Daily Market Reports | May 13 2009
By Greg Peel
The Dow rose 50 points or 0.6% while the S&P fell 0.1% and the Nasdaq rose 0.9%.
Wall Street is poised on the horns of a dilemma. Has this rally still got legs or is another drop just around the corner? There are apparently equal numbers of bulls and bears in the market right at the moment given the unusual circumstance last night of the Dow being up while the S&P 500 was down. This is a good chance to reiterate that the Dow Jones Industrial Average is a price average of the “top” 30 stocks on the NYSE, although the components have not been changed over the past year despite bank components Citigroup and Bank of America having fallen to low capitalisations and General Motors being now near zero.
The S&P 500 is a market capitalisation-weighted index of the top 500 stocks on the NYSE, just as the S&P ASX 200 is the equivalent on the Australian Stock Exchange, albeit only 200 stocks. The S&P is the broad market indicator. The Dow, despite its history and despite the fact we all relate movements on Wall Street directly to the Dow, has become a less reliable indicator over the past two years.
So why was the Dow up and the S&P down? One reason is that last night saw a continuation of weakness in bank stocks post the stress tests and in the face of widespread secondary capital raisings. Citi and BA were both down 5%. Nervous investors are now switching out of the “risk” stocks they’ve been profiting from for the last two months (banks, retail etc) and back into the “defensive” stocks that have been left behind in the rally (health, consumer staples etc). So while the banks were sold, stocks such as Pfizer (pharma), Coke and McDonalds (America’s food staples) were bought. The latter have more clout in the Dow average, and so dominated even though investors would have been transacting dollar-neutral switches. That’s the way the Dow works. The oil price was also higher last night, so Exxon and Chevron were also contributors.
But in the S&P 500, banks are more numerous and collectively have more weighting. The avalanche of capital raisings thus served to push bank stock prices down, and thus helped to tick the S&P 500 down.
There is, however, an interesting side-line here. Banks have been told they must raise capital, and they all are. They’re all raising right now to take advantage of the near 100% rally in the bank index since early March. The good news, the bulls suggest, is that these capital raisings are being comfortably put away, even at these high levels. But interestingly, the sheer weight of capital on offer from the banks is skewing the weighting of the bank sector within the S&P 500. This means index-tracking funds HAVE to buy new bank capital to maintain weightings consistent with the index.
And that is the unfortunate contradiction of a cap-weighted index. If you think of our own BHP – biggest stock in the ASX 200 – every time the BHP share price goes up its cap-weight in the index goes up (all things being equal) which means index-trackers have to buy more BHP which pushes up its cap-weight up and so BHP keeps going up – too far. The reverse is true in a round of selling. All indices will swing into “too overbought” and “too oversold” levels in any cycle, but it is the big caps that really swing heavily. Just look at resources and banks in Australia.
So while Wall Street effectively held up last night, it was more about switching than general support. Tech was clearly popular again (the Dow contains Microsoft, Intel and HP) and Intel reported its profit after the bell with quite optimistic guidance. Intel shares are up 3.5% in the after-market. General Motors fell 20% to its lowest level since 1933. Former Fed chairman Alan Greenspan came out and suggested the US economy was looking much healthier now, which supposedly helped the Dow rally late, but then many attribute the GFC to Greenspan’s monetary policy post 9/11.
Back in the real world, the White House forecasts the US budget deficit would hit US$1.8trn or 13% of GDP (Wayne Swan will be jumping all over that one), sending the US dollar to its lowest level in four months despite the Fed stepping in to buy US Treasuries. The National Association of Realtors announced US home prices fell in the first quarter to be 13.8% lower than the first quarter last year.
The fall in the greenback sent gold up US$10.90 to US$923.60/oz. The fear traders and inflation traders were this time holding hands. The Aussie was up over half a cent to US$0.7652, proving no one’s too concerned with Wayne’s deficit.
Oil kicked up US82c to US$58.85/bbl but base metals were unconvinced in London, closing mixed and uneventful.
The SPI Overnight took its lead from the Dow and not from the more representative S&P, rising 20 points or 0.5%.
Just on last night’s budget, there seems little to be excited about stock-wise (at least on my simple viewing of the speech). Infrastructure wins big, but we knew that. Renewables came out well, but that was a gimme too. The extension of the home loan grants will be good for builders, but no shock. Healthcare – forever beholden to government policy – was a loser. Otherwise I agree with Alan Kohler, who suggested it was all La-La-Land stuff. What is the point of talking about deficits and surpluses out to 2015-16? Is nothing going to change in the meantime? How different does 2009-10 look from 2008-09?
The budget is simply a year-on-year proposition. And as for the pension age rising to 67 in 2023, we might all be dead by then anyway. Or Chinese. It is meaningless.