The Overnight Report: Confident Double-Think

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By Greg Peel

The Dow rallied 196 points or 2.4% while the S&P gained 2.6% to be yet again back at 910 and the Nasdaq surged 3.5%.

Deja vu. The first session of last week saw a 200 point rally in the Dow as the home building industry showed it was feeling a bit better about things. The rally from March had been accelerated by ever so slightly less worse than expected housing data, and unsurprisingly home builders reflected these numbers in an increased sentiment indicator. On the news that builders felt good about the data that had already sent the market up 35%, Wall Street sent the Dow up another 200 points.

Last night, in the first session of this week, it was the turn of the consumer. Funnily enough, a 35% rally in the stock market based on “green shoots” of economic recovery also had consumers feeling a bit better about themselves. So Wall Street added another 200 points in the Dow.

Admittedly, it was a significant confidence jump. Consumer confidence measured 40.8 in April after the rally had begun and economists were expecting a jump to 43 in May given the rally had really taken off. But the reading was 54.9, representing the biggest monthly gain in six years and the highest level in eight months. Corks popped, horns were blown, streamers were thrown and the Dow rallied 150 points in the first half hour. For the rest of the session it managed to scrape up another 50.

Like last week’s rally, it’s a case of double counting. Incidentally, last week’s Monday rally saw the S&P 500 close at 909 and this one has it at 910. Following last week’s rally the market did little but drift off again. Last night’s volume, on a back-from-the-long-weekend Tuesday, was very low. Last Monday’s volume was not much better.

Now let’s have a look at what the real world threw up last night.

The Dow futures were weak ahead of the confidence number largely in a reaction to more North Korean pop-guns. But no one on financial markets is really much concerned. More importantly, Case-Shiller released their first quarter housing index last night. In March the 20-city house price average fell 2.2% to 18.7% lower than a year before for the month and 19.1% lower for the quarter. Wall Street has been rejoicing a supposed improvement on the housing front, but the head Case-Shiller compiler said last night, “we see no evidence that a recovery in home prices has begun”.

General Motors’ bondholders are still rejecting the government’s equity restructure plan in the majority, and so GM is yet closer to bankruptcy (although many believe that would ultimately be a more positive result).

Wall Street nevertheless liked the sound of the consumer confidence number better than anything else. But let’s look at that. This index is not the same as manufacturing and other indices in that 50 represents the neutral point, such that anything above is growth and anything below is contraction. The consumer confidence measure is just a score out of 100. While 54.9 looks like a “pass” you might be surprised to learn that the average reading for the index in past recessions is 76.3. In recoveries after recessions the average is 85.9 and in boom times the average is 99.8. On that basis, 54.9 does not look at all confident.

It’s just less bad than it was.

And in such buoyant mood, all news seems good. Wall Street was further boosted last night by Rio Tinto’s ((RIO)) triumphant iron ore price settlement – a drop of only a third compared to the half or worse expected by some – which helped to fire up material stocks in the US including the other contracted bulk mineral sector, coal. The oil price shot up another US78c to US$62.45/bbl on the consumer confidence number to push up the energy sector. A report from Morgan Stanley suggesting iPhone sales would drive strong earnings growth for Apple over the next two years had Apple shares up 7% and the Nasdaq all a-flutter, up 3.5%.

The beleaguered US dollar had a reprieve last night. The index managed to bounce from a perilous 80.05 on Friday to 80.54 as North Korea encouraged a bit of a shift back to the white-hats. This sent gold down US$5.90 to US$952.00/oz, which just goes to show a weak reserve currency is more frightening a prospect than a nuclear apocalypse these days. The Aussie was nevertheless defiant after Rio’s news, rising a third of a cent to US$0.7859.

Base metals were on their way south in London before the US confidence number turned them around. Copper finished the day 2% higher, but was down 3% at one point. Early weakness was due to news that China’s State Reserves Bureau, which had been buying copper with its ears pinned back in the first quarter, had 50,000 tonnes on offer.

Uh oh.

The SPI Overnight rose 65 points or 1.7%.

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