Daily Market Reports | Jul 15 2009
By Greg Peel
The Dow closed up 27 points or 0.3% while the S&P rose 0.5% to 905 and the Nasdaq added 0.4%.
It was a fluctuating market on Wall Street last night – not surprising given Monday night’s surge. The Dow was down as much as 46 and up as much as 30 but the tight range belied a lot of rocking and rolling in between as earnings reports and economic data fought it out. Volume was once again very light.
The highlight of last night’s session was the quarterly earnings release from Goldman Sachs. Goldmans has long been considered the king of the investment banks, and throughout the GFC the king of all banks. But this hasn’t stopped Goldmans being hit along with everyone else, despite entering the GFC short CDOs. Heavy leverage saw the investment bank topped up with TARP money and forced to become a commercial bank. When Lehman went under last year Goldmans posted a record loss of US$3.3bn over four months.
But the TARP money has since been repaid, and Wall Street has long considered Goldmans one of few banks likely to come racing out of the GFC over time. Expectations have been growing of a possible US$2bn profit for the June quarter, culminating in Monday night’s 6% share price surge following an upgrade to Buy from Meredith Whitney.
Goldmans did not disappoint, posting a US$2.7bn profit for an earnings per share of US$4.93 to Wall Street’s forecast of US$3.54. The shares only closed up 0.2% last night nevertheless, given the bank’s strong run of late.
The earnings season is off to a flying start. Alcoa provided the first positive result, and results to date have remained upbeat. Healthcare/staple defensive Johnson & Johnson also posted last night, reporting a loss of 3.5%. But earnings per share of US$1.15 still managed to beat expectations of US$1.11.
Immediately after the closing bell, chip-maker Intel provided its numbers. In short, Intel blew Wall Street away with a US18c EPS to an expected US8c. Revenues and margins were also much better than forecast, as was third quarter guidance from the company compared to analyst forecasts. Wall Street had become concerned that the new range of super-cheap notebook computers appearing on the market would have carved a hole out of Intel profits, but this was not to be. Intel shares are up nearly 8% in the after-market.
Suddenly there is exuberance in the air. But there are always bears, and the bears were quick to point out that the feature so far in the reporting season – albeit very early on – is better than expected profits derived from greater than expected cost cutting efforts (which of course includes staff). On the other side of the balance sheet, sales volumes are weak. The potential here is to set up for a good June quarter which will not be matched down the track now that companies have been pared to the bone.
But Wall Street believes the saviour of the US economy will be inventory rebuilding. Last night it was revealed May business inventories fell 1.0% in the US. How do we take this? Is it disappointing that inventories have fallen rather than grown as hoped?
Firstly, May is a bit ancient history. Secondly, economists were expecting a 0.8% fall to mark the fifteenth consecutive month of inventory reduction. So it can be taken as good news that inventories were still falling in May, suggesting warehouses must be very close to being empty and will need to be restocked. Wall Street will be hoping for signs of the turnaround soon. But one mustn’t forget – building inventories is one thing, selling the stuff is another.
And so we move to retail sales. US retail sales rose 0.6% in June against an economist expectation of 0.5%. On the face of it, this is an encouraging result. This is the best result in five months, and this time last year Americans were receiving stimulus cheques (or “checks”) making annual comparables a challenge. However, the positive result was heavy influenced by the rise in petrol prices (gasoline, sorry) and a big jump in auto sales as Chrysler and GM dealers on death row started jettisoning stock at throwaway prices. Just about every other category of retail sales showed a drop for the month. Take out auto/gasoline and the result was down 0.2%.
Those gasoline prices have again raised the spectre of inflation. In May, the US purchasing price index (PPI) – the measure of wholesale price movements – rose only 0.2% but in June it rose 1.8%. Economists were expecting only 0.9%. Gasoline added 6.6% and food prices were also higher, rising 1.1% in June following a 1.6% drop in May. This is the biggest PPI rise since November 2007.
The Fed has been shouting from the rooftops that it is deflation – not inflation – the US should worry about as excess credit is unwound. This stance provides justification for the Fed’s quantitative easing program. However when assessing the PPI, the Fed is interested only in the core reading (ex of food and energy prices). You can argue all you want whether it is realistic or selective to do so, but core PPI rose only 0.5% in June. But in May, it fell 0.1%. So it’s not all oil and wheat.
It may have something to do with the fact oil is not the only commodity which surged in June. And the commodity buyers were back in force last night – not in oil, which fell another US17c to US$59.52/bbl – but in base metals. Copper, aluminium and zinc all rose 2-3% while nickel and tin rose 5-6%.
Strength in London was attributed to three factors: the US dollar was marginally weaker in the London session (although it ultimately rose a tad by the end of New York to 80.12 on the index); earnings reports were favourable and encouraging; and there is now tightness in near-month markets.
Basemetals.com reports the copper forward curve is now in near month backwardation. For the inexperienced, this means there is strong demand in the short term as inventories continue an unseasonal drop, mostly due to strength in Chinese buying. This puts upward pressure on spot prices over forward prices. Copper is not the only metal to see recent inventory take-offs, but a strike at two Vale nickel mines in Canada announced overnight was also a factor in nickel’s steep rise.
Gold also rose again last night – US$5.50 to US$925.40/oz – mostly in response to an inflation-hinting PPI.
The Aussie dollar has surged over a cent to US$0.7933 over the space of 24 hours, belying little movement in the greenback. But it was all about yesterday’s extraordinary surge in Australian stocks, fuelled not just by a light-volume short-covering rally Monday night on Wall Street but by another astounding jump in monthly confidence, this time from the business community.
Damn the torpedoes.
The SPI Overnight added another 35 points or 0.9%.
And just to top things off, late in the Wall Street session a BA-Merrill Lynch analyst released a report declaring the US recession to be over.
