Daily Market Reports | Jul 17 2008
By Greg Peel
The Dow closed up 276 or 2.4% while the S&P rose 2.5% and the Nasdaq 3.1%. The Dow is solidly back over 11k at 11,239 and it was not a volatile day – it was all one way traffic. The VIX volatility index fell back to 25 after its brief intraday foray over 30 yesterday. The chickens and eggs are still arguing.
After months of tough talk from Congress and various regulators about pending moves to curb speculative buying in commodities, on Tuesday the SEC placed an indefinite moratorium on naked short-selling in financial stocks. US authorities have come up with the most brilliant of all solutions to protect its markets – cut out the buying and selling. Throw in Sunday’s announcement by the US Treasury that it would nationalise half of the country’s mortgages if it had to, and one might say welcome to America – land of the free and the home of the brave.
With the rules in place all that was needed was the catalyst. In the oil market, it was inventories. In the financial market, it was Wells Fargo.
The weekly inventory data from the EIA released last night showed US crude inventories had risen by 300m barrels last week. Analysts had been expecting a fall of 3m. Oil fell another US$4.14 to US$134.60/bbl, brining the total two-day fall to over US$10.
The joy over the fall in the oil price managed to offset what might otherwise been depression over the June CPI, released last night. Economists were expecting a 0.8% monthly rise, but the figure was 1.1%. This was twice the May result and took the twelve-month rate to 5.0% – the highest level since 1991. Two-thirds of the headline increase was attributed to energy. The core CPI rose only 0.3%, but this was still greater than the 0.2% expected.
The US$4 fall in oil was a trigger for all those stocks beaten down by previously higher prices. Airline stocks soared, with UAL rising 40%. Car makers soared, with General Motors rising 17%. It’s amazing what difference US$4 makes. Or is the market short?
If it is short financials, and let’s face it – of course it is – then the risk is the slightest catalyst could trigger a snap-back rally. Take out the capacity to naked short-sell, and a shortage of stock to borrow, and threat is that rally might be quite substantial.
Wells Fargo announced last night its second quarter earnings were down 23% from the second quarter 07 on an 18% increase in average loan losses. The bank is one of the biggest mortgage lenders in the country, but managed to steer largely away from subprime. The loss was not quite as bad as analysts had expected, and an increased revenue figure was also a surprise. Wells’ CEO noted his bank had been picking up business from failed or failing rival lenders.
In a move that had bank analysts shaking their heads in dismay, Wells increased its dividend by 10%. This was the 21st consecutive year Wells has increased its dividend, and goddammit it wasn’t going to let a little thing like the biggest global credit crunch since the Great Depression force a break with tradition. Analysts acknowledged that Wells was in a better capital position than many of its rivals, but this was just plain foolhardy.
But it worked. Wells shares jumped 30%. Washington Mutual jumped 25%. Fannie and Freddie were up 30% each, Lehman was up 26% and Citi was up 13%.
The US dollar also jumped, but it was initially inspired by the CPI. It so happened that the minutes of the last Fed rate meeting were released last night, and lo and behold the Fed was hinting at a rate rise. The CPI only adds the fuel. But that news is two-weeks old, back in the Long, Long Ago before Fannie & Freddie. If oil continues to fall – and barring nuclear war or Daughter of Katrina it should – then there might be little to prevent the Fed contemplating more reflation, ie another cut. Well it worked for Greenspan.
On the rising US dollar and falling oil the game was over for gold, at least for now. Gold fell US$17.70 to US$959.30/oz. The Aussie came back to earth somewhat, falling half a cent to US$0.9743 after some giddy forays above 98 in the local market.
It was all too much for the LME as well, and aluminium fell another 3%, copper, nickel and lead 1.5% and zinc 3%.
The SPI Overnight rose 66 points.
We enjoyed the beginnings of a bank bounce-back yesterday. Today might be fun too. In the US, it looks like we might get some further buying, but then it all depends on how the earnings season plays out. After the bell, eBay disappointed with weak guidance.
