FYI | Jul 13 2007
By Greg Peel
The bulls were dancing on Wall Street last night, dosey-doeing with Goldilocks as a raft of retailer earnings reports spun sentiment on a dime and allowed a collective sigh of spectacular relief.
The Dow rallied 2% or 284 points to close the session at 13,862. It never wavered. This was the highest percentage gain since October 2003 and the highest points gain since 2002. It set the 50th record close since October 2006 and eclipsed the previous record high of 13,676 set in June.
The S&P 500 rose 1.9% to 1548, eclipsing its June all-time high of 1539. The Nasdaq rose 1.9% to 2701, but it will still be a long time before the 2000 high of 5048 will be seen again.
There has been a pall hanging over Wall Street these last few weeks, and that’s been all about the housing market. Ongoing weakness in the housing market has set off the subprime mortgage crisis, and the subprime mortgage crisis has indicated further housing weakness. The financial sector has been slammed. And the biggest fear was that the American consumer – the driving force of the economy – would cut spending, crimped by mortgage burdens and rising fuel and food prices. The retail sector has also been slammed.
But as many a bull will say, never underestimate the American consumer.
One by one the retail earnings figures came in last night. The biggest drawcard was Wal-Mart, which posted a better then expected 2.4% increase in same-store sales for the second quarter. The euphoria continued as American Eagle, JC Penney, Target and others announced similar results. It was undeniably clear – there has been no retail slump.
(Macy’s result went the other way, but we’ll ignore that.)
It was always going to be about earnings. If the second quarter earnings season turned out to be poor, amidst the mortgage crisis, then the bulls were prepared to concede. But look! There’s nothing to worry about.
The slightly more circumspect amongst traders were encouraged but nevertheless bemused. A result of 2.4% same-store sales growth is not exactly a great result. It is only the fact that the market was fearing the worst that made this result look somewhat spectacular. While the bulls are looking to any positive earnings results as the proof in the eating, the less bullish are predicting a positive but nonetheless lower earnings result for the second quarter over the first quarter. That, they say, is really not bullish at all.
Moreover, as Babs might put it, we’ve only just begun. This is the first week of a month-long quarterly earnings fest. The less bullish would like to get a few more results in the door before they conclude that new record highs in the indices are indeed justifiable. And there is still the mortgage crisis factor, which could play out for a long time yet.
Mortgage crisis? What mortgage crisis?
Buffalo NY based M&T bank announced a second quarter profit increase of 1% last night. Within that result was a 14% year-on-year decline in mortgage revenue. However, mortgage revenue in the second quarter was DOUBLE that of the first. There is no need to explain just how this was received.
On the back of this news, and the retailer results, the financial sector staged a glorious recovery last night. The sector, representing 20% of the S&P, bounced backed with gains of around 3.5%. But wait, there’s more.
As we know, while the world has been agonising over mortgages, the global resource sector has been oblivious. So it was that when “British” miner (that’s how the Seppos see it) Rio Tinto (RIO) confirmed its bid for Alcan it caused Alcan’s price to jump 10% and Alcoa’s price to jump 7%. In Alcoa’s case, not only is the burden of paying for Alcan lifted, but the company now becomes an obvious target for that other British miner, BHP Billiton (BHP).
But what really drove Wall Street to extraordinary gains last night were the short positions. With the weight of relief flowing from these somewhat isolated results, those backing further bad news in retail and financials were forced to bail as the king tide swept toward them. The real scramble started around 2pm when the shorts realised it was a lost cause – at least for now.
So one might say it was a perfect storm of bullishness on the Street last night. We no longer have anything to worry about in the retail sector or the financial sector thank God. Tally ho!
Just for the record, while all this was going on at the NYSE, the US dollar continued to set new record lows against the euro and pound. This provided another burst of momentum for precious metals, despite a very slight dip in the oil price and another shift up in US 10-year bonds to 5.12%. Gold rose 1% or US$6.30 to US$667/oz which, in theory, represents an important break through US$665/oz. Silver posted a 1.7% rise to drag itself back over US$13/oz, making the recent US$12.40/oz low look like just a bad dream.
It was the usual shenanigans in base metals in New York as lead and zinc rose 3.5% while nickel rose 1% and copper fell 1%.
How will the local bourse respond today? The SPI Overnight says up 67. By the way, it’s Friday the thirteenth (and will be in the US tonight).
