FYI | Jul 20 2007
By Greg Peel
There is a quiet battle raging on Wall Street at present between the bulls and the bears. Well of course there is – that’s what makes a market – but at the moment we specifically have Goldilocks on one side, waving increased earnings reports, while on the other we have the subprime doomsayers who keep pointing out that we ain’t seen nothing yet.
In the middle is Fed chairman Ben Bernanke, who last night wrapped up his obligatory six month testimony to Congress by addressing a committee of the Senate. While there was never going to be any new news flowing to Senators that hadn’t already been presented to the House of Reps, Wall Street has come to decide that what Bernanke has been saying is actually pretty bullish. It started the night before, as the Dow recovered from an extensive loss, and it continued last night as the Dow closed at 14,000.41 and Goldilocks did a little jig.
That put the Dow up 82 points or 0.6%, while the S&P gained 0.5% and the Nasdaq 0.8%.
Wall Street has read between the lines of what Bernanke has been saying, and decided that interest rates are going to be frozen for the foreseeable future. This is despite persistent Fed warnings of inflation concerns, which are beginning to wear thin. Bernanke also says core inflation appears to be drifting lower. Frozen rates are a boon to the bulls, who have spent the last few months driving up the market in constant fear of a rate hike.
The bears have had plenty to take away as well, however. Bernanke suggested that the housing slump will get worse before it gets better, that the subprime crisis will also get worse, and that there will be substantial losses as a result – possibly US$50-100 billion. Nevertheless he was not in any panic mode.
Financials were once again hit last last night despite positive earnings reports. Bank of America posted a solid result and suggested its credit market losses were minimal and contained, and that reserves have been put aside for any further weakness. Does the market not believe BA? Or is there just too much uncertainty hanging over financials as to what may yet transpire?
Reporting Dow components provided a boost during the session, led by a solid result from IBM. Microsoft posted what looked like a good result before the bell, but by the after-market had given up any gains. Microsoft’s Xbox recall problems have not helped. The after-market has become just as, if not more, important as this earnings season pans out. Google came in with a 28% increase in earnings for the quarter and the stock was slammed 8%. Why? Because EPS was only US$3.56 and not US$3.59 as the market expected. That is brutal.
The economic data news of the night was the Conference Board Index of Leading Economic Indicators falling 0.3% when only 0.1% was expected. This was clearly paid little attention.
The US dollar was initially weak last night (no interest rate hikes to look forward to) but managed to stabilise after some fairly horrific recent sessions. Ten-year bonds were also stable on the Bernanke testimony, giving gold further reason to be bullish. Gold posted another solid gain of US$5 to close at US$677.50/oz.
Further driving the gold price was the oil price which, yet again, posted a solid gain to close at US$75.92/bbl for August delivery. We are now at an 11-month high in oil.
Base metal prices also had solid gains across the board as the lead-led recovery continues. Copper – the bellwether metal – was particularly strong in London and closed up over 2% in New York. Zinc was up 1%, aluminium 1.5%, nickel 2%, and lead another 4%. Tin has also been very strong in London of late.
The news from China yesterday was that second quarter economic growth rose to 11.9% from 11.1% in the first quarter and blew away market expectations of a 10.8% figure. While domestic consumption was pleasingly a contributor to the bottom line, China’s economy is simply still accelerating despite all attempts by officials to stop it from overheating. One presumes some more decisive measures must be soon at hand, not the least of which will be an interest rate rise.
With the Dow up, oil up, gold up, base metals all up and the Chinese economy surging, it’s hard to see anything holding back the local bourse today. The SPI Overnight gained 21 points. As we speak, the little Aussie battler is printing a nice round US$0.8800.
