Daily Market Reports | Oct 16 2009
By Greg Peel
The Dow closed up 47 points or 0.5% to remain above 10,000. The S&P gained 0.4% to 1096 while the Nasdaq was again flat.
The focus last night was on earnings results, both before and after the closing bell. With JP Morgan having set a very positive tone on Wednesday, beating the Street substantially on trading income, good things were expected of rivals Goldman Sachs and Citigroup last night.
Goldman didn’t disappoint, at least on the bottom line. Earnings per share of US$5.25 again blew away the Street at US$4.24. However the breakdown showed Goldmans made all its money out of trading in the quarter’s very strong markets, while its traditional investment banking businesses such as bond underwriting and M&A fees had only a quiet three months. Investment banking profits fell 31% from last September and 38% from June. If not for some well-positioned trades, it would not have been a good quarter for the bank.
Having been solidly bought in the rally, and again on Wednesday following the JP Morgan result, Goldman shares fell 2%.
If Goldman is the aggressive proprietary trading bank, Citigroup has a much greater leaning towards Main Street banking. Citi posted a convoluted result which had to be first pulled apart to be appreciated. A small profit of US$101m was actually misleading as it excluded dividend and debt exchange payments to the US government, which has a US$45bn stake. Before adjustments, the bank realistically lost US$3.24bn. Loan losses totalled US$8bn.
This was actually better than the June quarter, in which loan losses were US$8.4bn, but the bottom line is that Citi is continuing to lose money on credit cards and mortgages as the unemployment rate rises. Citi shares are down 6%.
These two results came during the trading session, and were cause for choppiness in the general market. On the flipside, the Dow was buoyed by strong moves in the oil sector.
Thursday night is weekly US inventory data night, and the response to these numbers never ceases to amaze me. Aside from the volatility of the inventory count, which can send the oil price hurtling up one week and down the next, there doesn’t seem to be much thought given to the reason for certain results.
Last night the Energy Information Agency announced a big drop in gasoline inventories, much more than expected, and this sent oil up US$2.40 to US$77.58/bbl to effectively break out of its medium-term range. The US dollar was relatively steady at 75.54, so this was not a dollar-push phenomenon. What the Nymex pit decided was that lower gasoline inventories clearly means higher demand from a recovering economy.
But no. The reason for the drop was that gasoline production from refineries was cut to its lowest level for the year – a result of the annual maintenance period commencing. Inventories were down because supply was down, not because demand was up. The maintenance period is one in which gauging actual demand is difficult. Moreover, Wall Street continues to trade in an “high oil price is good” mode at present, as it suggests economic growth. But all through the lead up to oil reaching US$147/bbl in 2008, every time oil went up, stocks went down, for the simple reason that energy is the biggest input into all industry. Higher oil means much higher costs.
And it also means higher costs for the consumer, who is already struggling with unemployment, mortgage foreclosures, credit card defaults and a general unwillingness to spend.
The oil price had nevertheless remained relatively steady in a range during the month of September, allowing the US CPI to come in at 0.2% growth as expected, with the core (ex-food and energy) result the same. While the CPI is now to the positive side rather than the negative of earlier months, it is still low enough to assume the Fed can maintain its funds rate range for some time yet, as intended.
The New York Fed’s Empire State manufacturing index was released last night, and it was very positive. The index jumped from 18.9 in September to 34.6 in October, showing a big jump in shipments and the first turning of the employment component from positive to negative in a year. But while this was great news, the regional index that gets most of the attention is the Philadelphia Fed’s manufacturing index, given the concentration of industry in the region. The Philly index is considered more of a bellwether.
In September the index was looking good at 14.1 after a couple of months of positive numbers. But in October it fell to 11.5 – lower than expected – suggesting the road to US economic recovery is indeed going to be a bumpy one, as the Fed keeps telling us.
Results and data thus made for a bumpy ride on Wall Street last night as well, with only a late buying surge sending the Dow up sharply to its close. The Nasdaq remained steady on the session given anticipation of three big results releases after the bell.
First came Google, which had the Nasdaq cheering (I say that metaphorically – the Nasdaq is an electronic exchange) in posting an earnings per share of US$5.89 against expectation of US$5.42. Revenue came in at US$4.38bn against US$4.24bn, and other elements of the result breakdown were also positive. Google shares are up 2.7% in the after-market.
Then came the mighty IBM, which is a Dow component. Its result also beat the Street, with an EPS of US$2.40 to US$2.38 expectation and revenue of US$23.6bn to US$23.4bn, but Wall Street now wants more. Tech stocks have been heavily bought up in the rally so a close-to-the-mark result is no reason to be excited, and IBM shares have fallen 3.4% in the after-market.
Finally it was the turn of Intel rival Advanced Micro Devices, which lost US18c per share. But Wall Street was expecting a loss of US42cps from the chip-maker, so this was actually a very good result. Revenue came in at US$1.4bn to an expected US$1.26bn. But once again, the Street had been over-excited in the lead-up. AMD shares are down 4%.
So there’s not a lot there to definitively suggest how Wall Street might open tonight, nor how Australia should trade today. Tonight sees results from Dow components Bank of America and General Electric, and industrial production and consumer confidence numbers are released.
Elsewhere in the market, a US dollar which closed not much changed, albeit after some intra-session volatility, meant a breather for gold. It fell US$13.80 to US$1049.00/oz, suggesting profit-taking after the solid run. The London base metals markets were described as “nervy”, falling early on a weaker Wall Street but rebounding later to post virtually unchanged results across the spectrum.
The Aussie dollar is up half a cent over 24 hours to US$0.9195, although it was trading above 92 locally yesterday following a hawkish speech from RBA governor Glenn Stevens.
The SPI Overnight added 17 points or 0.35%.
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