Daily Market Reports | Apr 07 2009
By Greg Peel
The Dow closed down 41 points or 0.5% to slip back under 8000 at 7975. The S&P closed down 0.8% and the Nasdaq 0.9%.
Wall Street opened weaker last night as investors weighed up profits gained from a 24% rally against the potential evils of the profit season about to commence. The season is considered to kick off tonight with the first quarter report from Dow component and serial underperformer Alcoa. Shortly after midday the Dow was down 155 points.
But lunch time brought the turnaround as the other side of the fence began to exert influence. Profit-takers are happy to stay out to see just how bad the earnings season might prove. The more optimistic can’t see how earnings could be any worse than already expected, and are placing their faith in earnings reports being yesterday’s news anyway. Stock market prices lead earnings out of recessions. Where’s Moses when you need him?
Not helping the buy-side argument last night was a report from one of Wall Street’s banking analyst superstars. Mike Mayo has left Deutsche Bank and joined CLSA’s Caylon Securities. Last night he initiated coverage under his new banner and began by placing either Sell or Underperform ratings on eleven of America’s major banks. Mayo’s bank earnings forecasts are unsurprisingly below Wall Street averages, given he believes that loan losses will ultimate exceed Great Depression levels.
Not what the bulls want to hear.
But Mayo’s Great Depression comments were seen as sensationalist by others, and an intergalactic war erupted when Wall Street’s other bank analyst superstar – Meredith Whitney – was invited to comment by CNBC. Whitney, who achieved her cosmic status by correctly calling bank stocks all the way down over the past two years, suggested that now is a foolish time to be selling the banks. With asset valuations marked down and the government throwing everything at reviving the financial markets, Whitney believes there is more upside in bank stocks than down. It is arguably the most bullish the blonde bombshell has been since 2007.
[More on US bank views later today.]
The favoured tech sector also took a hit last night when reports suggested IBM’s takeover offer for Sun Microsystems may be withdrawn. Sun fell 24%.
The afternoon recovery in the stock markets was matched by a return to some strength for the US dollar, which had been knocked around by negative speculation ahead of the G20. The dollar rose against all major currencies, although the Aussie slipped only slightly to US$0.7140 ahead of today’s RBA decision. Economists are 100% agreed that the decision could go either way.
A rising greenback helped to quell recent commodity strength. Oil lost US$1.46 to US$51.05/bbl while base metals were mostly 1% or so weaker.
Gold, however, was a major victim. The return to stock market confidence has sparked an unwinding of the safe haven trade – not all but part of gold’s appeal. Once the metal fell through US$900/oz there was always going to be a rush, and that rush gained momentum last night as gold dropped US$26.60 to US$868.70/oz. The inflation buyers will probably now stand aside to let the safe-haveners exit, and gold could fall a lot further in the short term. Unless the stock market rally suddenly fails.
The VIX volatility index closed on Friday night at 39.7, no doubt giving hope to the bears that a meaningful breach of 40 could be made. History shows the VIX needs to fall below 40 before any real confidence in the stock market is indicated. But last night the VIX jumped back 3% to 40.9.
If one is concerned about what the US first quarter earnings season might bring, one can take profits on longs, which has been the case to some extent. Or one can hold on to the longs and buy put options as protection. Demand for put options on the S&P 500 is exactly what the VIX measures. If there are no certainties about just how bad Q1 earnings are going to prove, then the only certainty is uncertainty and that means volatility. We may be in for some sharp ups and downs in the next couple of weeks. Spacecraft Wall Street is heading into an asteroid belt (just thought I’d keep the space theme going).
One thing about recovery rallies is they never just go straight up. There are many willing Wall Street to have a pullback to provide buying opportunities again, but just not all the way back to the lows. Somewhat of a pullback from what has been an historical rally is just what a doctor would order.
The SPI Overnight lost 21 points or 0.5%.
