Daily Market Reports | Jul 24 2009
By Greg Peel
The Dow rose 188 points or 2.1% while the S&P jumped 2.3% to 976 and the Nasdaq posted its twelfth consecutive up-day with a 2.5% gain.
After Wednesday’s brief wobble, Wall Street took off with a vengeance last night. The sharp move brought suggestions of short-covering by those who thought the rally may had peaked, however the bulls were quick to point out volumes were pretty solid for a summer holiday period. Moreover, there was other evidence to suggest the buying was real.
The US dollar was mixed last night, but the index moved higher to 79.07. Usually the dollar is sold off when Wall Street rallies. But bond yields surged, suggesting there was money flowing out of safe haven bonds and back into the stock market, and the failure of the US dollar to drop might suggest offshore buying of US stocks as well. The ten-year bond yield leapt 4.4% or 15 basis points to 3.70%.
The VIX volatility index dropped to 23. When this latest rally began on the back of Goldman Sachs, clearly short-covering was the immediate driver. The VIX leapt back up as traders caught short barrelled quickly into call options to cover their upside risk. Now those options are being sold, suggesting faith in the rally.
So the buying seems real. However, while volumes last night were good they were only good in the context. The S&P 500 has now added 11% in ten days in a period where average volumes remain very summer holiday-light. Low volumes tend to exacerbate the volatility of a market, and in this case the market has only gone one way after short-coverers put fear into the eyes of those still on the sidelines waiting in cash. That’s why the VIX index is down despite the apparent volatility. A market is not actually volatile if its direction is constant. With each day of rally, more and more cash has been converted into stock.
It could thus be called a “fomo” rally – fear of missing out.
The Dow passed 9000 last night for the first time since early January. The S&P looks like it now wants to try for 1000. Adding to the enthusiasm these last few days have been several upgrades from major houses – Goldman and Credit Suisse being but two – of year-end S&P targets to over somewhere 1000. But these are year-end upgrades, not next week upgrades. Somewhere in between we have a little period we call September-October. Be warned.
The initial catalyst for last night’s rally was the June existing home sales number. It rose 3.6% to its highest level since October, representing three consecutive months of increase. That hasn’t happened since 2004. The median house price was marked as down 15.4% over twelve months, but that’s 4% higher than the May reading and again the best level since October. Inventories of existing homes for sale fell from 9.8 month’s worth to 9.4 months. That’s also very encouraging, although 6 months is the historical average.
It was also noted that inventories of lower values homes are being snapped up, bringing down the average. Inventories of higher value homes are still running at around 20 months.
Next came the weekly jobless figures. New claims for the week rose by 30,000 to 554,000 seasonally adjusted, which was above the 550,000 expected by Wall Street. However, the numbers were elevated by coordinated auto factory shutdowns. The important news was that the number of continuing claims fell 88,000 to 6.22m. That number peaked at 6.9m earlier in the year. Ben Bernanke expects unemployment to continue rising, but Wall Street liked the opposite new trend suggested by continuing claims. (See also “The Good, The Bad And The Ugly From The US Labour Market” , FNArena Weekly Analysis, July 20, 2009).
On the earnings front, Post-It note maker 3M was the highlight with a US$1.20 EPS to the Street’s US94c forecast. That represented a 17% drop in profit, but 3M beat on the revenue line and also lifted year-end sales guidance. The Dow component’s shares were up 7.5% on the day.
Leading telco and exclusive iPhone ISP AT&T posted US54c to a US51c forecast on a 15% drop in profits. But the revenue line was of interest because while land-line revenues are collapsing, as one might expect, wireless revenues are surging given the company’s iPhone deal. Wall Street liked the result, and the shares were up 2.5% for the Dow component.
Un-government-funded automaker Ford surprised the Street with a US$2.3bn profit for the quarter, having posted a US$8.7bn loss the quarter before. But this number was affected by significant debt reduction, such that the “apples to apples” comparison was a small loss for the quarter. This was still much better than the Street expected, and Ford shares rose 9.4%.
Another driver of the recent rally as far as traders are concerned relates to the Obama health policy. The Administration’s attempt to introduce universal healthcare is socially popular, and an election plank, but the idea of raising high-end income tax, capital gains tax and payroll tax (which mostly affects SMEs) to pay for it is not. The bill is wavering in Congress, as not even all Democrats are convinced. Realistically, the middle of a GFC is not a great time to introduce costly social reform, from a purely economic point of view. The general electorate might like the idea of taxing greedy Wall Street villains to fund the health of honest Main Street, but increasing taxes in a recession is just the sort of policy that can bring about Depression. That is Wall Street’s fear.
The healthcare sector has laboured on Wall Street recently under the weight of fear that public sector healthcare will take away from the private sector. As the bill looks less and less likely to pass, investors are getting back into the listed healthcare sector. But higher taxes are a more general market impediment. If these do not eventuate, then that’s good for the whole market.
There was also surprisingly good news from across the pond. In May, UK retail sales dropped 0.9% as the country slipped further into deep recession. Economists nevertheless expected a rebound of plus 0.3% in June to account for summer clothing sales. But it’s been an unseasonably warm summer, and the actual figure was plus 1.2%. The FTSE 100 stock index is now up 9 days in a row.
Tonight the UK reveals the first take on its second quarter GDP.
At present, oil goes up when the stock market goes up, particularly if stronger housing numbers are involved. This is in contrast to the first half last year, when the stock market went down when oil went up. Last night oil jumped US$1.76 to US$67.16/bbl, despite a slightly stronger US dollar.
Base metals were a tad confused nevertheless, particularly after having a pretty good run of late. Tin rose 2.8% but the others swapped 1% gains or losses.
Gold fell US$2.50 to US$948.80/oz, while the Aussie, which topped US$0.82 yesterday in local trade, was down a third of a cent over 24 hours to US$0.8131.
The SPI Overnight was up 61 points or 1.5%, suggesting more 2009 blue sky.
Can the S&P 500 push on to 1000? Well it won’t get any help from the after-the-bell earnings reports.
Credit card issuer American Express, internet retailer Amazon and software giant Microsoft all reported quarterly earnings after 4pm NY. The former two beat on the EPS line, but Microsoft failed to do so. All three missed on the revenue line, with Microsoft missing significantly. Clearly the tech sector has been driven hard this last week, and it was more of the same last night, and such misses were not going to inspire further confidence.
Amex is down 4% in the after-market, Amazon is down 6% and Microsoft is down 8%. Amex and Microsoft are Dow components. All things being equal, the next leg up may not be tonight. Tonight is a Friday, as is today on the local bourse. Fridays are often a good excuse to take profits after a week of gains.
