Daily Market Reports | Jul 19 2008
By Rudi Filapek-Vandyck
It’s a case of sour grapes for investors in Australia as the Australian share market continued its weekly losses for a ninth consecutive week, but on Wall Street a losing streak of six weeks in a row has finally been broken and the bulls have cautiously started showing their faces from behind the curtains. There is hope for another bear market rally after all!
Don’t forget, this is still a bear market. One of the oft forgotten characteristics of a bear market is that new funds remain scarce, or even diminish as investors switch more into cash or other assets. The result of this is that any market advance is oft based on money switching from one sector into another (as opposed to new funds flowing into the market). The advance in the week past can thus be summarised as: out of energy, into banks and other financials.
Banking stocks on Wall Street surged between 20% and 30% from Monday’s open till Friday’s close and their recovery has now been elevated to public debate. Is this the start of a new rally? Is this the start of the next bull market? Or is this all related to the authorities clamping down on the practice of “naked selling” (go short without owning the stock)? Has the market been too fearful?
The jury remains out.
What we do know is that oil posted another loss on Friday and that the difference between where crude oil futures were one week ago has now grown to nearly US$18 per barrel. Of course, the oil bulls will tell you, this is all fundamentals driven, this is not investors doing their thing. The bears are back, however, and they are talking US$85 per barrel by year end, early next year at the latest. It’s going to be interesting to see what yesterday’s bulls come up with if these predictions will prove to be correct.
Right now it seems crude oil is on a declining path and those with a sharp eye for technical analysis believe that any bounce should be regarded a temporary delay only, hence their advice: sell in rallies. US$120 per barrel remains the crucial support line. If oil remains above that level US$150 and higher remains a possibility, if it sinks through that line the bears might have it their way quicker rather than sooner.
Oil’s price decline comes amidst market talk that large fundies are stepping out of commodities in general. Remember those were the ones who were thought to be responsible for commodities’ (and energy’s) outperformance in the first half of the year. Their departure from these markets, if correct, could well cause the opposite effect in the second half. It would explain where all the monies are coming from to push up share prices of US financials this week. Let’s face it: near 30% in one week, there has been plenty of return around for those who made the switch.
Feeding hopes that investors may have been too harsh on those financial companies has been the fact that, despite massive write-downs at Merrill Lynch and others catching main headlines, more than half of the 22 financial companies that have reported so far during the Q2 earnings season actually came out with better than expected numbers. A more accurate description of the latter sentence would likely be: they reported financial figures that were not as bad as feared by the market, and this has opened the gates to some optimism creeping in, further fueled by various market experts exclaiming “told you it wouldn’t be THAT bad”.
This recovery in banking stocks could well continue into the coming weeks, especially if oil continues to drop. Note that technology stocks, Wall Street’s benchmark for global economic growth, did not join the positive mood elsewhere. The Nasdaq closed lower on follow-through from disappointing results by Google and Microsoft on Thursday.
On Friday Citigroup posted a loss of 49 cents a share from continuing operations. That was less than the 60-cent loss analysts had expected prior to the release. Citigroup added about US$7.2 billion of credit-market writedowns.
Fannie Mae and Freddie Mac, household names now in every investor’s small-talk around the world, continued their recovery with Freddie Mac announcing it had received clearance to register with the US Securities and Exchange Commission to raise US$5.5 billion of capital. The intention to do so was already announced in May.
Further fueling overall upbeat sentiment was the fact that so far company results ex-financials have been above expectations. Bloomberg reported this morning Q2 company results are currently running some 6.7% ahead of analyst forecasts. Again, less bad than expected, but a positive nevertheless as it raises the question: have investors simply been too negative?
Various oil stocks actually had a good day on Friday following a better than expected results release by Schlumberger, the world’s numero uno in the servicing of oilfields.
Weakness in general for commodities, not just for energy, continued. Nickel is back at US$20,400/t. Gold cannot get away from US$950/oz. Crude oil is sitting above technical support of US$128 per barrel.
The Dow managed to gain close to 0.5% and sits back at 11,496. The broader S&P500 only managed a gain of 0.36 points to 1260.68. The Nasdaq lost 29.52 (-1.38%) to 2282.78. The broadest index of them all, the Russell 2000 posted a 0.5% loss.
The SPI futures are suggesting the Australian share market will make up for the losses recorded on Friday and open more than one percent higher on Monday. This may prove a case of wishful thinking as index heavyweights BHP Billiton and Rio Tinto each lost more than one percent in London trade. The banks should pick up on Wall Street’s positive mood.
Greg Peel will be back doing the Overnight Report on Tuesday. You can catch him today live on Sky Business (Business View from 9-10am).
