Daily Market Reports | Jul 23 2009
By Greg Peel
The Dow closed down 34 points or 0.4% while the S&P edged down a mere 0.05% to 954. The Nasdaq nevertheless rose 0.5%.
I must apologise – I got ahead of myself in yesterday’s report in suggesting the Nasdaq was headed for 13 straight up-days. Today’s rally – inspired by Tuesday night’s late Apple result – actually marked 11 up-days. That’s the longest winning streak in 13 years, and hence my confusion. I have had myself taken out and shot.
I was right about the S&P though – it failed to mark an eighth consecutive rise, although the fall from 954.58 on Tuesday to 954.07 last night is hardly the stuff of major correction. At least the Dow was a little more definitive.
One feels the oxygen is thinning at these dizzy heights to fuel a further rally, and that a bit of a profit-taking pullback might provide a healthier base for another assault towards four digits in the S&P, if that is to be the case. But as the earnings season trundles on, one also gets the feeling Wall Street has begun to become a bit wary of the succession of Street-beating earnings per share figures. While just about every company is beating on the bottom line (reported profit), not everyone is beating on the top line (revenue) nor exciting with third quarter guidance.
A case in point last night was whitegoods maker (guess whose Mum’s gotta) Whirlpool, which posted an EPS of US$1.04 against expectations of US51c but saw its shares fall 10%. Those earnings still marked a 33% drop from this time last year, and Wall Street clearly took heed from the CEO’s accompanying comment, that “Consumer demand for appliances was significantly lower in the second quarter, which negatively impacted our global unit volumes”.
As far as US consumer demand is concerned, analysts are cautious on the fact government stimulus hand-outs have now run their course. Australia take note.
In contrast was the world’s biggest drug maker Pfizer, which beat expectations but also raised its full-year profit guidance. Its 4% rally on the day prevented a bigger fall in the Dow. But it was the banking sector providing most of the angst.
After promising results from peers Goldman Sachs and JP Morgan, good things were also expected of Morgan Stanley. But the only other “investment” bank posted a loss of US$1.10 per share against expectation of only a US49c loss. Wall Street probably expected Morgan to match its peers in posting solid proprietary trading profits in the quarter, but it disappointed. On the other side of the ledger, the bottom-line cost to the bank of paying back TARP money was a factor, as was the bank’s improved debt value.
Those with good memories may remember I had a bit of a rant about this last year. At the height of the GFC, obviously the investment banks were posting big losses, but they also tempered those losses by claiming a profit on the devaluation of their company bonds on issue. Put simply, if a Morgan Stanley bond fell from 95c in the dollar to 85c in the dollar as Wall Street began to fear for the bank’s ongoing existence, Morgan would call that 10c less it owes on a mark-to-market basis, and thus a 10c positive revaluation on the balance sheet – meaning a profit.
The madness of this accounting anomaly (and Morgan was not the only exploiter) is that if the company manages to remain in existence, it will ultimately have to pay back 100c in the dollar. Thus when the outlook improves, profits taken on bond values will have to come back and bite the bank on the backside. And this quarter they did, given Morgan’s bonds were considered less risky than they were previously. Hence the bank was forced to book a US$2.3bn loss as part of its result.
In the meantime, rival bank Wells Fargo posted a record 81% increase profit for the quarter – go figure. The bulk of that little earner was somehow related to Wells’ purchase of investment bank Wachovia at the bottom of the market nevertheless, and thus Wall Street looked through the floss last night to see a more realistic spectre of troubled loans. Wells Fargo shares fell 6%. It was a similar story for Bank of New York Mellon, the shares of which lost 9% after the bank posted a 43% drop in profit due to housing related write-downs.
There was, however, good news for the housing sector. According to official measures, the US house price average rose by 0.9% in May following a 0.3% fall in April (seasonally adjusted). This means house prices are down 5.6% for the year and 10.7% from the 2007 peak. It might be a positive statistic, but the Case-Shiller 20 city index was down 18% over twelve months on the April reading, which probably drives home more realistically what the bulk of the population is suffering. The Case-Shiller May reading will be interesting.
Wall Street was also heartened by a June quarter result from small home builder NVR (meaning not one of the majors – it doesn’t specifically build small houses) which sells mainly to first-home buyers. It posted an EPS of US$6.79 when the Street expected US$4.11, and the 6% rally in its shares spurred on the rest of the sector.
The US dollar still ticked lower again (78.75) last night despite a flat stock market. A rise in oil inventories nevertheless saw oil down US21c to US$65.40/bbl. We have now rolled into the September contract so we actually picked up a dollar overnight on the front-month price.
It was a different story for base metals, however. News of a power failure at a Chilean copper mine sent copper on a run again, triggering technical buying across the metals spectrum. Copper and zinc were up 4% and aluminium, lead and nickel up 3%. Back in early 2008, when commodity prices were running riot, the problem of reliable power supply became critical in South America, Africa, and particularly in China. One might assume that when metals prices are on the move, mines are ramped up to higher production levels, putting pressure on the hamsters at the power stations. This only serves to exacerbate price rises.
The same is true of labour strikes. Power failures and labour strikes were both a feature of the last commodity price rally, but in the subsequent correction obviously the hamsters got a breather and workers were just happy to keep their jobs. But now that prices are on the rise again, Canadian nickel workers have walked out of two Vale-owned mines and may be settling in for a long dispute.
Gold ticked up US$2.50 to US$951.30/oz last night on the US dollar’s slip, while the Aussie trod water again to remain at US$0.8165.
The SPI Overnight was down 6 points.
After the bell, SIM card maker Qualcomm posted a small drop in profit and slightly beat the Street on revenue, but an upgrade to full-year revenue guidance actually fell short of the number the Street was already assuming. Thus Qualcomm shares are down 5% in the after-market.
Everyone’s favourite discount store – eBay – also pipped the Street on both EPS and revenue. Company commentary was relatively downbeat about its auction business and subsequent margins, but strong results from PayPal (its global internet payment system) and Skype (voice-over-internet service which eBay is intending to sell) sent eBay shares up 5% in the after-market as well.
All up, it was a mixed day. If anything one might say more downbeat than upbeat when earnings results and guidance are netted out, but still the S&P 500 remained as good as flat. It may take one very poor result from someone to prompt a proper profit-taking pullback. Otherwise, the buyers still seem keen.
On the local front, yesterday’s close in the ASX 200 at 4068 set a new rally high above the previous 4062 set in June. It also marked seven straight up-days. Can we go to eight today? The SPI futures say no, but what would they know?
