FYI | Nov 15 2007
By Greg Peel
After the big surge of yesterday the Dow spent nearly all day going nowhere in particular, before probably frustrated longs knocked it down 83 points or 0.6% at the death. The S&P was down 0.7% and the Nasdaq was weaker, down 1.1%.
Highlights of the day came in the form of some important economic data, and a spate of influential corporate developments.
Most highly anticipated was the October retail sales figure, which came in at a modest 0.2% rise compared to September’s 0.7%. It was, however, just slightly ahead of expectations. The producer price index (PPI) for October registered only a 0.1% gain at the headline and flat at the core (ex food & energy), when a 0.1% rise was expected for each. While such a number might seem to allay inflation fears, economists are bracing themselves for when US$90+ oil really starts to hit, probably this month.
The October business inventories number was similarly benign, increasing by 0.4% while sales increased by 0.6%. These are not scary numbers, and as such helped to reduce expectations of a December Fed rate cut. The futures are currently showing a 70% chance, down from over 100% last week. But while that may be negative for stocks, the fact the numbers aren’t recessionary is alternatively positive.
So the market went nowhere.
The financial sector was once again the centre of attention last night. This sector has had a positive few days as the market begins to feel (hope?) the worst of the bad news is now out there. It received another boost today from two pieces of news.
The first is that highly respected NYSE head and former Goldman Sachs COO, John Thain, is to take over as CEO at Merrill Lynch. Thain is held responsible for turning the NYSE from a corrupt gentleman’s club into the world’s first truly global listed exchange. The greatest proportion of NYSE earnings now come from outside the US. Who better to take over the remnants of a once great Merrill Lynch? Thain’s first job will be to remove Stan O’Neil’s rotting head from the spike on the Merrills drawbridge.
In other positive news, the investment bank that started it all – Bear Stearns – announced it would write-down another US$1.2 billion in mortgage securities. This was positive because the market had expected more like US$3bn. Bear Stearns further suggested it had now cleaned up its balance sheet, so that should be the end of it.
The financial sector thus had another good day, ignoring a US$3.4bn write-down from Britain’s HSBC. We don’t want to spoil the party, but Europe has so far been very silent while the Americans air all their dirty laundry. Continuing strength in financials probably explains the fall in the Nasdaq, as short financial positions need to be covered by selling tech longs. Banking stocks were actually higher in Britain as well, as HSBC’s write-down countered solid profits from Middle East and Asian operations. The UK is hoping the sector might be in better shape than it thought – exactly what the Americans said a month ago.
The late fall in the Dow was assisted by a sudden pullback in airline stocks. Airline stocks have been the third sector hit hard alongside financials and retail. If the US goes into recession, there will be less flying. But last night a rumour went around that Delta was going to merge with United, and the whole sector, um, took off, showing 10%+ gains. Delta came out at the death and quashed the rumours, and the airlines circled and landed.
It turns out that Tuesday’s big fall in the oil price was not really related to expectations of reduced demand at all. The day’s trading was clouded by futures option expiries and there were a lot of punters long the 100 calls. This meant covering by ditching oil, and this was clearly the big influence given the oil price rallied straight back US$2.92 last night to US$94.09/bbl. Back to inflation fears again.
The bounce in oil sparked a similar bounce in gold, which rose US$11.20 to US$811.30/oz. The US dollar had been weaker again for most of the session, except against the yen, and the Aussie had risen well over US90c once more, but the dollar rapidly reversed at the close, and the Aussie went back to US$0.8968.
Base metal prices in London were relatively unmoved last night, but news came through in the New York session that a 7.7 earthquake had hit Chile – the world’s largest copper producer. Copper had risen only 0.5% in London, but jumped 5% in New York.
The SPI Overnight was down 12 points.
