Daily Market Reports | Apr 15 2009
By Greg Peel
The Dow fell 137 points or 1.7% while the S&P lost 2% and the Nasdaq 1.7%. The Dow’s fall took it back under 8000. The S&P’s fall took it just back under the technical level of 842.
Speaking in Atlanta last night, Fed chairman Ben Bernanke declared that “green shoots” were appearing in the US economy, citing positive retail sales figures in January and February as indicative that the pace of US economic decline was slowing. Unfortunately as he spoke, the March figure was released. While the January and February figures were revised higher still the March figure showed a fall of 1.1% when economists were expecting a 0.2% rise. Retail sales account for half of all consumer spending in the US. They are now down 9.4% in twelve months.
Back to the drawing board.
More disappointment was to come in the form of the producer price index. Economists were expecting a 0.5% decline in March but a 1.2% fall transpired. The big factor was gasoline prices, which fell 13% in the month. A small rise was expected in the core PPI (ex food & energy) but it remained flat. The headline PPI is now down 3.5% in twelve months – the biggest decline since 1950. The core is up 3.8%.
The PPI is a measure of wholesale inflation, just as the CPI measures retail inflation. The great fear is that the US economy will fall into deflation causing a downward spiral of prices and wages. While the Fed chooses to focus on the core rate given the seasonal volatility of food and energy prices, some economists argue that this is simply to ignore the staple products that dominate everyday life. To fight disinflation (less positive inflation) a central bank would normally lower its interest rate. The Fed cannot lower below zero. That’s why we currently have quantitative easing – a measure that is highly inflationary and which might come back to haunt the Fed if deflation is overly compensated for.
On a brighter note, February business inventories fell 1.3% in a month in which sales rose 0.2%. At the edge of a recession, this would be bad news as it would imply demand was falling. But in the middle of a recession it’s good news as it implies businesses are clearing out excess stock. If businesses are stuck with stock they can’t sell they are forced to deeply discount, thus fuelling deflation.
Goldman Sachs had reported its first quarter earnings result after the bell on Monday. On face value it appeared Goldmans had beaten the Street quite comfortably. But closer inspection presented details that Wall Street didn’t much like. Goldman shares fell 12% last night.
The main problem was that the Street-beating earnings figure did not imply better than expected performance across the board. In fact, the result was polarised between a record quarterly profit in areas such as fixed income and foreign exchange which offset a very poor result in areas such as equity trading and traditional investment banking. The former is a case of a global financial crisis fuelling a big increase in activity. The latter is a case of weak equity markets and a lack of interest in such areas as corporate finance and M&A – backbones of any healthy investment market. In other words, both results provide a weak picture rather than a stronger one.
To top things off, Goldman put away an issue of US$5bn of fresh capital, thus diluting earnings. The bank has indicated it is hell-bent on returning its TARP injection (US$10bn). Aside from weakness in its own shares, the Goldmans result encouraged weakness across the financial sector. Goldmans is the biggest player in what was once called investment banking. If its result was poor, how will other banks fare? And if Goldmans and perhaps others return their TARP funds, will this spark a run on those banks unable to follow suit?
The US dollar was mixed but weaker on the index over the session. However the yen rose, and the Aussie, which has had a big run of late, has pulled back 0.8 of a cent to US$0.7237 over the past 24 hours. A weak PPI is not good news for gold, but it only fell US$2.60 to US$880.00/oz.
On Monday the International Energy Agency downgraded its global oil demand forecast for 2009. Last night the US Energy Information Administration chimed in, also downgrading its 2009 forecast for US oil demand. Oil fell US89c to US$49.41/bbl.
There were some big movements last night, however, in base metal prices – to the upside. While aluminium missed out, and an already strong copper added only 1.5%, zinc and tin were up 3%, lead 4% and nickel 7%. The surge was put down to fresh fund buying swamping profit-taking from traders. Funds appear to be backing the Chinese stimulus package – which China claims to be achieving great things – and focusing on the reduction in Chinese supply more so than the restocking phase China has been in for a month or more.
More on that later today.
After a big day yesterday, the SPI Overnight gave back 41 points or 1.1%.
After the bell, Dow component and leading global chip maker Intel posted its first quarter profit result. Earnings per share were US11c compared to US25c in the first quarter 08. However the Street had only US3c a share pencilled in. Intel noted that the first quarter included significant “inventory adjustment” and suggested that global PC sales “bottomed out” in the quarter.
That was the good news. The bad news is that Wall Street is not so much focussed on EPS as it is on revenue and gross margins for Intel. Both were only on expectation and the company declined to provide second quarter guidance of any detail, suggesting only that revenues and margins were likely to remain “flat”. This did not encourage traders, who have sold the stock down 5% in the after-market.
