Daily Market Reports | Apr 02 2009
By Greg Peel
The Dow rose 152 or 2% while the S&P crossed back over the 800 mark once again, adding 13 points or 1.7% to 811. The Nasdaq rose 1.5%.
Sellers kicked off the new quarter, sending the Dow down 125 points from the open. This was mostly a response to economic data.
The ADP private sector jobs report – the one which rarely correlates with the official numbers (due Friday) – showed that 745,000 Americans lost their job in the private sector in March. That’s the worst number ADP’s ever seen but it’s only been around for nine years. The ISM manufacturing index for March came in at 36.3% indicating yet another month of contraction. US car sales fell again in March by yet another 40%-odd across the board. The only good news was that February pending home sales rose 2.1% (seasonally adjusted).
It was the only good news if you take the glass-half-empty approach, and even then a cynic can note that Spring always brings out the buyers. But if you take a glass-half-full approach, all of those numbers can be otherwise interpreted.
Yes, the job numbers were shocking, and sure as eggs Friday’s numbers will also be shocking. But unemployment is one of the lag-iest of lagging economic indicators. Stock markets turn long before an economy turns, and employment turns long after that. The ISM number was indeed another contraction (below 50%) but the February number was 35.8% so March was actually a small improvement. It indicates that the rate of contraction is slowing. US car sales were bad but not as bad as they have been, so run-out sales combined with TALF financing support might be starting to work. Also working is the Fed’s purchase of mortgage securities and long bonds, which has finally pushed down mortgage rates.
Wall Street went with glass-half-full, and so the buyers moved in and pushed the Dow all session to close just off its highs, representing about a 275 point rally.
It is common to say that the banking and material sectors “led” the rally in the broad market S&P. However, it is now a case of these sectors leading in terms of sentiment rather than index points. They have both been shot to pieces. The biggest sectors in the S&P 500 are currently tech (18%) and healthcare (15%), and the latter has begun to lag as investors move out of defensives and begin to take more risk.
For the materials sector there was no real lead in commodity prices overnight, it was more a case of greater confidence and bargain-hunting from new money entering the market for a new quarter. The banking sector is a more interesting case in point, however.
Driving the banking sector last night was anticipation that the Federal Accounting Standards Board, which meets on Thursday morning NY time, will agree to a relaxing of the mark-to-market rules. Predictions are that FASB will allow a return to a mark-to-model rule for illiquid or inactive securities (read CDOs) so long as that model can be justified by some other means. Cashflow is one means – if a prime mortgage CDO has never seen a missed mortgage payment all this time why should it be worthless?
The implications of a relaxation of the rules is stark. In essence, banks can “write up” the value of a lot of the supposedly toxic securities they’ve been writing down since November 2007, thus returning balance sheets to more healthy level. And the mail is that FASB will make any new rule retrospective to the first quarter ’09. With banks shortly to post first quarter earnings, there will likely be some significant positive surprises.
But there are two problems.
Firstly, when Wall Street bottomed on March 6 the turnaround in sentiment was led by the banking sector, and part of the reason for that turnaround was news that FASB was considering exactly that which it will vote on tonight. The banking sector index has rallied about 50% in the meantime, so the door is open for a bit of a “sell the fact”.
Secondly, if FASB does sufficiently relax the rules, then the Obama administration’s Public-Private Investment Plan for toxic assets is dead in the water. One cancels the other out. Those in the private sector willing to buy toxic assets would only do so if they thought they were getting a bargain. Those holding the toxic assets would only sell them if they thought the assets were continuing to impact on the balance sheet. If banks can now write up the value of those assets, then there are no bargains. It was always touch and go as to whether the banks would sell at bargain prices anyway even with the current FASB rules in place. Why crystallise losses now if true longer term value can be reinstated?
Another interesting point to consider is that if FASB relaxes the rules tonight it is implicitly admitting that tightening the rules in November ’07 was an incredibly bad mistake. In November ’07 the Dow was at 14,000. Oops.
If you don’t agree with my assertions here, consider that the first thing the big banks will do if they can revalue their balance sheets is to try to give back their TARP injections as quickly as possible and release themselves from the accompanying restrictions the government has set (including taxing 90% of executive bonuses). If the banks can give back their TARP money then again one is forced to ask: Why did we have to get to here?
Indeed last night four small banks, who will have had their “stress tests” completed by now, handed back some TARP.
And another reason why the market turned on March 6 is because the regulators are also considering reinstating the “uptick rule” – a rule that hamstrings destructive short selling and reduces market volatility. That rule was rescinded in June ’07. Are you getting the picture?
Of course none of this means that America should have been able to build up all that spurious debt, or that such debt should not now be brought back to realistic levels. But it makes one wonder whether recent OECD forecasts of a 4% global economic contraction in 2009 would be the case if a few US regulators actually had any brains in the first place.
The weekly oil inventory numbers showed another increase again as expected, as did gasoline ahead of the summer driving season. Oil fell US$1.27 to US$48.39/bbl.
The US dollar was mixed and gold rose US$8.00 to US$926.40/oz. The Aussie added half a cent to US$0.6977.
Base metals barely moved in London for the start of the new quarter, except for lead which was down 3% and nickel which was up 2.5%.
The SPI Overnight gained 58 points or 1.6%.
[An aside: “cozen”: to cheat, defraud, act deceitfully; “cozenage”: the act of cozening. And Walter Mitty? C’mon.]
