Dubai Credit Rattles the Stock Markets

The world stock markets fell on Thursday as Dubai attempted to delay debt payments for six months.   The US stock market was closed for the Thanksgiving holiday, but the S&P futures are down considerably.  Commodities, especially oil prices, are weakening while the U.S. Dollar and Treasury bonds are starting to rise.

Emerging markets are suffering significant losses and money appears to be moving into consumer staples.  Investors remain very cautious as we wait to learn more about Dubai’s credit situation.   Keep in mind that money managers are eager to lock in profits for the 2009, so an event such as this may be a catalyst for year end selling.  Couple this with the fact that the US dollar and Treasuries are at historic lows, and we may see some selling pressure ahead.

Economic Growth Projected to Continue

The U.S. Economy will continue to grow in 2010 and this expected strength will help ensure the dollar stays firm, Federal Reserve Chairman Ben Bernanke said Monday.

In a rare move, the Fed chief made several remarks on the U.S. dollar, which has fallen in value recently as global economic activity has picked up and investors no longer seek the safety of dollar assets.

Mr. Bernanke said the central bank will keep a close eye on the dollar’s slide but reiterated that the key federal funds target rate is expected to remain at record lows for some time. More from Bernake’s luncheon speech on US Economy today:

“Today, financial conditions are considerably better than they were then, but significant economic challenges remain. The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible. Nevertheless, I think it is fair to say that policymakers’ forceful actions last fall, and others that followed, were instrumental in bringing our financial system and our economy back from the brink. The stabilization of financial markets and the gradual restoration of confidence are in turn helping to provide a necessary foundation for economic recovery.

“We are seeing early evidence of that recovery: Real gross domestic product (GDP) in the United States rose an estimated 3-1/2 percent at an annual rate in the third quarter, following four consecutive quarters of decline. Most forecasters anticipate another moderate gain in the fourth quarter.

How the economy will evolve in 2010 and beyond is less certain. On the one hand, those who see further weakness or even a relapse into recession next year point out that some of the sources of the recent pickup–including a reduced pace of inventory liquidation and limited-time policies such as the “cash for clunkers” program–are likely to provide only temporary support to the economy. On the other hand, those who are more optimistic point to indications of more fundamental improvements, including strengthening consumer spending outside of autos, a nascent recovery in home construction, continued stabilization in financial conditions, and stronger growth abroad.

My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely. However, some important headwinds–in particular, constrained bank lending and a weak job market–likely will prevent the expansion from being as robust as we would hope. I’ll discuss each of these problem areas in a bit more detail and then end with some further comments on the outlook for the economy and for policy.

Bank Lending and Credit Availability.  Several factors help explain the reluctance of banks to lend, despite general improvement in financial conditions and increases in bank stock prices and earnings. First, bank funding markets were badly impaired for a time, and some banks have accordingly decided (or have been urged by regulators) to hold larger buffers of liquid assets than before. Second, with loan losses still high and difficult to predict in the current environment, and with further uncertainty attending how regulatory capital standards may change, banks are being especially conservative in taking on more risk. Third, many securitization markets remain impaired, reducing an important source of funding for bank loans. In addition, changes to accounting rules at the beginning of next year will require banks to move a large volume of securitized assets back onto their balance sheets. Unfortunately, reduced bank lending may well slow the recovery by damping consumer spending, especially on durable goods, and by restricting the ability of some firms to finance their operations.

More of Bernanke’s speech found at Reuters.com Bernanke’s  Economic Speech

Stocks start week off with a bang

Securities investors kept the stock market’s upward momentum going Monday, sending shares sharply higher after retail sales rebounded more than expected in October and the dollar extended its slide.

Major stock indexes rose more than 1 percent to new 13-month highs, including the Dow Jones industrial average, which jumped 136 points. The Standard & Poor’s 500 index closed above the 1,100 mark for the first time in more than a year.

The weaker dollar lifted gold to a new record and pumped up prices of other commodities, including oil. That, in turn, helped shares of energy and materials companies.

Stocks got another boost after Federal Reserve Chairman Ben Bernanke reaffirmed in a midday speech that the central bank would hold interest rates at record-low levels for an “extended period,” and that he didn’t see signs that the money being pumped into the economy by the government was creating speculative bubbles. Bond prices rose after Bernanke said inflation appeared contained.

Some analysts have cautioned that the surge in stocks, which has been hastened by the falling dollar, might not be justified by the still-struggling economy. In fact, they say some investors might misread the big advance in stocks as a sign that the economy is stronger than it actually is.

The market’s own dynamics fed some of the day’s gains.

The S&P is breaking through the 1,100 mark, which is psychologically significant, and the market is seeing a little pop from this. Stocks began rising from the start after the Commerce Department said retail sales rose 1.4 percent in October, nearly double the increase forecast by economists polled by Thomson Reuters. It was a sharp rebound following the 2.3 percent drop in September. Excluding the gain from autos, however, sales rose just 0.2 percent, half of what economists predicted.

The broader S&P 500 index rose 15.82, or 1.5 percent, to 1,109.30. It has hovered around the 1,100 mark for a month but hadn’t closed above it since October last year. The index first finished above 1,100 more than a decade ago, in March 1998.

Best ETF Investments

The commodities bull market looks like it has still got a long way to run.  Looking for safe commodities to bet on? Then let’s look to four ETFs to play gold, silver, and base metals as well as coal.

As long as the world’s central banks continue to interest rates at these very low levels, speculative interest in commodities will be strong. And since only minor central banks yet show signs of moving rates, the commodities bull market has further to run.

There are three reasons why commodity prices have been rising, and they’re all still true:

• China and India continue their torrid growth.

• Global stimulus plans are bullish for commodity prices

• And hedge funds and other speculative investors are big commodities players.

There are a number of ways to play a commodities bubble. It’s probably smart not to restrict your buying to gold and oil alone, but to spread yourself among a number of sectors. Let’s take a peak at some of the safer bets available out there right now.

Powershares DB Base Metals ETF (NYSE: DBB) tracks the Deutsche Bank AG base metals index, thereby allowing you to invest directly in the price movements of non-precious metals. It is reasonably liquid and money has been flowing into it recently.

iShares Silver Trust (Amex: SLV) invests directly in silver bullion, which has been left behind somewhat in its relationship to gold’s price rise – and which can be expected to move up as gold does, possibly by an even greater percentage.

Market Vectors Gold Miners ETF (NYSE: GDX) holds gold minin stocks; gold miners benefit disproportionately from a rise in the price of gold because their production costs are fixed.

This means that miners are a more leveraged way to play gold than the metal itself, particularly as surging speculative demand can increase mining companies’ P/E ratios.

Market Vectors Coal ETF (NYSE: KOL): China’s power supply is still coal-fired, and demand is soaring, hence global coal prices are likely to be pulled upwards by Chinese demand alone. KOL has a market capitalization of $283 million.