Daily Market Reports | Nov 25 2009
By Greg Peel
The Dow closed down 17 points or 0.2% while the S&P was barely changed at 1105 and the Nasdaq lost 0.3%.
While it is to be expected that NYSE volumes would taper off ahead of the Thanksgiving holiday, weak volumes have become a feature of November in general. Last night was no exception, and as it has been noted in this Report the belief is hedge funds have decided they won’t be improving on gains achieved from the 60% rally to October, so why risk giving some back by trading for trading’s sake? The process of shutting up the shop is not one of selling out of everything, and thus risking a correction, but of shuffling into a defensive mode.
Commentators have been bemused in the last week or so that US healthcare stocks have been performing well. Obama’s controversial healthcare bill goes to the Senate after Thanksgiving where it is expected to meet stiffer opposition than it did in the House, but either way there is a pall of uncertainty hanging over private healthcare companies. Yet they are being accumulated by Wall Street. But the fact that telcos are also now popular suggests this is simply indicative of a sector switch back to “defensive” sectors and away from “risk” sectors such as financials, industrials and tech. Risk sectors have brought traders all their profits in 2009, so it’s time to now reduce risk and replace it with a defensive stance – a way to not lose money made.
Another big risk trade during the rally has been to invest offshore, in emerging markets and markets tied to emerging markets, such as Australia. The ASX 200 has struggled to recover the ground lost in the most recent correction despite a full recovery of the S&P 500, and positive sessions have often become flat sessions by day’s end. Yesterday a very positive beginning swung violently back to a weak close, confusing many observers.
The likely reason is that the Yanks are pulling out. For the best part of 2009 the Yanks have been “overpaid and over here”, making double-whammy profits on both a 60% rise in our solid and safe banks and our China-driven resource stocks, and on a 30% rise in the Aussie. Almost every time CNBC interviewed a fund manager over the period, as it does each afternoon, the name Australia would come up. Recently I’ve heard no mention. And recently the Aussie has slipped as much as two cents from its highs while the US dollar index has remained largely stuck at 75. The troops are withdrawing for Christmas.
Last night in the US the Treasury auctioned US$42bn of five-year notes and was swamped. It was the greatest demand in over two years and a resultant yield of 2.175% was much lower than expected. At the same time, investors are also rushing short-dated Treasury bills which are trading at negative real yields (net of inflation). Why give money away, effectively? Because the Fed has insisted rates aren’t going up and the US Treasury is still the safest haven in town (with at least some yield) despite its printing press. Once again – defensive mode.
The stock market session on Wall Street began to the downside last night on the release of the first revision of the third quarter GDP calculation. The Dow was down 91 points at 10am. The first estimate, released last month, was 3.5%, but pretty quickly even the Fed was questioning its providence. The Fed said 2.5% was more likely, economist consensus had 2.9%, and the number came out before the bell at 2.8%.
So you could take that as either a bad result against the first estimate or not too bad against worst-case expectation, but either way it brought home a reality that US economic recovery will be a slow and frustrating process. Then at 10am a whole round of other data was released.
The Conference Board consumer confidence index, which had ticked down this past couple of months, unexpectedly rose from 48.7 to 49.5 this month. This helped stop the rot of stock selling, but more circumspect commentators reminded that this is not a 50-neutral index and that a reading of 90 is considered a step into positive territory. At only 49.5 going into the year’s busiest consumer buying spree, there’s really not much to be excited about.
The Federal Housing Finance Association house price index (conforming loans only – Fannie and Freddie) was unchanged in the month of September and up 0.2% for the September quarter. Again – to the positive side, showing stabilisation, but nothing to write home about. The Case-Shiller 20-city house price index (all prices) for the month of September showed a 0.3% increase to add to a string of positive months, but it is still net down 9.4% for the year – greater than the 9.0% expected by economists. The compilers also noted that the number of cities showing price increases this month among the 20 fell back from the August level.
Separate private data released last night noted 23% of all US mortgages are currently in negative equity, meaning the mortgage obligation is greater than the current value of the house. Of loans issued in 2006, 40% are underwater. The greatest concentration of negative equity is in five states.
The Dow nevertheless recovered towards lunch to be down around 50 points, ahead of the Treasury auction, which itself was ahead of the afternoon release of the minutes of the last Fed meeting.
The minutes were rather interesting. As far as the stock market is concerned, they again reinforced the “exceptionally low rates for an extended period” mantra and that was enough for the Dow to rally back towards the flat line at the close. But surely this has become a bit of a goldfish response, noting a new castle in the bowl every five seconds. The Fed has been at pains to reinforce its policy on many occasions, but each time Wall Street treats it like a revelation.
The Fed did, nevertheless, revise up its economic growth forecast, by now assuming 2009 growth would not be quite as negative as first thought (although not improving on 2010-11 forecasts). It also added that unemployment would remain high for some time, but would then likely retreat quicker than first thought. These views were at least enough to be a bit positive, despite just having had the third quarter GDP revised down from 3.5% to 2.8%.
The interesting part is that the Committee suddenly took an interest in possible speculative bubbles (where have they been?) caused by a weak US dollar, which in turn is caused by a zero interest rate. They noted possible “side-effects” of a long term low rate and the possibility that traders might be leveraging off a low rate to fund speculative trades.
Hello? Is there anybody in there?
Now – apparently Wall Street took this as a sort of backward indication the Fed is happy to allow a weaker dollar for now, which is a good thing. A dollar bounce would kill the stock market. But, and call me a fool if you must, but I would have thought this is an indication the Fed is keeping an eye on unjustifiable speculation despite its low price inflation expectations. And thus perhaps is willing to act if it has to (raise rates).
What was actually even more interesting was a warning from Chinese banking regulators yesterday that banks should not be too loose with their lending lest they face sanctions. (A factor which no doubt impacted on the Australian market). This is a first indication that China is doling out the stimulus dollars but keeping a tight control on things, and as such can be construed as a bit of a dampener on runaway Chinese growth. Thus China is hinting at a possible rate rise as well.
The US dollar index trod water after all the inputs last night, at 75.07. This led for a mostly dullsville day for commodities, with gold up US$2.90 to US$1167.50/oz and base metals slightly weaker. Oil responded to the Chinese news by falling US$1.54 to US$76.02/bbl to reach the bottom of the trading range of the last six weeks.
The Aussie fell near half a cent over 24 hours to US$0.9196 (see above) while the SPI Overnight was “unch”.
The VIX volatility index on the S&P 500 fell to 20.5 last night. There’s not a lot of demand for option protection, which is likely not so much because of complacency but because most everyone already has some. It is indicative, to me, of a market that will neither rise much or fall much in the near term. Having said that, every time the VIX has hit 20 recently Wall Street has pulled back.
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