Daily Market Reports | Apr 16 2009
By Greg Peel
The Dow closed up 109 points or 1.4% to sneak above 8000 once more. The S&P gained 1.3% to pass 850 while the Nasdaq laboured under weak guidance from Intel, gaining only 0.07%.
It was a weakish start on Wall Street but some positive earnings reports and data pushed the Dow to 8000 at 1pm. It failed at this point and fell back to square before the Fed Beige Book was released after 2pm. A 100 point rally ensued. The story of the day was once again “less bad”.
Economic data were a feature of last night’s session. The March CPI showed a fall of 0.1%, sending the 12-month CPI reading to negative 0.4% – the first annual price fall since 1955. While this is enough to fuel deflation fears, the core CPI (ex food and energy) rose 0.2% given petrol was the biggest price influence. The core is up 1.8% over the same 12 months, assuaging those deflation concerns. Whereas economists were caught out yesterday by a very weak PPI, 0.1% was on the button for the CPI. And economists had assumed a 0.1% rise in the core, so 0.2% was a pleasant surprise.
Less bad.
The National Association of Homebuilders confidence index leapt a solid 5 points for April – its biggest monthly jump for five years. This sent homebuilder share prices soaring as investors looked to the end of the housing crisis. The figure, however, was 14. This might be the highest result since last November, but bearing in mind that 50 is neutral, one can hardly pop the corks. Wall Street was euphoric nevertheless.
Less bad.
The New York Fed’s Empire manufacturing index uses zero as the neutral point. April saw a big jump from minus 38.2 to minus 14.7, implying business is still contracting, but at a slower pace.
Less bad.
And the biggie was the Fed Beige Book – an anecdotal survey of economic activity across the twelve Fed regions. Last month all twelve regions reported a marked decline in economic activity. This month five of those regions suggested the pace of contraction had begun to slow and stabilise. Wall Street took this as evidence that the end is nigh (of the GFC).
Less bad.
AMR Ltd, owner of American Airlines, surprised the Street with a loss of only US$1.35 per share in the first quarter against expectations of US$1.45. Last March quarter AMR lost US$1.37 per share. Guidance was positive, suggesting AMR will still struggle against deteriorating demand but do so under a much lower fuel cost. AMR shares leapt 20%.
Less bad.
Financial stocks had a big day as well. The government announced that bank stress testing would be complete by early May, which was encouraging. Wall Street suspects the stress tests are likely to come out looking good one way or the other, given the government does not want banks to fail. JP Morgan reports its earnings tonight and its shares were up a predicatory 7%. Goldman Sachs shares lost 12% yesterday but rebounded 6% last night.
The materials sector also had a good run as metals prices in London surged once more. Copper has passed six-month highs, and further buying from the Chinese has caught short speculators who were sure the run to this level was already overdone. Short-covering was thus the feature of all metals, with copper jumping 4%, lead 5% and nickel and zinc 6%. Aluminium and tin were laggards with 1% and 2% rises.
“That is essentially a short-covering rally,” analyst David Wilson of Societe Generale told Basemetals.com. “We have seen a return of more positive investor sentiment towards the base metals, driven by record imports of copper into China,” he added. “There is no improvement in economic activity as such”.
Aw David, don’t spoil the party!
[For more on China and metals see “The China Factor: Smoke And Mirrors?”; Commodities; yesterday]
Now to the other data – the stuff Wall Street ignored last night.
Economists were expecting a 0.8% decline in industrial production – output from factories, mines and utilities – in March but the figure was a 1.5% decline. Industrial production has now declined 13.3% since the recession is deemed to have begun in December 2007 and 12.8% over the past year. That’s the biggest drop since WWII closed factories. Capacity utilisation fell to 69.3% in March – the biggest decline since records began in 1967 – including a fall to 65.8% in manufacturing. One third of America’s manufacturing capacity now sits idle.
The big drop in IP implies wholesalers are furiously working down inventories. This can be taken one of two ways. Either wholesalers are attempting not to get caught with inventory overhang as consumer spending continues to slide, or they are simply not getting enough orders. If you take the glass-half-full approach, one can look to the eventual need to rebuild inventories and the boost that will provide. You could also go as far as to say the big drop in PPI and small drop in CPI implies retailers can make good profits when this occurs. Or is this all just rose-tinted glasses stuff?
A salient observation made by a guest on CNBC last night is the large number of companies which have reported first quarter losses to date and added that “we will be cutting X number of jobs”. These job cuts are only at the announcement point. They are yet to be implemented or hit the unemployment numbers.
With all the money the US Treasury and Fed has been throwing at the financial sector in order to get banks lending again, lending activity dropped 2.2% in February. The Fed has been a big buyer of mortgage-backed securities and has finally managed to bring mortgage rates down. This, along with cheap house prices, fuelled a 35.4% jump in mortgage lending in February. That bit might be working, but lending to businesses plunged 47%. Of the 21 recipients of TARP funds, nine reported an overall increase in lending but 12 reported a decline.
Are we sure this policy is working?
The rest of the market was quiet last night. The US dollar was mixed, gold rose US$1.90 to US$891.90/oz and oil fell US16c to US$49.25/bbl. The Aussie rose half a cent to US$0.7289.
The SPI Overnight rose 32 points or 0.9%.
It’s time to take another look at the VIX volatility index. It fell 4% to 36.2 last night. The fall in the VIX is reflecting renewed confidence in the stock market as it implies investors are now shying away from the need for further put option protection. As long as the VIX keeps falling, and investors watch it fall, the glass-half-full mentality will remain. If it gets under 30 we can begin to talk about complacency.
