Daily Market Reports | Feb 07 2009
By Greg Peel
The Dow rose 217 points or 2.7% while the S&P also gained 2.7% and the Nasdaq topped off a very strong week for tech stocks with a 2.9% gain.
Were it six or more months ago, a bad jobs number would have sent Wall Street into a panic and indices into a tailspin. However six months ago America was still arguing passionately as to whether the US economy was or was not headed for recession (when all the time it was already in one) and so a weak number sent shivers through Wall Street. Now we know not only is the US in recession, it’s a real doozy of a recession. Thus when the worst job-loss result since 1974 is posted it is not a great surprise.
598,000 Americans lost their jobs in January, following up from 577,000 in December. The January figure was the worst since 1974. I assume that’s a nominal rather than a per capita comparison as the new unemployment rate of 7.6% is only the worst since 1992. But we love those records. And on that score, the rate of job losses in the last three months has averaged 5.1% and that’s the fastest pace of lay-offs in fifty years.
Nyeah – waddya gonna do? The ex-hedge fund trader shining shoes at Grand Central Station (don’t laugh – I saw him on the news) will have simply shrugged and so did Wall Street. The Dow shot up from the opening bell.
The Dow was up about 150 points in the first half hour and with little volatility merely added the other sixty-odd points steadily through the day. Strength was attributed to a simple short-covering rally – mostly in the influential financial sector but also in retail and home builders. These are the Big Three sectors which have been most sold down as recession victims, the most short-sold, and the three most likely to benefit from whatever the Obama administration is about to announce in terms of economic support. It is possible that by the time you read this the US Senate will have passed the stimulus package bill.
From the financial sector point of view, it’s all about what’s going to happen with TARP II, which Secretary Geithner maintains he will be ready to announce on Monday. We’ve been tossing this one around all week so there’s no point in rehashing again. Suffice to say, it’s looking like some sort of Bad Bank will be part of the plan as will further capital injections into remaining Good Banks. There is speculation (there’s always speculation) that perhaps the existing government preferred equity investments in various banks will be converted to common equity. This is not good news for bank shareholders at the micro level (it means dilution) but it is a more favoured option at the macro level.
Common stock is the highest form of capital; preferred stock is effectively just debt. For the sake of US banks becoming Good Banks it is better that their balance sheets show lots of equity capital rather than the quasi-equity of preferred stock. Also, the prefs pay very large coupons (fixed rate dividends) which might prove a drag on Good Bank performance.
Just don’t mention the N-word. There is a fear amongst some that the strong Left element within the Democrat reps will push for the strict nationalization of, say, a Bank of America or Citigroup. Most dismiss full nationalization as remote.
So we wait until Monday in the stock market. But the anticipation in Friday’s trade masked yet another record. Standard & Poor’s announced it expected 2009 dividends on the S&P 500 to fall by 13.3% and that’s the worst number since 1942. Again the market didn’t seem to care, and no one believes a word that comes out of S&P’s mouth anymore anyway given the disgrace the agency has become in most eyes. The market is simply bracing for the TARP.
They were selling the US dollar on Friday, but more emphatically they were selling the yen. In fact, the US dollar has really only become a passenger in global currency trade at the moment. For they were buying the euro and pound emphatically as well. (Buy euro equals dollar down, sell yen equals dollar up). The euro/yen is thus surging, and has been for a couple of days. While there has been some speculation the BoJ may have been intervening to stop the yen appreciating further, a stronger euro/yen is a global indication that risk appetite is returning. If you want more evidence to support the latter, the Aussie has also shot up – by two cents over the last 24 hours to Saturday morning to US$0.6747.
Is the world backing the Obama stimulus/bank rescue plan to work? Or is it just time to believe the worst is now over? The ECB has stopped cutting its cash rate, leaving it at 2% this week. Belief is mounting that the RBA’s 1 percentage point cut this week will be the last for the time being. There is no point in selling yen to buy US dollar-denominated assets at present on a “positive carry” as the respective interest rates are at parity. But you can borrow yen at 0.1% and invest in Aussie at 3.25%. Risk appetite collapses in times of volatility. Volatility has been slowly waning in financial markets.
If risk appetite is returning then, all things being equal, it’s not a good sign for gold. Gold fell US$4.90 to US$911.20/oz on Friday. However the fall will be more to do with the big rally on Thursday than any evaporation of perceived global risk. Gold is supported by the rampant printing of paper money across the globe and the risk of hyperinflation. It will not be scuppered simply by a bit more confidence in financial markets.
Oil fell again on Friday, by US88c to US$40.29/bbl. But what is now noticeable in oil is that all the action is in the front month (March) alone. There is apparently a very large and longstanding commodity fund holding in the March delivery futures contract. To maintain this position it must be rolled over into April delivery or beyond. To let it expire is, one assumes, to crystallise a huge loss at the bottom. The spread between the front and next months in the oil market is never much more than US$1 under most circumstances. On Friday, the April contract closed at US$46.15/bbl – a full US$6 above March. The March expiry is not until February 20 but it may be safe to say the “real” futures price in the front month should be somewhere in between the March and April prices at the moment.
If there was short-covering on Wall Street based on a building positive feel around the possible US government packages, there was an explosion in London on Friday night. Aluminium was up 2%, nickel and lead 3%, tin 4%, zinc 5% and copper 7%. Positive sentiment on the economy should be good for metals but it seems like some traders have been caught well short in the move to square up ahead of whatever Obama is set to unleash.
The SPI Overnight liked it too, closing 72 points higher and right on the magical 3500 mark.
