Daily Market Reports | Mar 27 2009
By Greg Peel
The Dow rose 174 points or 2.2% and the S&P rose 2.3%. Tech stocks sent the Nasdaq off to the races, the index rising 3.8% to stick its head just into profit in 2009.
After a bond auction scare on Wednesday which scuppered an otherwise exuberant rally it was back to a Wall Street brimming with confidence again last night. The day opened with still more new jobless claims as one might expect, but the other news was the third and final revision on the US fourth quarter GDP. The number was revised from a 6.2% contraction to a 6.3% contraction.
The last time the US economy contracted as much in a quarter was 1982, and from the outset the US dollar sunk on the news. However, given economist consensus was for a revision to a 6.7% fall, the news was considered positive by Wall Street.
Overall the US economy grew by 1.1% net in 2008, fell by 0.5% in the third quarter, and 6.3% in the fourth. Attention now turns to the first quarter ’09 result as we approach the end of March. On this, economists are split. The optimists see Q408 as bad as it will get and are looking for something like a further 5% contraction in 1Q09. The pessimists say we ain’t seen nothing yet and are predicting a 7-8% contraction. Either way, the last time the US economy posted two consecutive quarters of contraction greater than 4% was in 1947.
But do we care? No! We’re in buying mode.
And traders breathed a sigh of relief as a US$24bn auction of 7-year Treasury bonds was this time reasonably well supported, with the yield achieved as expected at 2.38%. This led to a fall back in 5-year and 10-year yields after yesterday’s lacklustre 5-year auction, leading traders to believe that the US is fine, thank you very much, it’s only the UK that has the problem of not much appetite for its debt.
So the Dow pushed onward ever upward, stumbled a bit as usual at 2pm, but turned to retrace to the highs by the close.
While exuberance was felt across most sectors, last night the banks missed out. As it has been the banks which have led the rally with some sensational snap-backs, it may be time to take stock. However, another new factor hanging over the financial sector is a new perceived problem with AIG.
We have all now argued to death over the US$164m of retention bonuses paid to the AIG executives who brought down the company, funded from the US$180bn of quasi-nationalisation capital the US government provided. One reason the government needed to prevent AIG from going under was the systematic risk inherent in the billions in credit default swaps (CDS) the company had written over collateral it didn’t have. Had AIG defaulted on those CDSs, the chain reaction would have been catastrophic. For the buyers of the CDSs, it would have been equivalent to having your house burn down and then your insurer go broke before it could pay you.
As far as things stand now on a contractual basis (and remembering that the retention bonuses were all about the sanctity of contracts), the likes of Goldman Sachs, Deutsche Bank, and other European investment banks, are expecting to be paid out their CDSs at 100 cents in the dollar. The investment banks made the right bet and deserved to be paid. One presumes their accounts show as much.
But the problem is that had the government not stepped in to save AIG, the Goldmans of the world would have received zero cents in the dollar on their CDSs because there would now not be an AIG. Hence government representatives are now arguing, with due cause, that holders of CDSs should be forced to take a “haircut” (receive less than 100 cents in the dollar) on their payouts which, incidentally are in excess of US$50bn. Makes the US$164m of bonuses look like pocket change really.
A strong argument can be made for 50 cents in the dollar on that basis, but its a curly one. Not only is contract law back in the frame, but if the government argues “why should the taxpayer have to be liable” then the investment banks can argue “why did the government permit an unregulated CDS market in the first place?” (There was a public service paper warning of the dangers of this new CDS product back in the mid-1990s. It was ignored.)
Suffice to say, this latest discussion may well provide an explanation for why US bank stocks went nowhere overnight.
Commodities certainly went somewhere however – straight up.
A happy stock market implies a vision of light at the end of the tunnel, and if there is light at the end of the tunnel then the world must soon want to buy commodities again. It’s not buying anything presently, with perhaps the exception of moves by China to get in quick and restock while prices are cheap, but these things need to be anticipated.
Last night oil jumped US$1.22 or 2% to US$53.99/bbl while aluminium, lead, nickel and tin jumped 2%, copper 4% and zinc 5%. Commentary from the LME was that the buyers were all investment funds.
The moves would have been even higher if not for the US dollar, which fell early, recovering after the successful bond auction. Gold shot up US$11 early but pulled back as the US dollar rallied and finished the session down US70c to US$9.33.60/oz. Gold is clearly delicately poised at these levels.
Strong commodities and a weaker yen pushed the Aussie back up half a cent to US$0.7023.
The SPI Overnight was up 44 points or 1.2%.
An interesting point to note as the S&P 500 now sits 25% above its low is that as the broad market pushed towards a 20% rally, the level of short positions in the market grew substantially, particularly in surging bank stocks. This simply means hedge funds were betting against this being anything more than a bear market rally. Then came “toxic asset day”, when the Dow rallied 500 points, and we have pushed further ahead since. Aiding the additional gains has been covering of those premature shorts.
So either the shorts were right, but too early, or wrong, and this rally will now take us higher and higher on the basis that the bottom has now been seen. We can certainly go higher from here. Locally, we could push past 4900 in the S&P 200 and still only show a classic 50% retracement. We saw a 50% retracement this time last year. And 5000 in the ASX 200 is the magic number from which we broke down last year, and hence is now the Berlin Wall of resistance levels.
