Daily State of the Markets 
Tuesday Morning – November 10, 2009  

Good morning. The recent correction in the stock market was sponsored largely by the worry that the Fed would begin talking “exit strategy” in the not-too distant future. As we’ve been discussing, this created a bit of a stir in the hedge fund community and put the spotlight on the dollar carry trade. With potential talk of higher rates, some traders began unwinding some of their dollar carry trades, which meant covering dollar shorts and selling so-called “risk assets” such as stocks in the U.S. and in the emerging markets. In short, this explains the recent tick-by-tick linkage between the greenback and the stock market.

However, with the Fed’s reaffirmation last week that it will keep rates low for an “extended” period of time and the pledge from G-20 finance ministers over the weekend that they would continue their stimulus programs, it was as if the central banks of the world told traders that it’s still okay to short the dollar for a while longer. Thus, the bottom line is the dollar carry trade lives on.

So, if you have the ability to borrow big bucks at nearly 0%, knowing that the dollar you are borrowing will go down in value, you’ve got a potential “no brainer” on your hands. So, before we start bashing the “evil speculators” around the globe, ask yourself: Wouldn’t you want to borrow at 0% and invest in stocks or commodities if you could?

Up until this weekend, there was fear that either the U.S. or some other foreign financial power would spoil traders’ fun in the carry trade and try to “talk up” either the dollar or the idea of higher rates. But besides the fact that the G-20 said it was committed to the stimulus plan, the biggest thing that came out of the weekend meeting was that no one breathed a single word about a stronger dollar.

To traders, this is a de facto sign that it’s okay for the dollar to head lower. Sure, everybody talks a good game about a strong dollar, but for right now at least, a lower dollar makes the world go around. And while we may not see a plunge in the greenback, we probably won’t see or hear about any support for the dollar either. So, as we’ve been saying, it’s “party on” for the dollar trade – at least for a while longer yet.

But the big thing to recognize on this topic is this game can’t last indefinitely. At some point, the economy WILL improve and the Fed WILL raise interest rates and the dollar WILL rise (or at least stop falling). This combination WILL cause traders to unwind the carry trade – possibly in a hurry. Thus, if the brief period of volatility seen in late October felt bad, imagine what is going to happen when the Fed actually does start hinting about raising rates and the dollar carry trade unwinds for real.

However, for now, the game is about finding ways to profit. And until the next market driver comes along, it looks like this one is a positive for stocks.

Turning to this morning, we don’t have any economic data to review before the bell and in fact the calendar is very light for the remainder of the week. However, we will get a good dose of Fedspeak as Atlanta Fed President Lockhart, San Francisco Fed President Yellen, Boston Fed President Rosengren, and Dallas Fed President Fisher all have speaking engagements today. So, it might be wise to listen closely for any new hints of policy changes to come.

Running through the rest of the pre-game indicators, the foreign markets are up fractionally across the board. Crude futures are higher with the latest quote showing oil trading up by $0.30 to $77.73. On the interest rate front, we’ve got the yield on the 10-yr trading at 3.45%, while the yield on the 3-month T-Bill is currently at 0.06%. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a soft open. The Dow futures are currently off by about 25 points; the S&P’s are down by about 2 points, while the NASDAQ looks to be about 4 points below fair value at the moment.

Yesterday’s Earnings After The Bell



Clear Channel Outdoor CCO -$0.10 -$0.08
Electronic Arts ERTS $0.06 $0.07
Fluor FLR $0.89 $0.90
Hologic HOLX $0.28 $0.27
Lions Gate LGF $0.26 $0.07
MBIA MBI -$3.50 -$1.04
NBTY NTY $0.93 $0.83
Priceline.com PCLN $3.45 $2.92


Earnings Before The Bell



Beazer Homes BZH -$0.87* -$1.39
Diana Shipping DSX $0.36 $0.34
Fossil FOSL $0.52 $0.42
Hewitt Associates HEW $0.68 $0.63
Tyco TYC $0.61 $0.54


Wall Street Research Summary


Pan Am Silver (PAAS) – Canaccord Adams Robert Half (RHI) – Deutsche Bank Taiwan Semiconductor (TSM) – FBR Capital BJ’s Wholesale (BJ) – Added to Conviction Buy at Goldman Polo Ralph Lauren (RL) – Added to Conviction Buy at Goldman Kroger (KR) – Added to Conviction Buy at Goldman Adobe Systems (ADBE) – Janney Capital TW Telecom (TWTC) – JP Morgan Nordic American Tanker (NAT) – JP Morgan Rackspace (RAX) – Oppenheimer Rockwell Automation (ROK) – RW Baird Ann Taylor (ANN) – Stephens Wynn Resorts (WYNN) – Target increased at UBS Vodafone (VOD) – UBS


TRW Automotive (TRW) – Deutsche Bank Coca-Cola Enterprises (CCE) – Removed from Conviction Buy at Goldman

Long positions in stocks mentioned: GS

* Report includes items that make comparisons to the consensus estimate questionable

Best of luck today and until next time, “may the bulls be with you!”

David D. Moenning
Founder TopStockPortfolios.com

For more “top stock” portfolios and research, visit TopStockPortfolios.com


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