Daily Market Reports | Feb 27 2009
By Greg Peel
The Dow closed down 88 points or 1.2% while the S&P lost 1.6% and the Nasdaq 2.4%. The Nasdaq has once again exhibited its more volatile nature, having turned from hero a week ago to villain once more – a pattern that has played out ever since the credit crisis began. After the bell, Dell reported very poor earnings.
Having slipped suddenly late in Wednesday’s session, the Dow opened with a bang last night to post a 132 gain by 11am. But that was the best it could do before sentiment waned and the Dow slid all session to finish near its lows, down 88. Wall Street is on track to post its six consecutive down-month tonight.
Last night’s session was all about the Obama administration’s first budget, elements of which were hinted at in the president’s speech on Tuesday.
It started well, with the government pledging it would go double or nothing on the TARP plan, committing the US taxpayer to yet another US$750bn of financial sector rescue funds, should they be required. This news provided ongoing rallies in banking stocks which have been more positive ever since the new capital injections were announced.
But as analysts had a chance to dig deeper into the budget detail, the situation began to look a bit more grim. Two areas that Obama targeted in his speech that were in desperate need of reform were healthcare and education. It was all about making both more accessible. This is, of course, a laudable plan. The problem for Wall Street, however, is that part of the inaccessibility problem stems from such services being heavily controlled by the private sector. Logic thus dictates that sectors such as health insurance, pharma, and student loans must be losers under any “more accessibility” public sector policy.
And so it was that big hits were taken last night in these sectors.
More universally, if there is one word a capitalistic-driven Wall Street does not like to hear it is the word “tax”. While legislation already passed will reduce taxes for average Americans, the quid pro quo is to hit the pockets of the wealthy. The Bush era high-end tax cuts will be allowed to expire in 2011. Tax increases will be enacted on various incentives such as carried interest and other lurks, bringing rates up to income tax levels.
America voted for change, and change is what Americans are getting. The budget will be celebrated on Main Street and derided on Wall Street. While this might leave a lot of people feeling all warm and gooey, unfortunately it ain’t good news for the stock market at a time when any little thing could set off another major leg down. To give you an idea of the possibility of this, earnings data to date in 2009 have shown a 60% decline. Analyst forecasts are nowhere near this. Indeed, analyst forecasts have the S&P 1500 (not a typo, it’s a broader index) trading at 23x earnings. That’s a number which looks expensive in a bull market, let alone a bear market.
And while the big banks may be benefiting from upcoming capital injections, down in the real world smaller banks are hurting. The FDIC announced last night that US banks will have lost over US$20bn in total in the first quarter – the first quarterly loss since 1990. The number of banks on bankruptcy watch at the FDIC has grown to 252.
And still there is no word on toxic assets.
Now for some good news, at least for some.
Oil shot up for a second consecutive session last night, leaping 6.4% or US$2.72 to US$45.22/bbl. Wednesday brought a shock revelation that gasoline demand has actually turned around, and as each day passes Nymex is beginning to see evidence that OPEC production cuts are starting to impact on crude inventories. Further cuts are expected amongst the world’s oil producers, with Abu Dhabi last night suggesting it would be cutting deliveries to Asia.
The other good news is that physical gold did not fall heavily again last night, but was steady at US$943.30/oz. If you consider that gold leapt US$60 in almost a single bound to ring the bell at US$1000/oz, and collapsed US$60 just as quickly, you might be better served by pretending it never happened. Previous resistance now becomes support below US$925, so gold bugs do not want that level to break. With Obama announcing yet another US$750bn of Monopoly money, the forces of inflation fear should put in a good show against any forces of risk abatement.
An interesting point to note is that the US 7-year Treasury bond made a return to the market last night after a 16 year hiatus. The first auction was doubly oversubscribed. The world still wants to lend the US money. The US dollar remains strong.
Base metals mostly traded off 1% moves either way last night, except for copper. A large and rare inventory drawdown from persons unknown saw copper spike 3%.
The Aussie remained steady last night on US$0.6497 while the SPI Overnight lost 21 points or 0.6%.
