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D&D Securities Company

The Morning Call:  Tuesday, September 01, 2009

North American markets reacted to the continuing decline in Shanghai. This market has lost almost a quarter of its value in the month of August.  It broke through the 50-day then the 100-day moving average and is half way to the 200-day. Just one more day like yesterday and it will get us there. We checked the new 21 day average and it, too, has broken. The implied loss of economic pull from china had commodities and oil (under $70) selling off and bringing the stocks with them.

There’s a well known seasonality to buying resource stocks in October and November then trading them out in March. It works most years. To get cheap enough, the stocks have to go down in September and into October. But looking at this another way: we’ve started a classic rotation, and the market is going to be led by the banks, non-banks, and the interest-sensitive as we move higher. Maybe the Shanghai market has come off because the Chinese banks have eased off on lending: too much of that money was finding its way into the market. Again, the action is more about flow of funds than about the underlying economy. Chinese purchasing Managers’ index came in at 54 up from 53.3 in July, making that up 6 in a row. Question is whether Chinese stimulus will buck the trend.

Our former partner Ed Yardeni is saying that the Fed will keep the Fed Funds rate at zero and, between the Fed and other central Banks, half the deficit is being monetized. Good for markets. The American Association of Individual Investors (AAII) polled 34 % bulls down from 50% bulls two weeks ago. The long term average is 38%. So we aren’t counting out North American markets yet.

This morning we will watch for the ISM at 10 o’clock. At the same time “pending home sales” will come out and both can impact the market. It’s like that silly time in the eighties when we all waited for the Fed funds rate or whatever it was… Today’s fixation speaks volumes as to the confusion of the participants to today’s markets.

It’s time to talk about gold. There are very few things that always work in the markets. When real rates are negative, you have to own gold stocks. Keep them as long as rates are negative. Often they do well while the rest of the markets are sorting themselves out. We’ve read, but not verified, that golds (between 2001 and 2008) have been up, on average, 27% in Sept, 9% in October, 31% in November, and 28% in December. -That’s an argument for the carry trade of long gold stocks and short the US$ if we ever saw one. Is it time to “Go for the gold?”

It’s really exciting what’s happening in Japan. The DPJ (democrats) have won a majority (308 seats out of 480) in their Parliament (Diet). They aren’t going to sell any more bonds than they did last year: ¥144 Trillion. The say they’ll curb public spending and the bureaucracy. Very difficult to do in an export dependent economy, but luckily China is their largest customer - and then it’s the US. They need to stop the climb in unemployment. They say they will cut gasoline taxes and highway Tolls. They will focus on childcare and education offering a bounty of ¥100K for anyone (unemployed) taking training for a job. The problems include a CPI that was down 2.2% in July and a Public Debt of 200% of GDP. Taro Aso resigned. Exciting times.

So we wait for the numbers and advise…

Invest the money.

Nuclear Tuesday

Inactive markets have drifted a $1 lower for spot and term leaving them at $46 and $64, respectively. UX revises the long term price every month. They did mention this week that although $64 was the lowest offer accepted for term, other and higher offers were also accepted.

There just seems to be very little interest by U3O8 buyers.

Quote of the Day:

“Punctuality is one of the cardinal business virtues: always insist on it in your subordinates.”
 Don Marquis

Ed Pennock, CFA, Managing Director
416-369-6921, epennock@dominick.ca

Graham Farrell, Institutional Equity Trading
416-369-4208, gfarrell@dominick.ca

Gordon Wright, Institutional Equity Trading

416-369-6924, gwright@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.