Daily Market Reports | Oct 02 2009
By Greg Peel
The Dow fell 203 points or 2.1% while the S&P plunged 2.6% to 1029 and the Nasdaq wiped off 3.1%.
Before we start asking the obvious question, being is the pull-back finally upon us?, we have to take two points into consideration.
Although the US stock market has not exactly been surging into blue sky this past week, it has been otherwise resilient against some weaker economic data. The last couple of trading days in particular have clearly featured “window dressing”, in which fund managers push up prices at the end of the quarter to enhance return performance. That’s point one. Point two is that we know that there was still a lot of “cash on the sidelines” as the end of the quarter approached, evident in any dip being enthusiastically bought. Fund managers who have missed the rally do not want to show an ongoing underweight in equities in their quarterly reports.
It’s all about the relative performance of funds, and about avoiding redemptions and encouraging new flows. Fund managers care little about how their own fund’s return stacked up against any particular index over the quarter. They care only about how their fund stacked up against competitors in the same category. It is relative performance, not absolute performance, which draws fresh investment (and that goes for “absolute return” funds as well). If an investor is making a decision about which fund to choose for the December quarter, he will look at the one which is underweight equity and performing relatively poorly and decide that fund must be a loser.
If fund managers end up buying at the highs at the end of the quarter in such an exercise, what do they care? They just need to get the money in the door and then they have another three months to worry about how best to manage it. So before we start talking about last night being the start of the long awaited pull-back, we have to “correct” the market back to where it might otherwise be if you remove the end-of-quarter fluff.
Take away the fluff, and what are we left with? Well the reality is that US economic data released over the last week or so have not been good. As I have long suggested, the first phase of the rally from March was driven by “green shoots” and the second phase was driven by affirmation of the green shoot proposition when data turned from “less bad” to “good”. But “good” gave us a total 50% rally, so to move the market higher yet again we really needed “very good”, otherwise what had transpired to date was already baked well into prices.
In the past week or so the US has been disappointed by results which have either fallen short of “very good” expectations, such as one or two of the home sale numbers and recent jobless data, and results which have been simply negative, including industrial production, durable goods, consumer confidence and the Chicago index. And then last night it got worse.
Despite manufacturing representing only 20% of US output (services 80%), the monthly ISM manufacturing index is a closely watched figure. Last month it moved into “expansion” territory for the first time post-GFC, marking 52.9 on the 50-neutral index. Given economists now expect every data release to be better than the last, consensus had September reading 54. Instead the index fell to 52.6.
Is this enough to ring desperate alarm bells? Of course not. It’s still an expansion result, and economic recovery was never going to be in a perfectly smooth “V” no matter what anyone has suggested. But the point is that the stock market has been priced for that “V”.
Then there was the weekly new jobless claim figure – of particular importance this week given the release of the official September employment numbers tonight. Economists had expected a rise in claims from 530,000 to 535,000, but they rose to 551,000. There was, however, a tick down in continuing claims, from 6.13m to 6.09m.
And there was actually some good news as well. Pending home sales rose again, and consumer spending leapt a higher than expected 1.3% in August after rising only 0.3% in July. The latter figure was, however, “clunked”.
So on Wall Street last night we had no more fluff-buying and mostly weak data. And then there was Fed chairman Ben Bernanke’s regular testimony to the House Financial Committee in Washington.
In response to questions, Bernanke told the Committee that suggestions by the rest of the world to establish a new reserve currency were not good for the US dollar (thanks Scoop) but that he didn’t see the dollar’s status as under any immediate threat. He also noted that while inflation remained low there was no problem in supporting the economy (monetary policy) but that the government needed to keep its “economic house in order” (fiscal policy) lest the dollar’s value was threatened.
These comments were taken by the Street as a “strong dollar policy” stance from the Fed, and despite the fact it is a hanging offence in America not to be supportive of a strong dollar, Bernanke was hinting that if he had to, he would put interest rates up. He doesn’t have to just yet because of low inflation, but he might have to if the government stuffs up the budget.
And so the US dollar shot up 0.6% on its index to 77.21. When the dollar goes up, the stock market goes down. And there we have the three reasons why the Dow was down 203 points last night.
But the Dow got off lightly. In a case of “the bigger they are the harder they fall”, the three sectors which have led the 50% rally to this point are financials, materials and tech, and they were thus the three most hammered last night. Financials and materials have big weightings in the S&P 500, which was down 2.6% to the Dow’s 2.1%, and the Nasdaq is tech-laden, so it was down 3.1%. A stronger US dollar is bad for tech because the sector is an American export leader, and bad for materials because commodity prices fall as a result.
On the latter point, I noted last night that commodity prices are also subject to end-of-quarter window dressing given the sheer number of commodity funds in action. So the big commodity price rallies of Wednesday were all given back last night. Base metals all fell 1.5 to 4%, including copper down 3%. Gold fell US$8.60 to US$998.50/oz.
Oil was a little more confused. From its US$70.61/bbl close on Wednesday oil initially fell to US$69.13 on the stronger dollar and weak data but bounced again on the consumer spending numbers. Oil likes consumer spending. At the 2pm close oil was actually up US21c to US$70.82/bbl but turned weaker again in post-Nymex trade. (Note that the FNArena Cockpit price is always a later read on the global WTI price, and today it shows down US36c to US$70.25/bbl.)
None of the above was ever going to be of much help to the Aussie of course, so it gave back all of the previous 24 hours by falling over a cent to US$0.8697.
Australia had its First of October yesterday, with a bit of weakness to kick things off. The SPI Overnight was thus only down 75 points or 1.6% to the S&P 500’s 2.6% last night. Our equivalent manufacturing index, released yesterday, was nevertheless a positive result compared to the negative US result.
If the ASX 200 does go into a bit of a slide for a week then perhaps the RBA might not roll the cannons forward just yet. But if not, then I reckon we’re in for a shot across the bow on Tuesday. And that might be the pull-back signal anyway.
It is also notable that US economists have been mostly wrong, wrong, and more wrong on economic data release forecasts this past week or two. In each case they have erred to the upside. Where does this put US stock analysts? Have they, too, over-estimated forecast third quarter earnings? We begin to find out in a couple of weeks.
Readers please note: NSW switches to daylight savings time this weekend. For the next month, the close of New York will be at 7am Sydney time rather than the 6am close of the winter months. At the beginning of November the US switches out of daylight savings time, meaning New York will close at 8am Sydney time. I will be endeavouring (as I have always done in the summer) to get this report out before 9am Sydney, but bear in mind I can’t do a lot until markets have actually closed.
Note also that Monday is a public holiday in NSW. The ASX is open for trading, but broker research will be all but non-existent. To that end, FNArena will come in an abridged version on Monday. (It makes no difference to this report as there isn’t one on a Monday.)
