FYI | Oct 26 2007
By Greg Peel
Australia awoke to the strains of Sonny & Cher’s “I Got You Babe” yet again this morning. Wall Street put on a performance that went close to mirroring Wednesday’s, and indeed has fallen heavily and rallied back for four days in a row now. Once again it was Bernanke and his cavalry charging over the hill in the final reel.
If you submitted last night on Wall Street as a movie script it would be rejected for being overly fanciful. For the record, the Dow recovered from a 128 point fall to be down 3. The S&P closed down 0.1% while volatility continues to reign in the tech sector and the Nasdaq was down 0.9%. Decliners outnumbered advances on the NYSE by 3 to 2. These were some of the factors affecting the Street last night:
Sales of new homes rose 4.8% in September. Yes that’s right – rose. Traders could barely believe their eyes but just before they made the mistake of buying with their ears pinned back, someone pointed out that the sales figure of 770,000 was 4.8% above a revised August figure. August sales had been reported as 795,000 but were last night revised back to only 735,000. In other words, the numbers were bad – very bad. And to make matters worse, the slightly better September numbers were achieved in a month when McMansion homebuilders were discounting excess stock so heavily it was almost a BOGOF sale. Despite the scramble, inventories remain at historical highs.
With all the revisions, one wonders what the point of these Commerce Department releases really is.
Adding to the pain was the September durable goods number. Orders were down 1.7% following August’s 5.3% drop and against analyst expectations of a 1.1% rise.
Another wild rumour hit the Street last night, that Dow component AIG Insurance was about to make a massive write-down in the value of its debt securities. This rumour was later independently quashed. AIG closed down 6%.
State and Federal agents raided the headquarters of health insurer WellCare for reasons that yet remain undisclosed. After a trading halt, the shares reopened down 70%.
The semiconductor sector came in for unwanted attention last night as traders decided to slam chip makers. But after the bell, Dow component Microsoft thrashed analyst expectations by announcing a third quarter profit increase of 23%, largely on the success of Vista and something called “Halo” (ask your 12-year old). Microsoft shares rose 11% in the after-market, dragging along PC makers such as Dell and Hewlett Packard and even breathing life back into some of the chip companies. All things being equal, the Dow should start strongly out of the blocks tonight.
But if it does, it will again be launching from the exalted heights of the anticipated Fed rate cut. Yet again last night the market was bought up on the close as traders weighed up all the bad news and decided it was thus good. A 25 basis point cut next week is now considered a given, and the real betting is on whether the Fed might go the whole 50 once more. That’s four days in a row a market that has wanted to go down has been pulled back up by rate cut expectations. Amazing things, these rate cuts. As CNBC’s floor reporter Bob Pisani so aptly put it, obviously a Fed cut will solve all the problems of the world and “may even cure cancer”.
Which begs the question of what the hell is going to happen if the Fed does cut? Do we just go up higher again? Or is it sell the fact? The Dow jumped 200 points on Wednesday on a mere fanciful rumour of an emergency Fed rate cut, which would tend to suggest the real thing might yet send the stock market to the moon.
Meanwhile, back in the real world, Condi Rice ignited yet another oil price surge by announcing the toughest sanctions to be placed on Iran since the 1979 deposition of the Shah and subsequent hostage crisis. The sanctions were mostly to do with cutting off finances to Iranian banks and the military. Oil jumped a whole US$3.36 or nearly 4% to close at US$90.46/bbl. One hundred dollar oil is looking awfully close.
Gold responded in sympathy, rising another US$6.10 to US$768.90/oz. Aiding gold’s rise was yet another slide in the US dollar, driven by the weak economic data. The yen, however, closed relatively stable, allowing the Aussie to push up above US$0.9050. Base metal prices in London remained relatively unchanged.
These crash-and-recover Dow moves must be really doing in the heads of traders in Europe. Each night European markets close with the Dow on its lows and the next day they have to come in and buy it all back. The Australian market, on the other hand, seems to be doing the opposite. Each rally is now being met with a sell-off. To get things started before today’s turnaround, the SPI Overnight was up 41 points.
So put that all into one 90-minute movie about a day in the life of Wall Street (Ben Kingsley as Ben Bernanke? Halle Berry as Condi Rice? Robert Carlyle as Mahmoud Ahmadinejad? Bill Murray as the NYSE trader who just doesn’t know whether to buy or sell?). You just wouldn’t believe it.
