FYI | Oct 12 2007
By Greg Peel
Tech stocks have been the darling of Wall Street in 2007. They were sold off in the credit crunch, but only because margin-called investors were liquidating everything they owned, from quality stocks to gold. Since the bottom, however, tech has led the way higher – the Nasdaq having outperformed the S&P.
The reason tech stocks have been so popular is evidence of a thematic within the US equity market at present – a thematic that argues strongly there will not be a stock market collapse from a slowing US economy. That argument is based on the strength of offshore earnings generated by certain sectors and companies in the US. While the US domestic economy may be slowing, the global economy, led by emerging economies, is not. Thus those companies deriving 50% or more of their earnings from the global economy should be immune from domestic weakness, and are the stocks of preference amongst the market bulls.
American companies sell computers, software, and communications technology to the world. Consumers in emerging economies are only now beginning to see a mobile phone and a computer as affordable necessities, and are eyeing off their first iPod or Blackberry. With a weaker US dollar, US export sales are rising. That is why the tech sector has been so popular.
While it is always the Nasdaq that is associated with the tech sector, tech stocks are spread across all the major indices, and many other sectors are represented in the Nasdaq. The Dow contains AT&T (iPhone’s SP), Hewlett-Packard, IBM, Intel, Microsoft, United Technologies and Verizon among its 30 components. Tech stocks may have been index leaders, but the reality is the Dow and S&P have hit new highs – despite ongoing credit concerns and despite ongoing recession concerns. Sure, Bernanke is there to save the market, but should we really be at new highs? (The Nasdaq is still a long, long way from its tech boom top).
There is a creeping concern on Wall Street that the rally to new highs is “unconvincing” – driven more by Fed euphoria than logical reality. This concern became evident last night when JP Morgan downgraded Chinese search engine company Baidu.com.
The market had started positively, with several retailers announcing weaker than expected same store sales for September. This is positive because as we know it increases the chance of another rate cut. But perversely Wal-Mart, whose same store sales also disappointed, actually increased its profit guidance. That, too, was positive, so the double positives had the Dow up 120 points at lunch time.
Then came the Baidu downgrade. Sometimes it only takes one little stone to tumble to set off a slide. Baidu might be considered a proxy for the whole China-tech story, and here we were thinking such a stock should go to the moon. Baidu fell, and the whole tech sector fell with it. Apple, Google, Research in Motion – all the big names that had performed so well took a hit.
It didn’t help matters that around the same time one ECB governor came out and voiced very real concerns about growing inflation in Europe, and suggested policy action may need to be taken. The ECB was always a hot tip to raise rates last week, but refrained, no doubt influenced by the credit crunch and the Fed cut. If inflation is a worry in Europe, then there’s no reason it shouldn’t be in the US. Look at the gold price, for one. This could mean the Fed will not want to cut rates. Oh dear.
The Dow proceeded to fall 228 points to its low, before bouncing somewhat to be down 63 points, or 0.5%, on the day. The fall was dampened by strong performances from Wal-Mart (up 3%) and General Motors (up 5%). The S&P also fell 0.5%, but the Nasdaq took the big hit, dropping a full 1.4%.
If Europe raises rates, and the US doesn’t (or worse still, cuts), then the US dollar is toast. Thus it fell yet again last night. Gold subsequently surged, adding another US$7.10 to US$747.40/oz. The Aussie is hanging around US$0.90.
Oil also rallied strongly once more, but its rise was assisted by news that supplies were less than most expected (yes – inventories again). November crude rose another US$1.78 to US$83.08/bbl. If there’s talk about inflation, a continuingly rising oil price doesn’t help. Many a market observer has been forecasting a pull back in oil, but it just isn’t happening – even as the hurricane season draws to a close.
While base metals have tended to follow the commodity price rise of late, there have been concerns that growing inventories, particularly in copper, suggest prices might be too high. This didn’t work for nickel however, which left the other metals behind last night in leaping 4% in London. Nickel inventories are also growing, so traders declared the move to be “technical”.
The SPI Overnight fell 26 points.
