Paragon America Investment Group
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Wall Street Java
May 12, 2010
News Affecting the Market
Gordon Brown resigned as prime minister yesterday, and was replaced by Conservative leader David Cameron, ending a 13 year reign for the Labour Party. Cameron will lead Britain's first coalition government since 1945 with Liberal Democrat Nick Clegg as his deputy. Investors will be watching closely for signs that the new government will take swift action to reduce Britain's record budget deficit.
In the world of finance, Morgan Stanley is now in the news, as rumors circulate that Morgan will be federal investigation into whether the firm misled investors about mortgage-derivative products. Morgan Stanley denies that it is aware of any pending investigation, and CEO James Gorman added there is “no substance” to any allegations that the Morgan Stanley misled investors about mortgage derivatives it packaged and sold.
After a few days of volatile swings, it appears the US markets are tightening up a little. The Dow fluctuated throughout the day, yesterday, and finished only modestly lower. This morning, futures suggest a move to the upside at the opening bell; taking back yesterday’s loss. Perhaps the best indicator of investor sentiment is reflected in the present gold rally, as prices spiked by more than $30 yesterday and continue trending higher this morning at $1233. Lack of investor confidence in the European rescue plan is at least part of the reason gold has reach new all-time highs.
The Asian markets also finished relatively flat on the session, with further losses in the financial sector, and mixed trading elsewhere. Negative sentiment has grown around concern about the effectiveness of the European plan as well as what will happen when governments begin to withdraw stimulus in the not-too-distant future. In an already fragile recovery, and with unemployment still high, investors fear another global slowdown later this year.
Stocks are moving slowly higher in Europe this morning. Most high volume trading has been mixed within sectors, however, with little conviction. With gold at record highs, mining stocks are among the strongest on a global scale. After having some time to review the details of the European rescue package, investors are finding a lack of substance in terms of how it will actually work.
Many analysts are also seeing further trouble ahead for the Euro. If the rescue plan is put to use, what it really accomplishes is to redistribute the indebtedness of the EU, as a whole, and does little to resolve deficit problems within member nations. Economists suggest that the best way for an EU member to fix its own problem would be to abandon the Euro and gain the ability to manipulate its own currency.
Commodities are gaining some momentum after showing some weakness in the past few days. Oil is relatively flat; down a few cents at $76. Investors are concerned that demand will weaken if the global economy begins to sputter, but OPEC is a little more optimistic having raised its global oil demand estimate for 2010. OPEC is now expecting oil demand to grow by 950,000 barrels per day this year, an increase of 50,000 barrels per day from its previous forecast. Gold looks like it will set new highs again today. After surging by more than $30 yesterday, gold is seeing some consolidation this morning; adding about $3 to $1233 in early trading. The Dollar is higher still on the Yen but has lost some ground on the European currencies.
Investors will also be keeping a close on eye on economic data this week. On the calendar today, we have Mortgage Applications and Trade Balance data. On the earnings side, we will hear from Cisco Systems, Jaguar Mining, Macy’s, Whole Foods, and a few others.
Washington and Public Finance Update
Senator John McCain and other Republicans failed in their attempt to add an amendment to the financial regulatory bill that would have pulled government aid from Fannie Mae and Freddie Mac, and transition the companies to the private sector.
The two mortgage giants have, which have received more bailout cash than anyone else, asked for $8.5 Billion more from the government this week. The Obama administration has pledged unlimited financial support to keep Fannie and Freddie solvent.
Independent Vermont Senator Bernard Sanders has proposed an amendment to the Senate's financial regulation bill that would give the Government Accountability Office the power to audit the Federal Reserve and also force the Fed to disclose details about the firms that received TARP funds.
It could be called the uncertainty trade. The US is in the middle of a major financial regulatory overhaul, where even the Federal Reserve doesn’t know what its role and independence will be in the future. China has been a leading economy as the western world deals with a massive downturn. In Europe, Greece quickly became the poster child for a global sovereign debt crisis for which a Trillion Dollar rescue plan seemed like a good idea for about a day. In the middle of it all, gold is at an all time high.
Investors often flee from one asset class to another, depending on various conditions. They may run from stocks to bonds if corporate profits are weak. Currency traders see the Yen and Dollar as a safe haven versus most other fiats.
When things become even more ambiguous, gold becomes an attractive hedge against the stock market, against debt concerns, and against a general distaste for paper currencies. Fiat money essentially moves in relation to other fiat money. When none seem like a safe bet, gold is often seen as the currency of last resort.
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