Daily Market Reports | Apr 23 2009
By Greg Peel
The Dow closed down 82 points or 1% while the S&P lost 0.8% and the Nasdaq hung on to a 0.1% gain.
In the past few months Wall Street has been going either steadily down or, more recently, steadily up without the huge intraday oscillations we saw last year. Last night the Dow opened lower, was up 75 by late morning, was down over 20 points at lunch, was back at the highs after lunch, and then took one of its familiar baths in the last hour, closing on the lows of the day.
This is, however, the middle of earnings season and such moves are not unusual, particularly when the world is on edge. The battle is on between those grasping to silver linings in earnings results, and those pointing out stark realities. Between those believing we are back in bull mode and those believing this latest bear rally may have run its course. Financial stocks are still the banner-carriers, and it was financials that lost their bottle on the death.
There were well received results from Dow components AT&T, Boeing and McDonalds last night. Arguably the safest bank at present – Wells Fargo – announced a 50% increased profit for the first quarter over last first quarter, based mostly on its acquisition last year of rival Wachovia, to also sparked an initial rally. The result nevertheless included a hefty provision for real estate and consumer related loan losses.
Morgan Stanley, on the other hand, posted a first quarter loss that was greater than expected. The bank also cut its dividend from US27c to US5c. Hurting MS most was the same accounting stupidity that Bank of America was keen to cash in on. Debt on issue by BA-owned Merrill Lynch fell in value over the quarter due to increased perceived risk. On a mark-to-market basis, this implies a reduction in Merrill’s debt, ergo a profit. Morgan Stanley, however, has seen its debt value rise over the quarter as the market eased its fears of a demise. Thus on the same basis, Morgan’s debt obligation is higher, ergo a loss. The market rewarded MS for not going out the back door, and MS has to take a loss on that reward.
Just more evidence that mark-to-market is not always the most accurate path to price discovery.
The result was that while Wells Fargo shares initially rallied, Morgan Stanley shares fell. But the stumble in the indices at lunch time was all about General Motors. The zombie carmaker announced it had no intention of making an obligatory US$1 billion debt repayment on June 1. While GM shares fell, this is more of a bank problem than a car problem. Still we wait to see what will happen with GM.
They shoot horses, don’t they?
This is all just a case of more uncertainty for US banks. While the S&P 500 has rallied over 20% since the low, bank stocks have rallied anywhere between 50-200%. It may have been off a low base, but still a viable way to make extraordinary profits. By 3pm last night, holders of bank stocks were likely deciding enough is enough for now.
Which begs the question: Will we now head all the way back down? The answer is probably no, barring any fresh exogenous shock, because the majority of earnings reports are still coming out as better than expected and buyers are responding accordingly. After the bell last night, both eBay and Apple posted strong results. But with a wider economic picture weighing on markets, there seems little impetus to go up much further either. Could Wall Street actually be in for some sideways movement for the fist time since about July 2007?
A government agency released its house price index data for February last night, and showed a 0.7% rise and a revised 1.0% rise in January. There are several house price indices to choose from, either public or private sector generated, and they all tell a different story. The Case-Shiller 20-city index was, for example, down 2.8% in January. In these latest numbers, the Pacific Region led the charge with a 3.8% gain. But separate data also show California led the country with an 80% rise in foreclosures in the March quarter.
Pick the number you prefer.
Wall Street also had to deal with the IMF’s latest report suggesting the global economy would shrink by 1.3% in 2009 – the first fall since the Egyptian plagues or something. If the IMF is true to form, its next report will be vastly different.
The US dollar was a mixed bag last night. It fell against the yen (which indicates further risk aversion) and the euro but rose against the pound. The pound tanked when the UK government announced a new budget that sees 175bn pounds of public borrowing planned for 2009-10 following borrowings of 90bn pounds in 2008-09. That’s 12.4% of GDP, putting Britain right up there with some of the EU’s basket case economies. The government plans to raise taxes on the wealthy and cut back spending to cover the cost of borrowing. That’s a sure-fire way to reignite an economy!
The Aussie fell over half a cent to US$0.7052 as the yen rose but gold pushed ahead, adding US$6.40 to US$890.40 as uncertainty continues to hover.
Oil managed to add US13c to US$48.68/bbl to scrape back a little more from its 9% fall earlier in the week. The US government announced crude inventories have reached their highest level in 19 years, but the oil pit seems to have become relatively immune to such data. The forward curve contango already tells the story. Oil closed before the Dow’s late demise nevertheless.
A rumour went around the LME that China may have now completed its restocking phase. Base metals had rallied early on a stronger Dow and weaker US dollar, but by the end of the session those gains were given up. Copper closed down 1%, as did nickel and zinc.
The SPI Overnight fell 12 points.
