Daily Market Reports | Mar 10 2009
By Greg Peel
The Dow fell 79 points or 1.2% while the S&P fell 1% and the Nasdaq 2%.
It occurred to me this morning that the deflation-stimulus dichotomy is a good analogy for stock markets at present. Or should it simply be that stock markets are pre-empting the deflation stimulus battle, and laying bets on it? Stock markets are, after all, forward indicators.
The deflation-stimulus battle is the one in which authorities across the globe are madly printing money and implementing all sorts of stimulus measures both fiscal and monetary, both direct and indirect. The stimulus is an attempt to “reflate” the economy. Such measures are not at risk of causing high inflation yet as the economy is presently disinflating. It is disinflating because a massive credit bubble is being unwound. Deleveraging is forcing down the price of all assets, and the way things are going the next step is full blown deflation (negative inflation). A recession with deflation can lead to a depression. While the authorities are doing their darndest to avoid deflation through reflation, such measures take time and until there is some light at the end of the tunnel, we won’t know who’s going to win.
Under any normal circumstances, stock markets that receive no new news of any significance will tend to drift sideways rather than anything else. But these aren’t normal circumstances. At present, stock markets will drift lower until anyone gives them a reason not to. And it has to be a pretty good reason because the momentum is to the downside. The simplest trade to implement at the moment is to play the short side, and keep playing it until one day it proves to be wrong. Until that day comes, the short side is where money can be made.
So just as we wait to see whether any reflationary measures might reverse disinflation, we wait to see whether any positive developments might reverse the stock market. The stock market will turn before the economy bottoms, but for traders to become pre-emptively bullish they will need to see something that will offer that light at the end of the tunnel. No one knows how long this recession is going to last. It’s already becoming a historically long one. Over the weekend, the World Bank decided the global economy would actually fall into contraction in 2009, for the first time since the Second World War. Respected investor Warren Buffet was also on CNBC last night suggesting any turnaround will not happen quickly.
While the World Bank clanger might have been cause to send Wall Street spiralling from the open, stocks actually opened higher, following on from a bit of late momentum on Friday. The Dow was actually up 80 points before the rot set in again – only half an hour into the session. For the rest of the day the Dow simply slid slowly lower. There was good news – news that in a bull market would have sent some stocks surging – but it was not enough to overcome the downward momentum.
The good news was a raft of mergers and acquisitions suddenly occurring all at once in the biotech/health space, the largest of which was a proposed takeover of Shering-Plough by pharma rival and Dow component Merck at a 34% premium. Healthcare has been one of the defensive havens, and this takeover is almost bull market stuff. But it wasn’t enough to excite Wall Street, which shrugged.
Bank of America announced it would likely raise capital in the private sector (alongside government injection) which was taken as bullish news for some reason. Probably because BA is trading in pennies and, in theory, the government won’t let it go under. One might call it a free call option. The other positive news for banks is that the government will indeed look at revising the mark-to-market rules, albeit starting with yet another House enquiry on the subject this Thursday.
While this provided some boost for banking sector stocks, banking sector stocks no longer make much difference to the index. Oil stocks do, however, and it was a good day for energy.
Oil jumped US$1.71 to US$47.23/bbl on news that OPEC intends to announce further production cuts at its meeting on March 15. OPEC does not like US$40/bbl, it wants US$70/bbl, but one doubts whether the disparate group could ever combine effectively enough to orchestrate such a price. They are not exactly swamped with buyers.
The other influence on the oil price last night was, however, some argy-bargy in the South China Sea. Five Chinese naval vessels allegedly “harassed” the USS Impeccable, to the point where the Impeccable had to fire water cannon as one Chinese ship hoved awfully close. The Chinese navy told the Americans by radio they weren’t allowed to be where they were, but these were international waters.
Will America now be at war with China? No. This is just a typical Chinese manoeuvre attempting to establish some ground before the scheduled meeting of presidents Obama and Hu in a couple of weeks. The two countries have only just re-opened military cooperation agreements following the earlier administration’s freeze based on differences over Taiwan.
The US dollar edged higher again last night as US Treasuries remained the safe haven of choice. Gold fell back after its blip on Friday, losing US$15.70 to US$922.20/oz. Gold traders obviously couldn’t care less about pretend naval battles either. The Aussie fell back a cent to US$0.6315.
After a mostly strong week last week, base metals prices fell in London overnight, with the exception of tin. Copper fared the worst at 2.5% lower.
The SPI Overnight lost 15 points.
A warning to those who, like me, got caught out this morning. The US went on to summer time over the weekend which means the NYSE now closes at 7am Sydney time instead of 8am. By the end of this month, I think (I’ve lost track of daylight savings), we will switch to winter time which means the NYSE will close at 6am. Don’t I love it.
Another little point of interest. Last night I watched Top Gear on SBS which was a re-run of the series from about four or five years ago. From it I learned that Arnold Schwarzenegger was so taken with vision of the mighty Hum-Vees in the first Gulf War that it was he who asked for a civilian model. That conversion proved inadequate as what was produced was a clunky desert dueller about one and a half lanes wide. So General Motors stepped in and bought the brand. You can see where this is going, can’t you.
GM reduced the size of the Hummer, basically creating a slightly less clunky desert dueller – Arnie tank – out of a bog standard GMC 4WD. This thing weighed four – count them four – tonnes and had only a little six cylinder engine. When Jeremy Clarkson reached 35mph, his econo-meter was showing one – yes one – mile to the gallon petrol consumption. At this stage, the oil price was well on the rise.
And we wonder why GM is effectively insolvent.
