FYI | Nov 14 2007
By Greg Peel
The focus of Wall Street this week is on third quarter retail earnings and fourth quarter guidance. Wal-Mart kicked off the results last night by beating the Street with an 8% rise for Q3, largely driven by cutting costs and keeping inventories tight. That the result did not reflect actual sales increases of note did not deter traders who were inspired by positive guidance for Q4.
The result was a fillip for an otherwise downtrodden retail sector, raising hoped for more pleasing news. However, sceptics noted that as Wal-Mart is largely a grocery store it is unlikely to see the same level of discretionary spending drop off as some of the department stores will probably report. Home Depot managed to match expected earnings last night, but guided for an 11% fall in Q4.
There was also positive news in the financial sector. Underway last night was a conference for CEOs of all the big bank and brokerage names – an annual event hosted by Merrill Lynch. There was one notable attendance apology at this year’s conference – that being Merrill Lynch. But it was Goldman Sachs who provided positive impetus as the CEO (as opposed to the PR department) confirmed the constant rebuff to rumours by announcing that Goldmans does not have any credit write-downs to come. Now that it was coming out of the horse’s mouth, the market was more prepared to believe it.
Traders were also heartened by talk from the JP Morgan CEO that he saw positive opportunities emerging in the mortgage securities market. Just a lot of spin? It didn’t matter much as the financial sector has been trying to establish a bottom over the last few days and last night posted some strong percentage moves. Bank of America announced expectations of at least US$3bn in write-downs, but in the context this is not enormous. Recent support has come as traders have sold out of tech to buy back financial sector shorts but last night the tech sector also put in a very strong upside move after a few days of pain.
The Dow closed up 319 points or 2.5%. The S&P was even more bullish, posting a 2.9% rise, while the Nasdaq went berserk and gained back 3.5%. Despite the strength of the move it was not a volatile day. Stocks travelled in only the one direction over the course of the session, accelerating steadily towards the close.
The other big news came out of the oil market, and would also have helped the broader stock market. The International Energy Agency last night downgraded its demand expectations by 500,000bpd in the fourth quarter. It seems oil has finally found the price at which demand suffers, as it surged towards US$100. Barring any geopolitical catastrophes, that figure may now be a bridge too far.
Oil fell US$3.45 or 3.6% to US$91.17/bbl. Assisting the drop, apart from a lot of long speculators scrambling to get out, was news that OPEC production was 300,000bpd more in October than September which, as always, totally contradicts anything OPEC has said.
As news was to the positive side last night, the yen carry trade unwinding which had accelerated yesterday took a breather, allowing a return to a more normal concept of a falling US dollar against all currencies other than the yen. Japan left interest rates unchanged at 0.5% yesterday which, while expected, removes some uncertainty. Over in the UK, the October CPI figure came in at 2.1% against the BoE’s comfort zone top of 2%. As this suggests a leaning towards a rate hike in Britain rather than any cut, the pound jumped against the dollar. The Aussie turned around in a big way and put back almost US2c to US$0.8965. (Oil’s fall in Aussie terms was thus 5.7%).
Gold met a push-pull with a falling US dollar and falling oil, slipping slightly to US$800.10/oz. It may well be we’ll see some consolidation around this “big figure”. The highlight of base metals in London was another big bounce – this time in besieged copper which rallied 3%.
The SPI Overnight rose 132 points.
How does one read last night’s rally? Well if you’re a bull, you’d say that the market has been finding a bottom; financials have seen the worst of it; retailers have also been hard hit; techs corrected too much; all in all a day of strong buying conviction.
If you’re a bear you’d say this is simply a classic bear market “relief rally” which always occur when the market gets a little oversold. Thus all the buying was mostly about reversing nervous short positions, and the trend will shortly revert to down.
A word of warning. Each quarter US hedge funds open a 45-day window in which investors can notify their intention to withdraw funds. Once the window closes, investors then have to wait another quarter before the next opportunity arises. The last 45-day window closed on August 15. On August 14 the Dow fell 208 points and on August 15 167 points to close at 12,846 – the credit crunch low. Once notified of redemptions, hedge funds must sell positions to raise the cash. This quarter’s 45-day window closes on Thursday, November 15. After last night’s rally we are 461 points above the August low. How many investors have been holding on to decide whether to stick at it, or to get out? Holding stocks this last quarter has not provided any meaningful return.
