Daily Market Reports | Oct 08 2009
By Greg Peel
The Dow closed down 5 points or less than 0.1% while the S&P rose 0.3% to 1057 and the Nasdaq also rose 0.3%.
After the big surge on Tuesday, Wall Street was content to ease off the gas last night as ahead of flagship Dow component Alcoa’s earnings result which was due immediately after the bell. As the first Dow component to report each season, Alcoa’s result is seen as the official kick-off of the quarter despite a handful of results announced during the session last night, including those for Costco and Monsanto.
Alcoa’s result proved to be a good one at first glance, and its shares are up 6% in the after-market as I write. Wall Street was expecting a third quarter earnings per share loss of US9c but the company surprised with a US4c return to profitability. This does, however, compare to a US37c profit in the third quarter last year.
The bottom-line result was nevertheless boosted by cost cutting. Cost cutting was a general feature of second quarter earnings from much of the index, providing the illusion that most companies “beat the Street”. But many analysts were wary that revenues were generally lower than expected, leaving only cost-cutting and not improved sales to provide better than expected earnings. The third quarter should provide a better indication of whether earnings are improving for the right reasons or not.
Alcoa’s result did include better than expected revenues. Third quarter sales reached US$4.62bn ahead of the Street’s US$4.51bn consensus, although below the US$7.23bn of last year. Management credited Chinese economic resurgence as the key driver.
Warehouse supermarket chain Costco also released a result which beat on the revenue line, with sales of US$23.38bn to expectation of US$23.34bn. A 3% fall in earnings per share to US85c still beat the expectation of US77c. It was Costco’s first “beat” in 2009.
It was not the case for seed and chemical producer Monsanto however. The company managed an EPS of US2c against US1c expectations but US$1.88bn in revenues fell short of the US$1.99bn expected.
The two latter results came during the session, one in which the Dow chopped around all day between a 9 point gain at 11am and a 56 point loss at 2.30pm. The economic release of the day was August consumer credit, which fell US$12bn to US$2.46 trillion to mark an annualised 5.8% decline. Economists had pencilled in a US$10bn drop. While a reduction in household credit is a positive in the face of America’s excessive total debt, reduced consumer credit means Americans are saving and not spending, and that’s not going to much help an economy 70% reliant on consumer spending. The August fall marked the seventh straight month of declines.
The US Treasury auctioned US$20bn of ten-year notes last night, and demand was strong. Traders suggested Wall Street might be becoming a little wary of the rally to date in risk assets, and the consumer credit number only highlighted the likelihood of a sluggish return to growth for the US economy. The ten-year yield fell 8bps to 3.17% and foreign central banks took up 47.4% of the issue.
Which brings us to gold. There is somewhat of a disconnect at present between the two traditional inflation-affected assets. The US dollar managed to rebound from earlier weakness last night to be up 0.2% to 76.42 on the index, but gold still closed slightly higher at US$1043.30/oz. It had, however, topped out at just over US$1048 at the dollar’s low. Gold buying reflects a fear of monetary inflation surrounding constant questioning of the reserve currency, implying the Fed will soon be forced to raise its funds rate to attract more support for the currency. But if this were the case, bond yields should also be higher, yet instead they are lower.
Extracting all the currency speculation leaves us with a bond market simply not expecting anything much of the way of solid economic growth ahead.
Base metals also followed US dollar movements last night, rising early but easing back later in the London session. Aluminium, tin and zinc rose 1% and nickel 3% while lead and copper were steady.
Wednesday is oil inventory chocolate wheel day in the US. Analysts had a spin and landed on an expected gasoline inventory increase of 1.3m barrels last week, but then the Energy Information Agency had its spin and scored a 2.9m barrel increase. So oil fell US$1.31 to US$69.57/bbl.
After yesterday’s big surge on the ASX, the SPI Overnight fell 6 points.
Earnings results will dominate the US landscape for the next month, with things really hotting up in a couple of weeks. The propensity of many companies to report after the bell often gives Australia a head start on any significant beats or misses which might drive Wall Street the following evening.
Note that today is unemployment day in Australia. Note also that tonight both the UK and Europe make rate decisions. Now that the first G20 country has made a move to tighten, will the rest of the world begin to follow? This will have a fundamental impact on the US dollar, but at this stage it is too early for the UK and probably too early for the EU.
