Daily Market Reports | May 14 2009
By Greg Peel
The Dow fell 184 points or 2.2% while the S&P fell 2.7% to 883, falling back below the significant 900 level – a level which many had assumed earlier was a bridge too far. The Nasdaq fell 3.0%.
Over the course of the rally which began in early March, the theme has been one of “less bad”. Spurred on by encouraging rhetoric from Ben Bernanke and the leaders of the G7, the “less bad” theme has been fuelled by a flow of economic data which showed not an improving economy but at least an economy that was not weakening as quickly as it had been. Throw in enthusiasm over what was perceived to be successful economic stimulus in China, and then the revelation that US banks were supposedly in reasonable shape after all, and we had enough confirmation as far as the bulls were concerned.
The S&P 500 rallied 36% from low to high – the steepest rise within the timeframe since the 1930s. Commodities were sucked into the draught, ignoring inventory and real demand data and instead responding to “green shoots” and dosing up on a weaker US dollar. If the 1930s taught us one thing, it is that a bear market has many false dawns. From the ’29 crash through to what became the Great Depression, Wall Street posted several steep and significant rallies. In each case it seemed like things must finally be on the improve. At the end of the day, the stock market fell 80%.
That is not to say today’s market must fall 80%. Many policy errors were made in the 1930s and there were certainly no global stimulus packages. But one must appreciate that economic data, like stock markets, do not move in perfect straight lines. It is not simply a case of all good, then all bad, then all good again. There are peaks and troughs and blips and misleading readings all along the way. Rome was not rebuilt in a day.
And one must not forget the role that sentiment plays. With a fixed attitude, and desperate hope, one can interpret economic data any way one likes, and mould the expected ramifications to fit the desired outcome. Take last night’s oil market as an example.
The oil price has rallied around 80% to its recent high. The rally was all about “green shoots” and a weaker US dollar. The dollar was weaker because investors were selling out of US bonds to put their money back into stock markets across the globe and into commodities. The rally was feeding itself. But all along, investors were ignoring the simple reality that US oil and gasoline inventories have never, in the history of mankind, been as big as they are presently.
Last night the oil market was surprised to learn that last week both crude oil and gasoline inventories actually fell. If the oil price was able to run up despite ever building inventories, then one can be forgiven for thinking oil might shoot even further on news inventories had actually shrank. But oil fell US83c last night to US$58.02/bbl.
Aside from a stronger US dollar, oil fell because of the reality behind the falling inventory numbers. Inventories of crude fell not because refiners were drawing down more oil, but because they slowed oil imports given weak demand. Gasoline inventories fell not because Americans are guzzling oil again, but because refiners reduced their production capacity given weak demand. The US is about to enter the summer holiday period, known in the oil market as “the driving season”. When Americans go on their summer break, they drive. The period before the break would normally mark the seasonal peak for oil demand. But this year the demand is simply not there. If it’s not there now, what’s demand going to be like after the summer is over?
The “less bad” theme came to an abrupt halt last night. Economists had been expecting April retail sales in the US to be down by 0.1%, but the way the data have been flowing of late, no one would have been at all surprised to see a positive number. It was healthy retail sales figures in January and February which gave Ben Bernanke the impetus to coin “green shoots”. But the result was negative 0.4%. The spell has been broken.
The importance of US retail sales figures for the global economy can not be underestimated. The US economy is by far the largest in the world and it still is despite the GFC. It is an economy far, far bigger than that of Japan and that of China (which is probably now in second place) and that of Germany. One must add the GDPs of the 20-odd EU nations to equate to one US economy. The US consumer typically accounts for around 70% of US GDP. If Americans aren’t buying – be it their own Chevrolets, or fridges from China, or furniture from Sweden, or phones from Japan, or gasoline via Middle Eastern oil wells – then the whole global economy suffers. The producers of the raw materials, such as Brazil, South Africa and Australia, suffer down the chain.
And just to bring reality home further, last night a report by RealTrack showed the number of US households facing mortgage foreclosure in the US jumped by 34% in April. A good deal of the “green shoots” of late have been supposedly positive, or at least less negative, housing data.
I haven’t used this expression for a while now, but it might be time to dust it off: It’s not over till the fat lady sings.
There was no battle between bulls and bears last night on Wall Street. The Dow fell from the open and drifted lower all day, finally settling only 20 points above the day’s low. There was an immediate rush back into the safe havens. US Treasury yields have been drifting higher during the course of the stock market rally, despite Fed buying (quantitative easing). Last night bonds were popular again, causing yields to fall and the US dollar to bounce of the four-month low set last night. The Aussie fell over a cent to US$0.7526.
We have covered oil. Base metals in London also took a hit, with copper falling 2.7% to break back below the significant US$4500/t level. Aluminium, tin and lead fell 1%, while nickel and zinc fell 4%.
Gold has been ticking higher and higher lately on expectation of exactly this – that the stock market rally had run too far and confidence had become over-inflated. But gold still managed to defy a stronger US dollar last night and go for the safety trade. It was up US$2.40 to US$926.00/oz.
The SPI Overnight fell 86 points or 2.2%. This implies the ASX 200 will fall back through the January high break-out level of 3779.
Corrections are healthy things. How often have you heard a football coach declare that his side, which had won every game so far, will benefit from the dose of reality a surprise loss provides? This market probably should now come back a bit further given the confidence bubble has been pricked. But there should be buyers ready lower down. Will we test the lows again? Let’s see.
