Daily Market Reports | May 12 2009
By Greg Peel
The Dow fell 155 points or 1.8% while the S&P fell 2.2% and the Nasdaq, which has been marching to its own drum of late, fell only 0.5%.
A new week dawned post stress tests and post unemployment figures and Wall Street was not really sure what to do. Traders didn’t really sell it but they didn’t buy it either, and so the indices fell early and then drifted along on low volume and apparent indecision. After a 36% rally in the broad market and a near 100% rally in the banking sector, Wall Street is beginning to ponder whether more upside can be justified in the current market. Just how “less bad” is the economy looking? Every new “less bad” piece of data cannot push the banking index up another 100%.
And the banks in particular, and the market in general, are not planning to waste the rally. Before March, the idea of trying to raise much needed fresh capital in the stock market was just not an option. Aside from running the risk of raising capital at the lows of share prices, of not finding enough buyers, or of having to steeply discount and thus significantly dilute earnings per share, the implications of attempts to raise capital would likely have sent a fragile Wall Street spirally downward once more. One cannot chase the market down.
But now the market has rallied, a certain level of optimism has returned, whether misguided or not, and Wall Street is in a buying mood. Stress tests aside, US banks would have dearly loved to have been able to raise fresh capital at any point in the bear market in order to repair their balance sheets swiftly. Now that the stress tests are complete, and a supposedly (but dubiously) independent government taskforce has ordered more common equity but otherwise given everyone a tick, the door is open to make good on that order.
So the raisings have begun, and so far Wall Street has taken them on board. But how long investors are happy to keep picking up new stock at these rally levels while watching their existing holdings be diluted is questionable. Banks have indicated they wish to raise capital not just to satisfy stress test requirements, but to pay back TARP funds as soon as possible. A release from TARP fund restrictions is positive for bank shares, but here we are 100% up from the low. Clearly the banks are looking to take full advantage. Never look a gift horse in the mouth.
Bank shares were the leaders last night in dragging the market down. Comments on CNBC late in the session from bank analyst pin-up girl Meredith Whitney only helped to encourage the fall. Whitney cannot reconcile the sudden increased valuations of the banks against her expectations of earnings drag for several quarters to come. A rally from the lows has not surprised her, but the rally has run well ahead of itself, in her view.
Banks were not alone in announcing capital raisings. Immediately after the bell, automaker Ford announced it would be raising capital, thus sending its shares down a further 5% plus in the after-market after a 2.5% fall in the day session. Other corporations are also attempting to cash in. It is the same story in Australia as the capital raising bandwagon gains momentum, and jumping on are not just beaten-down companies with desperate debt positions, but also lesser geared companies looking to simply gather some nuts in May.
What this pick-up in capital activity suggests is that corporations are standing there saying c’mon – we’re waiting for you. Push our shares up on fresh hope and we’ll happily slap your bid. Not only does every raising put downward pressure on share prices, they dilute earnings per share and thus raise PE levels, making supposed “value” not quite such value after all.
All of this is occurring on a backdrop of “green shoots” of economic recovery. Bear in mind, of course, that these are not green shoots of positive economic growth, just green shoots of slower economic contraction.
There is little doubt stock markets need a breather after a solid run up that was punctuated by very few down-days. Maybe it’s time for that breather, maybe there’s a bit more enthusiasm left to push higher yet. But a breather would be good for the market. Were the market to drop on light volume but find new support lower down on good volume, that would be healthy. But one thing’s for sure – share markets ain’t gonna be posting 25% per year gains again anytime soon. We are not simply headed straight back to the highs at speed.
The US dollar had taken a hit last week on stock market exuberance as investors switched out of safe haven Treasury positions. Last night the greenback rebounded a tad as the stock market weakened. The Aussie, which traded as high as US$0.77 following yesterday’s more positive business survey in Australia fell back to US$0.7588 to be down a cent in 24 hours.
Gold is hanging in there, falling US$2.10 last night to US$912.70/oz. It appears that investors are still keen to hold gold in case this rally falters.
Oil took a breather as well after a big run-up, falling US52c to US$58.50/bbl. Base metals followed suit, drifting lower as traders brace for Chinese trade and production data due today and tomorrow. Copper fell 3%.
The SPI Overnight fell 51 points or 1.3%. Having run up against the 200-day moving average, the ASX 200 shrugged off Friday’s Wall Street rally in yesterday’s trade and took an anticipatory breather. It is notable that this time last year the index rallied into May, hit the 200-day MA, and turned heel.
