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Monday, August 16, 2010

Morning Market Report

The morning market report is back. This edition we'll be getting some guest commentary on the markets from Phil Nuciola of Scottsdale Capital.

Last week, the Wall Street Journal had this report about how high yield corporate bonds (junk) are getting back in favor.

Junk-bond issuance is on a record-setting pace this week, with a flurry of new offerings in the market Wednesday adding to the uncommonly high total seen this August.

This week has already produced $7.9 billion in high-yield bond issuance, the highest single-week total since late April, according to data provider Dealogic, and on pace to surpass the $12.5 billion one-week record set in December 2006. U.S. high-yield volume has reached a record high year-to-date volume of $148 billion, up 77% from the $83.6 billion at this point in 2009 and just $15.6 billion short of the $163.6 billion full-year 2009 total.

Companies, including Peabody Energy Corp. (BTU) and First Data Corp. (FDC) on Wednesday, have lined up to sell cheap debt and investors are increasingly willing to chase riskier investments to gain any yield advantage. Issuance of speculative-grade bonds began to pick up in late July and has accelerated as yields on high-grade corporate bonds have hit historic lows and equities continue to languish.

That's happening in large part because of record low yield on Treasury bonds, the ten year is hovering around 2.8%, as well as the AAA corporate debt. Johnson and Johnson just did an issuance for 3.13%. So, investors looking to make money in yields are rushing to junk which is paying 6% and higher. This trend is making Phil Nuciola weary. Nuciola says he staying away from individual bonds and he's only looking at high yield bond funds that are

not trading at a premium to their Net Asset Value.
He thinks that anyone paying a premium is overpaying for risky investments.

For short term traders, Nuciola says they should be keeping an eye on the S & P 500's. The S & P closed at just below 1080 on Friday. Nuciola says that's right at a support point. If we see another down day, watch for the S & P's to go to 1050. If it steadies itself, it could shoot back up to 1120. Either way, there's plenty of money to be made on the volatility if you get it right.

Generally though, Nuciola says he's "buy and hold" and looking for dividends.

In this market I'm going to buy securities that are going to pay me to own them.
Nuciola singled out Pfizer (PFE) as a stock he especially likes here. It traded at about 16 (it's at $16.08 in pre market) on Friday. It's got a low of 14 and a high of 20 over the last 52 weeks. The Price to Earnings here is a conservative 14.5 and it has "solid dollar earnings" here. Nuciola says the pipe line of new drugs is a bit bare but still loves the value here.

The Dow, S& P's, and NASDAQ futures are set to open a bit less than a half percent lower at the open. Meanwhile, Treasury bonds continue to show strength following the Fed's pronouncement that it will continue quantitative easing. The ten year is now trading at 2.64%. Thirty year fixed mortgages have been testing both sides of 4.5% and are on the verge of setting new records everyday. The yield spread between the two and ten year treasuries is at 2.1%.

Crude oil is sitting just a bit higher this morning at $75.58 a barrel while gold is showing a healthy gain to $1223. Things were mixed in the Far East today. The Hang Seng in China was up .19%, the NIKKEI in Japan was off .61%, while the Straits Time Index in Hong Kong was off .22%. In Europe, things were bloody. All indices but the Swedish index is currently down. The FTSE in London is off .51%, the DAX in Germany is off .35%, and the Spanish index is off .83%.

The Dollar is mixed this morning. It's up .45% against the Euro, up .18% against the British Pound, but off .83% against the Yen.

CNBC says that China has officially passed Japan as the world's second largest economy.

After three decades of spectacular growth, China passed Japan in the second quarter to become the world’s second-largest economy behind the United States, according to government figures released early Monday.

The milestone, though anticipated for some time, is the most striking evidence yet that China’s ascendance is for real and that the rest of the world will have to reckon with a new economic superpower.

The recognition came early Monday, when Tokyo said that Japan’s economy was valued at about $1.28 trillion in the second quarter, slightly below China’s $1.33 trillion. Japan’s economy grew 0.4 percent in the quarter, Tokyo said, substantially less than forecast. That weakness suggests that China’s economy will race past Japan’s for the full year.

The U.S. continues to have a larger economy based on GDP than the next three, China included, COMBINED. Also, despite it's fabulous growth, China still lags far behind in per capita income.

Meanwhile, according to Bloomberg, there's infighting among the investment banks in the upcoming IPO (initial public offering) of General Motors.

Wall Street banks led by JPMorgan Chase & Co. and Morgan Stanley stand to make a combined $120 million on General Motors Co.’s initial public offering. If it weren’t for Goldman Sachs Group Inc., they could have made four times as much.

In a pitch to the U.S. Treasury in May, Goldman Sachs offered to accept a fee of 0.75 percent, according to people with direct knowledge of the matter. That’s a fraction of the 3 percent banks typically charge on the largest IPOs and well below the 2 percent offered by Bank of America Corp. and other banks that presented to Treasury, said the people, speaking anonymously because the matter is private.

Finally, after the double whammy of bad jobs in July and a bad first time jobs claims number (484000) the next week all eyes will be on the weekly jobs number this Thursday.

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All investments involve different degrees of risk. You should be aware of your risk tolerance level and financial situations at all times. Furthermore, you should read all transaction onfirmations, monthly, and year-end statements. Read any and all prospectuses carefully before making any investment decisions.

Nothing on this page should be taken as investment advice but strictly for information purposes. All investors should consult with an investment advisor before making any investment decisions.

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