Daily Market Reports | May 14 2008
By Greg Peel
The Dow fell 44 points or 0.3%, while the S&P fell only 0.04% and the Nasdaq rose 0.3%.
The disparity in the index movements was all about Yahoo. The Dow had been sliding away to be down 100 points when it was learnt that billionaire investor Carl Icahn, who is rumoured to have bought up to 50 million shares in Yahoo, was launching a proxy fight in order to force the company to accept the Microsoft bid previously on the table. Microsoft walked away from its significant bid last week when Yahoo frustrated eager shareholders by countering at a higher price, despite an already healthy premium.
The rumours, which Icahn refused to comment on, turned the market around and sent the tech-laden Nasdaq scurrying back into the green, dragging the other indices with it. Outside that little one-off, there wasn’t much to get excited about.
Retail sales showed a 0.2% fall for April – the second consecutive monthly fall. Auto sales were the biggest contributor to weakness with a fall of 2.8%. Big ticket items are clearly now off the agenda for struggling middle Americans, as are higher-level department stores which saw falling sales while discount stores faired better. The result was as economists expected, but bear in mind the number looks better than it really is given the inflation effect. Nevertheless, if you take auto out of the equation April sales actually rose 0.5% nominally. The bulls latched on to this figure.
The largest retailer, Wal-Mart, posted a good first quarter result but warned of a weaker second quarter ahead. If not even Wal-mart is immune, the retail outlook is not positive.
The National Association of Realtors reported the average price of a single-family home dropped 7.7% in the first quarter (from the first quarter 07) which is the biggest drop since the NAR began collecting data in 1982. The median sales price fell 4.8% in the March quarter from the December quarter. The NAR attributed the bulk of the weakness not to subprime foreclosures but to the inability of even well-off Americans to secure “jumbo” mortgages (those in excess of US$417,000 which qualify for government sponsorship) given the reluctance of banks to lend any money to anyone unless they can jump through a succession of flaming hoops. Millionaires are having their creditworthiness knocked back.
This put paid to the idea that weak US housing prices are merely a result of a concentration of subprime implosions in but a handful of states. The spread of the credit crisis into every corner has a far-reaching effect across the housing market spectrum. Banks just aren’t lending.
The expectation of those bullish the market is they should begin lending soon because the credit crunch is easing. Fed chairman Ben Bernanke agreed in a speech last night that the “turmoil” in financial markets had eased somewhat, but he described the current conditions as being “far from normal”. These are not the words the market wanted to hear from their hero.
And if financial stocks weren’t feeling vulnerable enough on those words, the nemesis of the financial bulls – Oppenheimer’s financial analyst Meredith Whitney – again slashed earnings expectations for major broking houses as the sector approaches the end of its second quarter (Feb-May). Merrill Lynch, Lehman Bros, Morgan Stanley and Goldman Sachs all came in for downgrades, with Whitney suggesting the investment bank outlook is “far more bleak than reflected in the market”. Her greatest concern for Q2 is a rise in write-downs on credit default swaps – a factor not featuring in already weak Q1 numbers.
Investment bank shares were all down 1-4% as a result, and nor were the likes of JP Morgan or Citigroup spared.
Banking stocks were also weaker in Europe where Holland’s Fortis and France’s Societe Generale and Credit Agricole reported first quarter losses of 31%, 23% and 66% respectively, with Credit Agricole announcing a capital raising.
The Dow was also weak on the realisation Hewlett Packard was paying over the top in its offer for Electronic Data Systems – a company considered to be a bit of a dud. This took some gloss off the renewed M&A enthusiasm (Yahoo notwithstanding).
Not helping the stock market was a bounce-back in the price of oil of US$1.57 to US$125.80/bbl. This would have frustrated those who thought maybe the fall on Monday was the sign of a long overdue pullback beginning. It was a wild night’s trading as the market dealt with a stronger US dollar, the expectation of reduced demand out of China in the wake of the earthquake, and an IEA report suggesting oil demand is slowing on the one hand, and surging demand for gasoline and heating oil, and a rumour from Iran on the other.
The rumour was that Iran was going to cut back production from 1mbpd to 400,000bpd as of next month – a rumour denied by Iran. It has been noted, however, that Iranian crude is backing up for delivery given the reduction in US refinery throughput, which in turn is putting the squeeze on gasoline and heating oil which in turn is dragging up the crude price. It’s a vicious circle.
Either way, it just goes to show that there are so many factors affecting oil at present that calling a speculative bubble alone is dangerous. Oil defied what was quite a strong night in the greenback, attributed to those retail sales numbers which were supposedly pretty good if you take out cars. Gold thus took a dive again, falling US$16.00 to US$865.90/oz, while the Aussie retraced over US0.5c to be back at US$0.9412.
Base metals markets were no less confused than the oil pit as the Chinese earthquake sent prices of lead and zinc – two metals mined in the Sichuan region – rocketing up 3% and 6% respectively while everything else trod water on the higher US dollar.
The SPI Overnight gained 3 points.
