Daily Market Reports | Feb 25 2009
By Greg Peel
The Dow closed up 236 points or 3.3%, near its highs of the day. The S&P gained a solid 4% to push up to 773, well above the bearish line in the sand at 752. The Nasdaq rose 3.9%.
After several days of aggressive selling, Wall Street was due a bounce. Usually a bounce needs some little trigger, and then value-buying and short-covering does the rest. So it was, last night. There was a bit of a positive move ahead of Fed chairman Ben Bernanke’s regular testimony to Congress, but as his speech concluded around lunch time the market took off.
Bernanke’s message was clear: Fix the banking system first and then you are on your way to fixing the economy. If the banking system can be fixed, then Bernanke believes that the US economy will stop receding in about another six months. That does not mean it will suddenly regain its health of old by the end of 2009. Full recovery out of this disaster will take two to three years, the chairman believes.
Bernanke believes that all is in place to encourage economic recovery – a zero interest rate policy and other monetary incentives, and a stimulus package and other fiscal incentives – but improvement will not be seen until “financial conditions improve”. For conditions to improve, the authorities must halt the “adverse feedback loop” in the banking sector.
[An example of this loop would be: House prices continue to fall, mortgage security values thus continue to fall, bank capital thus continues to fall, banks are thus unwilling to lend, buyers are thus not hitting the market, house prices thus continue to fall.]
Bernanke has every faith that the Obama administration’s plan to save the banking system will be a productive one. It will promote the improved financial conditions required. Bernanke also soothed fears by suggesting that full nationalization of banks is unnecessary. The government would not fully take over the banks, and would not even seek more than a minority holding.
It was this sort of positive attitude the market wanted to hear. Later today, at 1pm Sydney time, President Obama will unveil what is believed to be the long-awaited details of the banking sector plan. Ahead of the announcement, it is already clear the government will likely take a larger stake in Citigroup, beyond the original TARP injection, and may even convert existing preferred stock into common stock.
[As a preferred stock holder, the government ranks above common stockholders and receives a fixed coupon return. As a common stockholder, the government is shoulder to shoulder with equity investors and will receive only whatever dividends the bank declares. It is notable that last night JP Morgan – considered one of the less troubled banks in a whole world of trouble – announced it would cut its dividend by 87%.]
Bank stocks posted a solid rally following Bernanke’s testament. However, while Bernanke may have declared, in a sense, that bank stocks need to lead Wall Street out of recession, from a stock market valuation perspective this is not going to happen. Not in the short term anyway. When we entered the GFC, the financial sector represented some 20% of the market capitalisation of the S&P 500. Now it represents closer to 9%. In the Dow, banks now barely register. The biggest sector by value in the S&P today is healthcare, at 17%.
There is a general feeling that the sector which will lead Wall Street out of recession is technology. The Nasdaq tends to be a more volatile index than the other two, but of late it is also the more positive. One cannot meaningfully make the same time-frame comparisons (lowest level since 1997) for the Nasdaq given how thoroughly the index was destroyed in the 2000 tech-wreck. But while the tech bubble was a immature market folly, the tech sector today is driven by those names which have risen from the ashes and become global icons – Microsoft, Apple, Google, Yahoo, Intel, Cisco, Amazon. The fly-by-nighters were long ago destroyed. It is the youth of the world who suck up new technology, and with youthful Chinese, Indians, Russians and others now forming part of the market, technology is this time truly set to replace legacy industries such as auto, home building, and even banking as the high-flyers.
Speaking of home building, the Case-Shiller index came out last night, showing home prices in the top 20 cities dropped 2.5% in December to be down 18.5% over twelve months.
As the Bernanke factor, and anticipation of an Obama factor, brought a relief rally to Wall Street last night, so was the relief felt elsewhere. Oil shot up 3.8% or US$1.49 to US$39.93/bbl. Base metals in London had a strong day, and copper led the way with a 4.5% rally.
Currency traders returned to selling the yen rather than buying it, and a reversal was also felt as the US dollar was sold against the euro and pound. The Aussie gained close to a cent to US$0.6518. But this represented a flight away from safety, and, as I have been warning for a couple of days now, gold subsequently fell US$29.50 to US$964.70/oz.
Gold holders should not, however, despair. I had noted that the gold market will probably try to push to US$1000 before falling back again. The US$1000 mark will not be decidedly breached without some work. There has been a fear-fuelled flight to safety, and any sign of the fear abating is going to mean a lack of fresh buyers. But gold has still clipped US$1000 in the face of what is now global deflation, and if Bernanke is right in his projections, the fear factor may abate but the inflation factor – a massively expanded money supply – will not.
The SPI Overnight was up 70 points, or 2%, despite what was an otherwise solid response on the local bourse yesterday to a weak lead from Wall Street. Strap yourselves in this morning, for all eyes will be on the Obama speech to Congress at 1pm.
