Daily Market Reports | Nov 18 2009
By Greg Peel
The Dow closed up 30 points or 0.3% but the S&P managed only a 0.1% gain to 1110 while the Nasdaq added 0.3%.
It was one of those rare sessions in which stocks finished higher, or at least not lower, despite the US dollar index rising half a percent to 75.31. It was nevertheless a choppy session.
Stocks were weak early following earnings results and economic data. Large retailers Home Depot and Target released better than expected earnings results early on, but commentary from both suggested caution heading into a Christmas season which is not expected to be too flash.
The October industrial production numbers were a disappointment. The past three months have averaged a 0.9% gain and although economists had expected a slip to only a 0.4% gain, the 0.1% result sent stocks lower. Moreover, the 0.1% gain was almost totally attributable to a 1.6% jump in utility output (electricity/gas) which itself was attributable to a sudden cold snap in the month. Within the breakdown, factory output had also posted a good couple of previous months but it was down 0.1% in October.
Such numbers provide confirmation for those assuming the 3.5% increase in US GDP in the third quarter represented a fiscally and monetarily stimulated bounce out of recession which is not immediately sustainable. The subject of a “double-dip recession” has often been raised, or a “W-bounce” as opposed to a “V-bounce”, and 10.2% unemployment is a dominant factor. But the US economy is looking a little brighter than that, and as such economists expect fourth quarter GDP growth in the order of 2.5% or lower. Such a figure would be consistent with the Fed’s constant suggestion that recovery will be sluggish – a major reason as to why its low interest rate policy will be retained for the foreseeable future.
The Fed sees little need to raise its funds rate as it sees little inflation threat while there remains a good deal of “slack” in the economy. This is represented by the unemployment figure, but also by capacity utilisation. The latter figure did rise in October, but only from 70.5% to 70.7%, meaning about 30% of US industrial capacity remains idle.
The NAHB housing industry sentiment index tells a similar tale, as this month’s figure of 17 was unchanged from last month. Economists were hoping for at least a rise to 19, but when one considers the neutral point on sentiment is 50, it just goes to show the housing “recovery” everyone is hoping for is still a long way off.
October also showed the biggest decline in wholesale inflation in three years, with the core producer price index falling 0.6%. Adding back food and energy costs provides a 0.3% increase, but high oil prices are the difference. Once again, the Fed seems right not to fear price inflation.
But a month earlier, prospects for US economic recovery were looking a little brighter (albeit heavily stimulated). Net long term flows into US dollar assets rose from US$34bn in August to US$47bn in September, but most surprising were foreign inflows which increased from US$25bn to US$133bn. This reflects foreign buying of stocks and bonds, including US Treasury securities.
The weaker US dollar belies such interest, and while China continues to make a song and dance about US debt and dollar weakness, Chinese holdings of US Treasuries ticked up from US$797.1bn to US$798.9bn. Okay, so that’s hardly a meaningful increase, but China is supposedly attempting to diversify out of the US dollar by buying other currencies, gold, commodities and stocks, and also signing cross-currency deals for long term energy supply. What this figure perhaps shows is that China is attempting a balancing act. It is directing new surplus toward other assets while maintaining its Treasury holdings in order not to be the sole trigger of a complete US dollar collapse.
These numbers were the main reason the US dollar decided to rally back last night. However, the dollar index seems to have great difficulty stringing together even two sessions in a row in which it closes under 75. With confirmation yesterday that even the Fed is happy for the dollar to depreciate, one might expect the floodgates would have opened by now. So either the world is just so short dollars there’s no one left to sell them, or someone, somewhere, is stealthily propping the dollar up. Looked at from the other side of the equation, someone is holding their own currency down. It would have to be a big currency, such as the euro.
Despite the stronger US dollar and despite disappointing data the Dow turned from down 45 points before midday to rally slowly to the close. This was confusing for commodity prices, as traders can’t be sure what to think when the dollar and stock indices are up simultaneously.
Consequently oil was up US24c to US$79.14/bbl, gold barely registered a move to US$1138.80/oz, and silver and base metals stood pretty much still with the exception of aluminium, which gained 1.5%. The Aussie dropped half a cent to US$0.9310.
Having broken into blue sky on a good surge on Monday, last night’s session will still be comforting for the bulls. It will require a good night tonight to provide some confirmation of that break, however. Tonight sees US housing starts and CPI.
The SPI overnight rose 28 points or 0.6%, which seems ambitious given a virtually unchanged S&P 500. However, yesterday in Australia the ASX 200 jumped early as expected on the Wall Street surge, and then got slammed. The main influence behind the slam was this week’s green light on bank DRP selling.
Dividend reinvestment plans allow investors to elect to take a dividend not as cash but as discounted stock. The idea, overtly, is that loyal investors are offered to increase their stake at a better price than the market offers. The reality, covertly, is that DRPs represent a back-door capital raising. On the other side of the coin, loyalty has little to do with it and when you consider the big banks are the biggest dividend payers collectively by dollar value, this week’s opportunity to sell the DRP stock one has taken at a time when bank valuations are looking stretched is simply a gimme.
The big institutions are usually first to dump, although because it is known when DRP selling will be open, the trick for traders is to get in ahead. Ergo, yesterday saw a wave of DRP-related selling in the big banks which has little to do with Monday’s move on Wall Street. That’s why the ASX 200 closed lower.
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