Daily Market Reports | Jul 29 2009
By Greg Peel
The Dow closed down 11 points or 0.1% and the S&P fell 0.3% to 979. The Nasdaq nevertheless rose 0.3%.
Officially we have marked a down-day, including a 2.5 point fall in the S&P 500. Not exactly the stuff of pullbacks, and the Nasdaq finished stronger on the session. It was another example of market resilience, as the vast pool of cash still sitting on the sidelines, agonising over having missed the rally to date, takes any dip opportunity to get in. Signals throughout the day were mixed.
The Dow tried to rally early but by 11.30am was down 101 points. Driving the market lower were some weak earnings reports and the latest consumer confidence measure.
US Steel registered a quarterly loss of US$2.92 per share on a 68% fall in revenue to US$2.13bn. While Wall Street was expecting a US$3.45ps loss, it had also forecast revenue of US$2.39bn. One-off items clouded the comparison so this was strictly a “miss”. The CEO noted some improvement in demand over the summer, but this was from a very low base and he commented that the demand outlook remained uncertain and “the timing and magnitude of sustained economic recovery remains difficult to forecast”. US Steel shares were down 5% early on but recovered to be down 2%.
High-end global leather goods retailer Coach represented the consumer discretionary sector last night. While it is no surprise this sector has struggled during the recession, Coach still managed to post an EPS loss of US46c to a US43c expectation and missed on the revenue line as well. The CEO’s outlook was also bleak, suggesting same-store sales numbers are expected to weaken further now that inventory has been flushed through and rebalanced on discounting. Coach shares were down 7% early on but recovered to be down 1%.
Office Depot is probably somewhere in between discretionary and staples – sorry, staple – and it posted a US22c loss to Wall Street’s US12c. This was a big miss. Office Depot shares fell 20% initially and only recovered to be down 18%. The CEO is forecasting further losses in the third quarter as heavy discounting in the sector disrupts any recovery in back-to-school revenues.
A lot of faith in a US recovery has been drawn from the fact market-wide inventories have been rapidly destocked and thus a restocking phase must begin. This might be beneficial on the wholsale side, but on the retail side someone still has to buy the products. The US consumer represents 70% of the US economy. If the consumer’s not buying, excessive restocking can mean retail suicide and a prolonged recession as discounting wars start again. It all depends on a return to consumer confidence.
Consumer confidence fell to a weaker than expected 46.6 in July having posted 49.3 in June. This is not a 50-neutral index. A healthy confidence measure is typically above 90. The survey indicated an overriding fear of job losses. July unemployment – released next week – is expected to show an increase to 9.7% from June’s 9.5%. One wonders how much confidence US consumers might garner from this week’s Newsweek heading “The Recession is Over”.
But that was the end of the bad news, just as the Dow tipped into a triple-digit loss.
The Case-Shiller 20-city house price index for May was released last night and showed a 0.5% gain. This is the first monthly gain since July 2006. House prices are 32% off their peak and down 17% in twelve months, but the April reading had them down 18% in twelve months. Even Messers Case and Shiller, who have tended to be more bearish than most on the US housing market outlook since the credit crunch began, conceded this result could indicate signs of stabilisation.
Wall Street turned around. Home builders soared again and the rest of the market followed. Then came news that IBM had made a takeover bid for software-maker SPSS at a 42% share price premium. The tech sector spun on a dime and that’s why the Nasdaq finished in the green. Despite the GFC, the heavy hitters in the tech space such as Microsoft, Cisco et al have bucket loads of cash on their books and are looking for bargains. Creative destruction – industry consolidation – call it what you will but it is definitely a feature of economic downturns and a sign of a bottom in the cycle.
How do we read all of this? We are now at a point where the indicators are conflicting – some shoots are green and some are just weeds.
Clearly there is uncertainty at 40% higher in the stock market. The last few days have seen a succession of dips and recoveries. Last night showed signs of nervousness returning.
When the stock market falls, the US dollar rises. That’s because frightened money comes back into the safety of home. Wall Street recovered last night but the dollar index finished higher. The US dollar was bought against the euro and the yen was bought against the dollar. A falling euro/yen is a clear sign of returning risk aversion. The VIX volatility index chimed in with a 3% jump to 25.
A stronger US dollar is not good for oil, and nor did it help when UK oil giant BP declared last night that there is little evidence of any growth in energy demand. BP posted a 53% drop in profit for the quarter but did acknowledge signs of stabilisation. However, demand growth would likely remain sluggish, the CEO noted. After several days of gains, oil fell US$1.15 to US$67.23/bbl.
London base metals have hit a bit of limbo. On Monday night copper rose 2% and nickel 3% while the others were largely unchanged. Closing before the rally-back on Wall Street, last night copper fell 2% and tin 3% while the others were largely unchanged.
Gold took a decisive tumble of US$16.20 to US$937.20/oz last night. It was another sign of gold investor frustration at backing a weaker dollar and thus stronger inflation, as last night the US dollar rose and oil fell, relieving inflationary pressures. While that might be a price-inflation response, the potential for monetary inflation remains in the background.
Last night the US Treasury managed to put away US$42bn of two-year notes at 1.07% – a lower yield than the 1.15% previously achieved. However, this time demand was described as “lacklustre”.
We could look at this two ways. Given the stock market is strong, and last night posted another recovery from a dip, one might argue that there is less demand for the traditional safe haven of short-end bonds. But this would seem in contrast to last night’s rise in the US dollar and the VIX, indicating a return to risk aversion. The other way we can look at it is a lack of demand from traditional foreign creditors. And therein lays the answer. Auction participation from foreign central banks and sovereign funds fell from 69% last month to 33% this month.
If this is really indicative of a drop in foreign demand for US debt, then the risk is the Fed will need to raise interest rates to attract more investment in order to fund the enormous fiscal deficit. At a time when the US economy appears to be stabilising, the last thing it needs is higher interest rates. Tonight and Thursday night see big auctions of five-year and seven-year Treasury notes. Wall Street will be watching closely.
Interestingly, exactly the same fear was raised after the speech made by RBA governor Glenn Stevens yesterday. While the point was made that the RBA has never in history raised its cash rate while unemployment was rising, Stevens suggested there is nothing in the rule book to say it can’t. But for Australia it’s a different scenario. Australia’s fiscal deficit is mild, irrespective of what the Opposition asserts, and looks like not being nearly as steep as first thought given Australia’s more resilient economy. The lynch-pin is China of course, and if China fuels inflation through its own economic stimulus, then that will flow to Australia and the RBA will be forced to raise, unemployment or no unemployment.
And it was interesting to hear Stevens declare his concern about a fresh housing bubble. Asset inflation has never been a central bank concern in the past, just as price inflation was never a concern until after the seventies. But asset inflation was a precursor to the GFC. Now the central bank is paying attention.
The SPI Overnight was down 21 points or 0.5%.
