FYI | Oct 27 2007
By Greg Peel
The week on Wall Street has brought us US$90 oil, alarming housing numbers, a shocking result from Merrill Lynch, mixed results elsewhere, and increased tensions between the US and Iran. No wonder the Dow is up for the week.
The markets came home with a wet sail last night. For four consecutive days the bears have pounded the market as bad news story after bad news story was revealed, only to see the bulls buy it all back on expectations of a 50 point rate cut. Given NYSE data shows a significant number of short positions in the market, the upside is always going to be vulnerable. And last night brought nothing but good news, so the only way to go was up.
The Dow closed up 135 points, or 1%, while the S&P added 1.4% and the Nasdaq 1.9%. It was always going to be a positive opening, given the surprisingly good Microsoft result announced in Thursday’s after-market. Not only did Microsoft surge 9% on the day, but its success sparked rallies in fellow Dow components such as Hewlett Packard, and other PC manufacturers and the tech sector in general all enjoyed a boost.
The secret to Microsoft’s 23% increase in profit for the quarter lay in two particular areas (although all areas performed well). Businesses have embraced the new operating system Vista, and have begun the change over to the new software. Vista requires twice the average memory space that corporations currently possess, so its installation flows through to a general upgrade of hardware and other IT elements. What’s good for Vista is good for everyone in tech. The other surprise was the turnaround in Xbox sales. Xbox has been a chronic underperformer to date for Microsoft, as Nintendo and PlayStation have dominated the computer game space, but the introduction of the new Halo game has captivated all those people across the world who are either children or have no life, and so Xbox sales have skyrocketed.
But that’s not where the good news ended. Over in the troubled financial sector, it was a good day for Merrill Lynch shares. Merrills announced a US$8bn loss on Wednesday – far and away the biggest amongst the investment banks – and suggestions are that there may be another US$4bn yet to come in the fourth quarter. But Merrills rallied 7% last night on two bits of speculation. One is that the CEO will be taken out and shot as early as next week, and the other is now that Merrills is in such a mess, some other entity must surely come in and take it over.
And the good news continued. Poster child for all things wrong with the mortgage market – Countrywide – released a third quarter loss of US$1.2bn. It was the company’s first quarterly loss in 25 years, and if you’re going to break a 25 year run why muck around. But the good news was that Countrywide explained to analysts in a conference call that it expected to actually make a small profit in the fourth quarter, and to be profitable in 2008. Good news? Countrywide shares rose 32%.
So it was really a Microsoft and Countrywide day, and there was little to undermine the exuberance. Oil actually hit US$92 during the session, before falling back to close up US$1.40 at US$91.86/bbl. This doesn’t seem to bother anyone.
And it was a significant day for gold. Oil was up again, and the US dollar once again slid to a new low against the euro as rate cut expectations grow, so there wasn’t much to send gold down. But after having a day to digest the latest phase of US-Iran tensions, the gold market decided that another US$14.60 was needed. Gold closed at yet another post-1980 high, at US$783.50/oz.
(Note: Gold closed at $750 on January 17, 1980, $830 on January 18, $850 on (Monday) January 21 and $737.50 on January 22. So there have only been two days in history when gold has been higher than where it is now. For the record, gold closed on March 18, 1980, at $481.50.)
The crux of the new US sanctions against Iran (and these are in response to a perceived impotence of UN sanctions) is that any company or individual in the world who has business dealings with Iran, including buying its oil, will be barred from the US financial system. Wise heads believe the extent of the sanctions will force Ahmadinejad back to the negotiating table, but gold traders are bracing themselves for an ultimate military attack.
Silver also jumped sharply last night, wearing its precious metal hat for a change. It was up US30c to US$14.17/oz, marking the first time silver has had a big figure 14 since April. Base metals were again positive in London, but unspectacularly so, with lead and nickel both up 2%.
The yen was relatively unmoved last night, allowing the Aussie to continue its relentless surge to US$0.9184.
The SPI Overnight was up 58 points.
