On Friday, the 30-share Dow Jones industrial average fell 14 points, or 0.1%, to close at 10,318.16.  The broader S&P 500 index closed 0.3% lower at 1091.38 and the tech-heavy Nasdaq finished the day at 2146.04, off 0.5%.  On the week, the Dow average managed to hang on to gains, registering a paltry 0.5% advance.  The S&P 500 and the Nasdaq fell 0.2% and 1%, respectively.  On the New York Stock Exchange, 1.1 billion shares exchanged hands, with declining issues ahead of those that advanced in price by a three-to-two margin.

Last week’s disappointing reports on housing and weak forecasts from technology companies had antsy investors swooping up safe haven investments like Treasury bonds and dollar.  The demand for safe havens also spiked after European Central Bank President Jean-Claude Trichet remarked that the bank is planning to unwind some of its stimulus measures.  A higher dollar pushed crude prices lower and pressured stocks.

Nevertheless, at the center of the activity on the Wall Street is the ascending price of such physical assets as gold, which touched its fresh highs of $1146.80 on Friday, and a declining dollar.  The metal, although lacking fundamental valuation measures, has surged 29.7% so far this year.  Since India's central bank bought 200 tons from the IMF, the metal has jumped 11.5% on its dollar-alternative, safe-haven, inflation-resistant appeal.

Meanwhile, the decline in the US dollar has raised valuation expectations for the major industrial companies, with offshore sales expected to boost revenues.  Nevertheless, this week’s highlight remains today’s after-market-close earnings from Hewlett-Packard (NYSE:HPQ).  Last week the company preannounced strong quarterly numbers, anticipating record sales results of $30.36 billion, and earnings of $1.13, and also lifted its 2010 guidance.

Last week, the 1% decline in the technology shares came after weaker-than-expected guidance from two software companies, Autodesk (NASDAQ:ADSK) and Salesforce.com (NYSE:CRM), was compounded by disappointing numbers from Dell (NASDAQ:DELL).  Technology companies felt the heat after Dell (NASDAQ:DELL) reported quarterly earnings that were well below analysts’ expectations.  The company said sales of its computers to big businesses remain weak.  Shares in the company plunged 10% to $14.29.  So far in November, the NASDAQ has advanced 5%, and is up 36.1% year-to-date. 

The 0.2% pullback in S&P500 was caused by declines in oil and gas (-1.4%) and tech (-1.3%) sector shares that offset gains in health care issues (+1.5%) and basic materials (+1.2%).

The earnings calendar has slowed, but companies still due to report include: Campbell Soup (NYSE:CPB) on Monday; American Eagle (NYSE:AEO), Barnes and Noble (NYSE:BKS), Dollar Tree (NASDAQ:DLTR) on Tuesday, with Deere (NYSE:DE), J Crew (NYSE:JCG) and Tiffany (NYSE:TIF) on Wednesday.

The Dow Jones industrial average, which was well supported by strength in its all but one component, rose 203 points, or 2.0%, to a 13-month high of 10,227.  The S&P500 climbed 2.2% for its sixth straight session gain to 1093 and the tech-heavy NASDAQ gained 2.0% to close at 2154.  The market’s measure of volatility, the CBOE Vix, plunged 4.3% to 23.15.

All ten S&P500 industry groups ended in the green, led by gains in basic material shares (+3.5%) and financials (+3.5%).  Crude prices added $2.00 to close at $79.43 even as Hurricane Ida was downgraded to a tropical storm.  Gold prices went past the $1100 level, up $5.70 to $1101.40, as the metal shined brightly on its inflation hedge appeal.  At the same time, greenback took a beating on such concerns, declining 1.0% against a basket of currencies, to a 15-month intraday low of 75.04.  Shares of Freeport-McMoRan (NYSE:FCX) advanced 4.6%; Rio Tinto (NYSE:RTP) surged 5.9%.

A weak dollar helped shares of companies with large exposure to overseas markets.  Caterpillar (NYSE:CAT) jumped 4.2%, DuPont (NYSE:DD) gained 3.7%, Boeing (NYSE:BA) rose 3.4%, and General Electric (NYSE:GE) added 3.4%.

Financials rose 3.5% with American Express (NYSE:AXP) jumping 4.9%, Bank of America (NYSE:BAC) up 4.8%, Discover Financial Services (NYSE:DFS) up 5.9% and Capital One Financial (NYSE:COF) up 5.6%.  The Fed noted that of the ten bank holding companies that underwent US government’s stress tests only GMAC has raised its capital reserves sufficiently to meet the economic risks of higher unemployment and slowing growth. On Thursday, the FDIC meets to address the negative implications of an accounting rule change requiring credit-card firms to bring back on to their books card loans that are bundled into securities and sold to investors.

While the economic calendar remains light and corporate earnings schedule slim, Fed speak schedule is heavy, with Atlanta Fed President Lockhart slated to take the stage at 9:15 ET; San Francisco President Yellen at 10:15. Boston Fed President Rosengren is due to speak at 4:15, Dallas Fed President Fisher at 7:30 and Fed Governor Tarullo at 8:30.  Senate Banking Committee Chairman Christopher Dodd is expected to release a draft of the bill on financial regulatory reform.

The first of the two long/short quant ETPs is the Elements S&P CTI exchange-traded note (NYSEArca: LSC). I wrote about LSC for our subscription-only monthly publication ETFR, so if you are a subscriber, you can see the story here.

LSC is a long/short commodity-linked note monitoring six different groups of assets: energy, industrial metals, precious metals, livestock, grains and softs. Because the note only alters its positions once a month, investors can occasionally find themselves on the wrong side of the trade for up to a period of around three weeks. For example, last month the note had a 10.5 percent short position in precious metals, much to investors’ chagrin.

LSC has since dropped its short position in precious metals, but it does have a 35 percent short position in cocoa, livestock and grains. While that might be a sensible position, I worry that we may be entering a commodity bull market where investors may chase everything and anything in the futures markets for a while.

I also worry that, after the vigorous recent rally in gold, that metal may be due for a small pullback. In other words, it is likely that investors could find nearly half their portfolio invested on the wrong side of the trade.

Sophisticated Strategy

For all the potential volatility however, a long/short commodity strategy is one that makes sense long term. It’s unclear how long emerging markets consumption will continue to grow at a breakneck pace, and the underlying economic conditions in the West are hardly growth-oriented right now. If you are a commodities investor, ignore those who tell you to dump all your money into raw materials, and instead choose a sophisticated strategy. That’s what LSC is here for.

The second ETP I want to focus on is the ProShares Credit Suisse 130/30 exchange-traded fund (NYSEArca: CSM). Many of the same arguments for LSC apply to CSM, but they are a little different.

CSM is a 130/30 fund, meaning it is 30 percent short and 130 percent long. It invests in S&P 500 companies and alters its positions monthly. (See story here.)

Since it was launched in August, CSM has beaten the S&P handily. At last count, it is up 8.25 percent vs. 7 percent for the S&P during the same time frame, and the performance disparity looks even better for the fund in the past month.

Where these types of funds tend to get stuck, however, is during a time when technical indicators take a back seat to the news flow (there’s no quant fund I’ve heard of yet that accurately predicts news events). Unfortunately for CSM, such a time is ahead of us, with third-quarter earnings.

Right now, CSM is short firms such as Tiffany & Co., KB Home and Nicor—all of which have relatively tame earnings expectations and may well beat analysts’ forecasts. If that is the case, then CSM’s performance relative to long-only S&P funds such as SPDR S&P 500 (NYSEArca: SPY) could look less impressive at the end of this month.

If third-quarter earnings disappoint across the board (and this is what I think will be the case), there could be a fairly big sell-off in stocks. Because CSM is a long-biased fund, it will fall in price along with everything else.

A round of selling in equities would present a great time to take a position in a long/short quant fund such as CSM. In 2010, equities are still likely to rise on a net basis as the economy recovers, except that this time there are likely to be some significant price adjustments (particularly among financials).

That is where CSM’s model works best, since it can capture the capital outflows in some companies, while it still gains from an overall market uptrend.

Investors shunned most quantitative models for most of 2009; next year they will likely come back to outperform us with a vengeance.

Mechel intends to increase the share of high-margin products manufactured under its Steel division. The company will process the cold-deformed reinforcement wire at its production unit in Moscow into quality wire rod highly demanded in construction. Mechel foresees an increase in demand for this new class of steel products. The company has already received an order for reinforcing wire of BMP production. 

Due to low carbon content and mechanical strengthening, the cold-deformed reinforcement wire has several advantages compared to hot-rolled reinforcement wire such as improved welding characteristics, increased toughness and durability, and lack of scale. Additionally, cold-deformed reinforcement wire has higher design resistance to expansion and compression allowing reduction of its expenditure at 10% to 15%.

Demand for steel in Russia is expected to be high in the coming years. Mechel and its subsidiaries have implemented a $5.2 billion investment program for 2008–2012, focusing on the development of its Mining and Steel businesses. About $3 billion would go to the Mining business, $2.2 billion to the Steel business, and $42 million to energy projects. Of this, $1.3 billion will be invested in the development of the Chelyabinsk metallurgical plant (Mechel’s primary steel production facility) until 2011.

The investments should increase total steel capacity by 35% to 6.5 million tons, besides cutting costs through a complete changeover to concasting. Chelyabinsk will increase its flat stainless sheet production by seven times to 300,000 tons and expand its range of construction and engineering steel. As a result, steel production should rise 12% and rolled products output should grow 26%.

Mechel is looking to invest $1.2 billion in the Mining segment. Part of the spending will be used to increase coal production at Southern Kuzbass by 47% to 21 million tons by 2011. Mechel recently obtained controlling stakes in the coal companies Elgaugol and Yakutugol (68.86% and 100%, respectively), paying $2.34 billion. The companies produce coal in the East Siberian region of Yakutia and had been the largest remaining standalone coal producers in Russia prior to their acquisition by Mechel. Their output is mainly high quality coking coal. Yakutugol produces 10 million tons of coal per year, most of which it has been selling to customers in Japan and Korea. The company plans to increase this output to 15 million tons and redirect it to the domestic market.

We maintain our Neutral recommendation on the stock.

Net sales in the quarter were down 6.2% to $689.5 million from $735.5 million in the prior-year quarter, primarily due to lower average selling prices in the Plastic Container business resulting from the pass through of resin price declines, unfavorable foreign currency translation impact, and lower volumes in the Plastic Container and Closures businesses.

The Metal Food Container segment’s second quarter revenue increased 7.4% year over year due to higher average selling prices and slightly higher unit volumes. Revenue in the Plastic Container segment was down 22.3% due to lower average selling prices, decline in unit volumes attributable to a weak macroeconomic environment, and unfavorable foreign currency translation impact. The Closures business posted revenue decline of 19.0% due to unfavorable foreign currency translation impact and lower volumes due to soft demand in the single-serve beverage markets.

Despite lower sales during the quarter, operating margin increased 20 basis points year-over-year to 9.4% as the company benefited from effective cost controls and manufacturing efficiencies, which was mostly offset by lower unit volumes in the Plastic Container and Closures businesses and increased pension and depreciation expense.

The company expects full year earnings in the range of $3.75–$3.95 per share, compared to earnings of $3.69 per share in 2008. For the third quarter, Silgan expects earnings of $1.45–$1.65 per share compared to $1.45 in the prior-year quarter.

The company also faces other problems. Recently, the state of Texas filed a lawsuit against Cemex for $558 million as royalty payments owed in the United States.

The company had drawn upon substantially big short-term loans to buy Australia’s Rinker in 2007, just before the U.S. housing crisis and the subsequent global financial disaster. It needs to repay $4.1 billion of debt by the end of 2009 and the remaining in 2010 and 2011. To stay afloat, Cemex is refinancing $14.5 billion of debt.

A steady fall in aggregate demand and employment in the U.S. is adversely impacting economic activities in Mexico since both the economies have very strong ties. Even worse, the outbreak of swine flu in Mexico during the second quarter has added more problems to the already difficult business environment. Gross Domestic Product (GDP) is expected to contract by 10% on a year-over-year basis in the quarter.

However, the Mexican economy has started showing signs of recovery. Rise in international raw material prices like oil and metal is a positive sign that will slightly aid the overall economy. Although the doemstic economy is expected to grow by 3% in 2010, 2009 will still remain challenging.

Thus, we maintain our Sell recommendation on Cemex for the time being, based on its high leverage coupled with tough market conditions worldwide.

Revenue plunged 42% year-over-year to $4.2 billion, steeper than the first-quarter drop of 28%, as the double blow of depressed metal prices coupled with curtailed production affected performance. The industrial bellwether recorded quarterly gross margin of 6.6%, though a sequential improvement of 650 basis points, but still way below the year-ago figure of 21%.

Aluminum makers have been hit hard by the global economic downturn, which has affected demand from key customers such as automotive, commercial transportation construction and aerospace industries. Alcoa responded to the scenario by slashing production by about 20% and initiating a massive cost cutting program thereby generating $1 billion in savings through the first half of the year.

Meanwhile, Alcoa reported negative free cash flow of $90 million in the quarter, which was well below the positive free cash flow of $211 million in the year-ago period. However, the result was a significant improvement over the first-quarter when it posted negative free cash flow of $742 million. The company also said that it incurred capital expenditure of $418 million in the quarter, compared to $796 million last year and $471 million in the previous quarter. Alcoa has curtailed its capital expenditure targets by about 48% to $1.8 billion in 2009 and further by 53% to $850 million in 2010.

Looking ahead, the company feels there are some positive signals as aluminum prices have climbed 9% from first-quarter levels, which is likely to have an impact on the third-quarter performance. The recent stimulus by the US government is expected to revive the demand for automobiles and in turn aluminum. However, the continuing sluggishness in aerospace and industrial gas turbines industry will continue to weigh on performance. Moreover, the demand from China is likely to be short-lived as the country becomes self-sustaining in the production of the metal.

Significant decline in demand along with high inventory levels is pressuring aluminum prices. Spot aluminum prices increased to $1,630 per ton in the second quarter of 2009. However, this is significantly lower than the prior-year levels.

In response to falling demand and low prices, the primary aluminum industry has announced significant production cuts in the last several months. However, we believe that the supply cuts may not be quick and deep enough to offset any potential drop in end demand amid the global economic slowdown.

Aluminum producers such as Alcoa (AA) and Century Aluminum (CENX) have reported losses in the last two quarters and are expected to report another loss in the second quarter.

Although additional production cuts are expected in the coming months, we believe the aluminum market will remain oversupplied for the rest of 2009. The demand for the metal is expected to remain low for the next couple of quarters.