued to fall while investment lending surged. The housing market in Australia has been fueled by not only Australian but also Chinese demand. Employment numbers released early today were all much better than expected the data is fueling further rally in the Aussie. With the employment component of service, manufacturing and construction sector PMI all rising in September, many correctly predicted that Australia experienced positive job growth last month.

NZD : Rising with the AUD because the two share many similarities, thus rate increases expected, hitting new annual high vs. the USD.

CAD : Meanwhile the Canadian dollar came under pressure Wednesday as oil prices gave back their earlier gains. Housing starts are also due for release tomorrow and the rise in building permits suggests a recovery in Canada’s real estate market which could help to lift the loonie.

CHF: Moving up against USD more as reflection of USD weakness. SNB intervention is more of a threat for the EUR than the USD.

CONCLUSIONS: Bias to risk currencies as stocks rise and AUD keeps rallying on good news. These favor short USD trades near term, long term, until stocks pull back or there is other major pro USD news. Earnings season begins to dominate news.

Trading Opportunities: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Always use sell stop orders.

Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever.



Gold Rises to Record for Third Day; Copper, Rubber Lead Commodities Rally

•European, Asia Stocks Gain; U.S. Index Futures Advance on Alcoa Earnings

•Trichet Faces `Trap' as ECB Prods Governments on Budget Deficit Vigilance

•Australian Hiring Unexpectedly Jumps, Driving Currency Higher on Rate Bets

•Credit Suisse, Deutsche Bank Earnings Estimates Raised by Morgan Stanley

I-Believe-in-a-Strong-Dollar Refrain Becomes Relic as China Begs Stability

•Russia's Economic Decline Forces Putin to Reduce Footprint of Government

Griebling predicts that the dollar will trade at about $1.42 per euro until mid-2010 compared with $1.4625 today, as investor concerns over rising U.S. deficits and debt offset optimism about the prospects for an economic recovery.

Multi-FX Gold View and Shanghai Reminder

A Global Cabal Plotting to Dump the Dollar?

Brown Brothers on Dollar Weakness, Alternative Currency Basket Reports and RBA Rate Hike

Dollar Hegemony Is Ending

Declining Dollar: The Markets' Take

The Economic Recovery That Isn't

Ugly Jobs Report Puts a Dent in V-Shaped Recovery Scenario

Ten Reasons for an Imminent Stock Market Crash

The Next Major Crisis Brewing

CIT's Failure Could Threaten Financial Sector's Overall Recovery


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