Daily Market Reports | Apr 10 2009
By Andrew Nelson
The Dow ran 246 points, or 3.1% higher, while the S&P 500 rose 3.8% and the Nasdaq gained 3.9%.
Stocks advanced yet again on Wall Street last night, driven by some big gains in the banking sector after Wells Fargo said it would book a record quarterly profit. The news fuelled hope that the sector might be stabilising and gave investors just the reason they needed to ensure the continued longevity of the now month-long rally.
Trading volume was lighter than usual and much lower than Wednesday due to the spring holiday season. Thursday is Passover and all financial markets will be closed on Good Friday. But still, Stocks have been on a hot streak, with the Dow and S&P 500 both up more than 20% after hitting 12-year lows on March 9 .
Shares in Wells Fargo jumped more than 30% after the bank unexpectedly announced it expects to post US$3bn in net income for the first quarter, with earnings of US$0.55 per share for the quarter, twice the consensus estimate of $0.23 per share. Forecasts revenues of about US$20bn were also well above estimates of $18.98bn.
Significantly, the bank talked about improving business momentum, with the extension of a lot of new credit. Mortgage applications were up 64%, and the bank also noted the strong operating results at legacy Wachovia. But CNBC’s Bob Pisani pointed out that cynics are less than impressed, noting that of course banks should be profitable given they’re able to borrow money at 0% from the government and then lend it out to customers at five times that.
The news from Wells Fargo landed at around the same time a report in the New York Times predicted the 19 banks undergoing government stress tests will pass them. All up, the KBW Banks Index rose 17%, putting the index on track for its longest weekly winning streak since 2006. Citigroup shares were up 12%, JP Morgan Chase jumped 19% and Bank of America rallied 35%.
Much of the big jump in financials can be attributed to the short bets that have been piling up on the sector ahead of the earnings season that most thought would be horrible given the still weak housing data. But the news from Wells Fargo had hedge funds and trading desks running to cover those short positions at the open, especially with light trading expected prior to a three-day weekend.
The Wall Street Journal reports that short positions in a host of banks have gained in the past week. The paper cites New York short-selling research firm Data Explorers, who said Wells Fargo has more than 3% of its stock out on loan, up from just above 2.7% a week ago. Bank of America has also seen an increase in the percentage of its stock held short in the past week, notes the Journal.
The state of the US banking sector which has been at the heart of the global economic crisis, is now the key factor behind the stock market’s recent improvement in sentiment. The current rally first took off in early March when several major banks said they had made money in the first two months of the year.
This burst of optimism in the financial sector is nowhere more evident than on the CBOE Volatility Index, or VIX, which booked its lowest close since late September. The gauge closed at its intraday low of 36.96, its lowest finish since Sept. 26, 2008, when the volatility index closed at 34.72.
A strong rally in retail stocks that helped to push the broader market higher yesterday fizzled out a bit, with many chains reporting disappointing March sales today. Investors had been hoping to see some sign of improvement from the troubled retail market that has been hit hard as consumers retreat from spending, but it just didn’t materialise.
This put pressure on the sector, with Wal-Mart Stores declining 3.2% after the discount giant posted a 1.4% increase in same-store sales, which was below expectations of 3.2%. The drop was a bit disappointing, given guidance was towards the high end of the range of US$0.72-US$0.76, which fits in with the street estimate of US$0.76. Wal-Mart was one of only three Dow stocks not participating in today’s advance.
Warehouse chain Costco was also down after it missed expectations. But it wasn’t all doom and gloom among the retailers, with Target, which hasn’t fared that well during this recession, posting a smaller drop in sales than expected. The company said it was seeing encouraging signs in its business and shares jumped better than 6% in response.
In other corporate news, Warren Buffett’s Berkshire Hathaway lost its top credit rating at Moody’s. The agency cut the rating on the diversified holdings company by two notches, saying the recession and the company’s investment losses were making it harder for Berkshire to meet its funding needs. Elsewhere, Dow component 3M is offering 3,600 employees, or around 11% of its workforce, early retirement packages, as it tries to deal with the ongoing recession. The company, often seen as a proxy for the economy due to its varied businesses, has already cut 3,600 jobs this year.
On the economic front, there seems to be a growing amount of evidence that the US economy may be beginning to make a cyclical turn. Wholesale inventories fell by the largest increment on record, according to a Wednesday report, and the inventory-to-sales ratio, the most direct measure of supply and demand in the economy, showed that the latter is gradually catching up with the former.
Lawrence Summers, a key economic adviser to President Barack Obama, noted at an appearance in Washington today there is the possibility of a cyclical surge in production revealed by the inventory data.
Backing this up was news that claims for state jobless benefits decreased 20,000 to 654,000 in the week ended April 4, the US Labor Department said. That was the biggest drop since the beginning of the year and more than double Wall Street expectations. However, it isn’t all clear sailing just yet, with total claims jumping to a fresh record high, a clear sign that the unemployed still face a hard time finding new work.
Meanwhile, the US trade deficit shrank 28% to US$25.97bn in February, the smallest deficit since 1999. Import prices rose 0.5% in March, the first increase in eight months. Export prices fell 0.6%.
The US dollar strengthened against the yen and the euro, but lost ground against the Aussie as the near-term outlook for commodities continues to improve. Treasury prices tumbled, raising the yield on the benchmark 10-year note to 2.93% from 2.88% Wednesday.
The copper rally continued, with the price up almost 50% from the recent February lows. Copper certainly led the way in London, with most other base metals following the lead ahead of the long Easter weekend. Basemetals.com reports that short-covering, buoyant equities and expectations of continued buying in China all helped to lift spirits.
Oil, as it has been doing quite often of late, tracked the positive equity market higher, rallying in hopes that an economic recovery will improve demand for the industrially critical commodity. US light crude oil for May delivery rose US$2.11 to US$51.49 a barrel on the New York Mercantile Exchange.
Gold continues to oscillate around the US$880.40 an ounce. Investment in gold exchange-traded funds also stalled, with holdings in SPDR Gold Shares, which is the biggest gold exchange-traded fund, remaining pretty much unchanged for a fourth straight session, according to a report from marketwatch.com.
The SPI reflected the day’s buoyant mood, jumping 63 points to 3722.
