Daily Market Reports | Jul 17 2009
By Greg Peel
The Dow rallied 95 points or 1.1% while the S&P added 0.9% to 940 and the Nasdaq added 1.2%. The previous high of 946 on the S&P 500 is now in the cross hairs, while the Dow closed at 8711 last night, not much below its 8799 high. The Nasdaq has already reached a new high. However…
After three days of solid rally, Wall Street tracked sideways in the morning session. The feature of the morning was the earnings report from JP Morgan which, like Goldman Sachs before it, blew estimates away. Long deemed the least battered of the commercial banks, JPM posted a US28c earnings per share result on a 36% jump in second quarter profits. Wall Street had expected only US4c per share.
But JPM shares did not surge on the news – in fact they fell 0.4%. The reason is twofold. Firstly, all bank stocks have re-rated sharply since Meredith Whitney upgraded Goldman on Monday, meaning Wall Street had already adjusted to assume a good result. Secondly, it was JPM’s investment banking business that made all the money, specifically in underwriting and bond trading. In the case of the former, the June quarter featured an unprecedented level of secondary capital raisings. In the case of the latter, trading desks make money from volatility, and it has been an unusually volatile time (compared to pre-GFC days). In other words, the result had a big element of “one-off” to it.
On the flipside, JPM posted a US$9.7bn loss from consumer loans and credit cards, up from US$4.3bn this time last year. The bank topped up its bad debt provisions by another US$2bn in the quarter to a total of US$30bn.
At this early stage of the earnings season, two-thirds of results to date have “beaten the Street”. In the case of the big names and Dow components, those “beats” have been significant. I have made the comment more than once ahead of this season that there was a distinct risk that having so badly underestimated company losses all through 2008, Wall Street analysts would swing the other way – overcompensating to the downside. It already appears this might be the case.
Earnings season is not about absolute profits and losses. Wall Street has forecast an extraordinary net 36% loss for the quarter for the S&P 500 stocks. It’s all about how results stack up against forecasts. So while results to date have looked fabulous, causing the index to adjust accordingly, the truth is that only means the extent of losses will not be as bad as 36%. It doesn’t mean companies are all now back gaily making squillions as if the recession were just a bad dream.
This theme carried over into the after-market, following post-closing bell reports from IBM and Google. IBM posted an EPS of US$2.32 to an US$2.02 consensus forecast and raised third quarter guidance. The computer giant also admitted rampant cost-cutting in the face of falling sales. The shares are up around 1.5% as I write.
Google posted an EPS of US$5.36 to the Street’s US$5.09. Revenue failed to excite however, amid falling advertising sales. Google shares are down 3% in the after-market.
What has been largely ignored by Wall Street this week amongst the euphoria, at least until last night, is the fate of the CIT Group. After a TARP injection, restructuring into a holding bank, a stress test and capital raising, this large US lender to small and medium enterprises is going under. If it does go under, CIT would represent the biggest failure of a mid-tier operation since Washington Mutual.
CIT has been cap in hand to the government this week. US Treasury Secretary Timothy Geithner has been charged with the task of deciding whether the bank should be granted “too big to fail” status and provided with further taxpayer support. CIT needs US$3bn from someone. But the stress tests have been completed and other banks are now paying back their TARP injections. Geithner closed the door.
CIT shares fell 75% last night. The bank is now hoping for a private equity saviour, or anyone for that matter.
In economic data news, the weekly jobless report surprised last night when new claims fell 47,000 in the face of Wall Street expectations of an increase. Economists dismissed the number however given there was all sorts of administrative adjustments made around temporary auto factory lay-offs.
The Philadelphia Fed manufacturing index is considered a good economic bellwether given the amount of industry located in the region. In June the index recovered to negative 2.2 from negative 22.6 in May. Economists pencilled in a fall to negative 3.3 for July given June’s surge, but the result was negative 7.5.
The NAHB index of housing industry sentiment rose from 15 in June to 17 in July. This was a bit of a positive, but it is a score out of 100.
So there we were at lunch time with a mixed set of drivers and a flat market. Then suddenly the wires ran hot. Nouriel Roubini had called the recession over!
This was significant news. On Monday, celebrated bank bear Meredith Whitney appeared to change her view. The RGE Monitor’s Nouriel Roubini is a respected economist and lecturer who correctly called the whole global financial crisis. He has, of course, since shot to superstardom, having been the butt of so many jokes for most of the noughties. For Roubini is one of a school of uber-bears who have been calling the credit bubble unsustainable since early in the century or beyond. Roubini was absolutely right, but if you’d backed him in 2003 you would have missed a bit of a rally.
When the news came through that Roubini had also turned, the Dow rallied 100 points to close on its highs. But fortunately I sit here each morning with a television on in my office, because Roubini has just retracted the comment, or at least jumped in quickly to say he was taken out of context. Cancel the front page! (FNArena has now also received an official statement from RGE confirming this is the case).
Roubini declared that in fact his view had not changed at all. He has long forecast that the US recession would last 24 months, and July is month 19. He does not believe a recovery will begin until the beginning of 2010. In the meantime, he expects a “W” pattern. In other words, we’ll go down again before we finally go up, according to the guru.
So in theory, take 100 points of last night’s move in the Dow.
It was a bit quieter around the rest of the market last night. The US dollar index slipped further away, down to 79.22. Oil rose US51c to US$62.05/bbl, but gold dropped US$2.10 to US$937.20/oz. The Aussie pushed on to US$0.8070.
London base metals were closed before the Roubini blunder, and were mixed on a steady Wall Street. Aluminium rose 2%, tin and lead fell 2%, and there was little movement elsewhere.
The SPI Overnight rose 36 points or 0.9%. Be warned however, for this was a close pre the Roubini retraction. Keep an eye out for the opening of the SPI day-market at 9.30am.
Tonight is Citigroup, Bank of America and General Electric. Strap in.
