Daily Market Reports | May 21 2009
By Greg Peel
The Dow fell 52 points or 0.6% while the S&P fell 0.5% to 903 and the Nasdaq fell 0.4%.
Wall Street opened the session with a more positive tone than Tuesday, sending the Dow up 117 points by 10.30am. But that was the end of it. The index was square by lunch and another half-hearted rally attempt failed as the sellers moved in towards the close.
Last night saw the release of the minutes of the Fed’s recent committee meeting.
It was Ben Bernanke who was originally the champion of the “green shoots” argument and the harbinger of a return to economic stability by the end of 2009. The Fed has maintained its belief in that stability but as far as the green shoots are concerned the Fed, like the RBA earlier this week, is ever cautious:
“Participants noted some improvement in financial conditions in recent months, signs that consumer spending was levelling out and tentative indications that activity in the housing sector might be nearing its bottom”.
“Tentative” seems to be the catch-cry and while reiterating expectations of improvement by year end, the Fed downgraded its GDP expectations, now expecting the US economy to contract by 1.3-2.0% in 2009 rather than the prior 0.5-1.3% expectation. Unemployment is now expected to rise by up to 9.6% rather than the previous 8.8% while inflation expectations have been lowered slightly to not much at all. While the latter is also a concern, the Fed decided that fears of Japanese-style deflation were actually assuaged by this prediction.
Looking ahead, the Fed sees 2010 bringing a recovery to 2-3% GDP growth with a pick up to 3.8-4.5% growth by 2011. (Do these numbers sound familiar? I bet Wayne breathed a sigh.) Nevertheless these numbers are consistent with the Fed’s view that recovery will be a slow and extended process out of the mire that has been the GFC. It could be 4-5 years before the economy recovers to anything like strong growth.
Despite these numbers potentially providing relief for those still worried about another slide into oblivion, the “tentative” catch-cry was again evident as the Fed discussed perhaps increasing the amount of funds it is injecting directly into the mortgage finance market and increasing its purchase of Treasury bonds in order to provide a boost to support. Call it what you will – “quantitative easing”, “unconventional measures”, “the monetization of debt” – it all comes down to printing more money.
On the flipside of the printing , however, is the determination of many US banks to pay back their TARP injections as soon as possible. While bank injections represent only part of the total US$700bn plus TARP, which has also been used to bail AIG, Fannie & Freddie and even GM, Congress has already begun to bicker about what to do with the money it’s about to get back. Treasury Secretary Geithner has pointed to the TARP legislation which suggests it will remain a Treasury slush fund as long as it’s needed, but one can just imagine the Congress members lining up to lobby for specific hand-outs within their own states.
The drop on Wall Street last night was unsurprisingly led by financials, which have mostly now raised their required capital and so simply responded to the Fed’s economic downgrade. Fighting against the banks was the materials sector, which has been boosted by rising commodity prices which in turn have been boosted by a weaker US dollar. The materials sector has now taken over from tech as the best performing on Wall Street in 2009.
The image conjured up here is of an aerobatic plane having shot up to a death stall. We have had two nights of mostly indecision, and that which is actually holding the market up remains questionable. Last night was slightly unusual in that the stock market fell but the US dollar also fell, meaning there was not enough influence from any movement back into Treasuries. Instead, the dollar was responding to Fed talk of possibly turning up the printing press another notch in order to provide more economic support in this “tentative” market.
The oil price has mostly been chasing the fortunes of the stock market since the rally began, but as the stock market fell last night oil jumped up to post its first close over US$60 since before it collapsed through that level in November. Oil rose US$1.94 to US$62.04/bbl. One might argue there were four reasons for the gain: (1) the June delivery futures contract expired and we rolled into July, providing around a 50c contango boost; (2) the US dollar was weaker; (3) the Nigerian rebels are back in action; (4) weekly inventory levels showed a drop of 2.1m barrels of crude when 1.5m was expected.
In the case of (1), a contango in oil is a simple reflection of the sheer extent of inventories which exist. In the case of (2), the dollar is falling on weaker economic forecasts, which is hardly a “real” impetus for the oil price. In the case of (3), rebel activity will always come and then go again, and in all honesty who cares if we lose some Nigerian production right now when inventories are at record levels? In the case of (4), weekly inventories are dropping because refineries are cutting back on imports. They are cutting back on imports due to lack of demand for gasoline et al. Demand data still show ongoing weakness. This weekend is the Memorial Day long weekend in the US which heralds the start of the summer driving season – traditionally the peak oil demand season. Not only is demand historically weak in 2009, summer does eventually end.
Base metals in London were nevertheless more subdued. Copper was the only star, rising 1.9% on US dollar weakness, but aluminium, lead and zinc all finished lower. Last night the World Bureau of Metals Statistics declared that all base metals were “oversupplied” in the first quarter, particularly aluminium.
It only took mention of more money printing for gold to take the hint. It rose US$12.40 last night to US$937.40/oz. The rampaging Aussie decided to take a breather over the 24 hours following weak consumer confidence data released yesterday in Australia. It trod water at US$0.7747.
Despite the fall on Wall Street, the SPI Overnight gained 2 points.
The SPI overnight no doubt proved resilient due to the strong day for resources, to which the Australian market has a greater weighting. Never mind that this is largely an inflation trade, and that the Aussie has recovered from US$0.63 to US$0.77. Many of the recent quarterly production reports released by local resource companies noted that the fall in revenues in the first quarter due to the fall in commodity prices was dampened by the fall in the Aussie to US$0.63.
A feature of the rally coming into May had been an increase in stock market volumes. This implied that all those funds sitting on the sidelines in March, underweight equities and overweight cash, had become concerned they were now missing out. Or at the very least they had decided the rally’s confirmation was enough reason to begin winding down their cash positions and re-establishing longer term equity positions. However, in order to push a stock market up you need to have such institutional buying on the actual stock market.
But what we have right now is an absolute avalanche of capital raisings, both here and in the US. As a contributor to FNArena’s Broker Call service, I cannot believe how many times I have written in the past two weeks that “XYZ has announced an institutional placement and retail offering of $Xm”. The point here is that yes – institutions are buying and they are buying a lot. But they are not buying in the stock market. They are increasing their equity weightings as desired in the “off-market” of capital placements.
And they are doing so at a discount. Why go into the stock market? Institutions are already buying stock as if the rally has seen a pullback, at anything up to 30% below last traded price. The question is: Why would institutions (and to some extent retail investors) see a need to keep piling into a higher-priced listed market? And with every new share issued, earnings per share are diluted. This simply means earnings in FY10 will have to be 10-20-30% better in FY10 to even catch up to what earnings per share would otherwise have been. And we are only looking at the possibility of a very slow turnaround in the economy.
