FYI | Oct 24 2007
By Greg Peel
It was another topsy-turvy day on Wall Street. Markets opened strongly out of the blocks led by Apple, which had posted an exceptional result in the after-market on Monday. The Dow was then down before lunch, before picking up again, and finally making a last minute surge. The Dow closed up 109 points, or 0.8%, while the S&P gained 0.9% and the Nasdaq ran away again with a 1.7% rise.
A lot of the late gains were put down to exuberance over the upcoming Amazon result, due out in the after-market. Someone might have known something, because Amazon – a stock that has already doubled in six months – added 10% on the day. When the result came out it was learnt Amazon had quadrupled its profits for the quarter. Vindication? No.
It turns out Amazon’s margins are getting very tight into Christmas. It was also remembered that the third quarter coincided with the latest Harry Potter release. The stock wiped out most of its gains for the day half an hour after the bell had rung.
Amazon had dragged the whole tech sector with it, and also dragged along stocks like United Parcel Service which delivers all of the online retailer’s books. The after-market is telling a different tale, which is one case of a tale of two markets.
But the real tale of two markets lies in the dichotomy of earnings results from those companies with mostly domestic US earnings, and those with a large portion of offshore earnings. Every domestic company is announcing either weak profits, weak guidance, or both. Every offshore diversified company is announcing the same, but offset by strong earnings from the likes of Europe and Asia. Those companies with a high proportion of offshore earnings are having a field day. Research in Motion, for example, declared it had finally sealed a deal to sell Blackberries to China. Dow component DuPont’s earnings were poor in the US but strong elsewhere.
If you took away offshore earnings the US stock market would be somewhat of a disaster area. But in the globalised world (I know – that sounds tautological but you know what I mean) the US stock market is acting more as the global stock market. This diversification means it is no longer the case that if the US catches a cold, everyone else gets the flu. However, the US economy is clearly slowing. France’s finance minister, when interviewed by CNBC, predicted the flow-on of a slowing US economy into a slower European economy would take two quarters. Another prediction is that Asia will feel the effects in four quarters.
The erratic nature of stock trading this week has reflected an “alpha” effect more so than a “beta” effect. Stocks are moving in opposite directions based on individual earnings. Tech sector reporting is coming to an end, so it will be interesting to see how the rest of the market then fares.
Elsewhere it was also a mixed session. The US dollar failed to rally along with the stock market this time, falling against the euro. However, it did rally against the yen, which means carry trading. And would you know the Aussie shot up over a cent over the last 24 hours to US$0.8986. Gold also pulled back some of yesterday’s losses, rising US$5.40 to US$759.40/oz.
Oil ignored the US dollar and fell US75c. There is now talk that the Turkey-Iraq issue may be solved diplomatically, which could open up a big hole under the oil price. The November delivery contract rolled off into December last night, so the US75c fall took us to US$85.27/bbl. This is actually US$2.29 below the November settlement, reflecting the backwardation currently existing in oil futures. Backwardation means those holding oil futures in the belief of higher prices have to suffer a two-steps-forward, one-step-backwards cost at each rollover. How confident are the longs?
The falling US dollar did its bit for base metal prices in London, with aluminium and tin up 1%, copper and nickel up 2%, lead up 3% and zinc up 4%.
The SPI Overnight was up 34 points.
Anticipation is rife for the last big investment bank earnings report tonight – that of Merrill Lynch. A poor result from Citigroup last week was not well received. Locally, it’s CPI day today.
