Daily Market Reports | Oct 21 2009
 By Greg Peel
The Dow closed down 50 points or 0.5% while the S&P lost 0.6% to 1091 and the Nasdaq also lost 0.6%.
The stocks/dollar dichotomy was again the feature last night on Wall Street. Early in the proceedings the US dollar was weaker, such that the euro traded up to the psychological level of US$1.50. But this is a strong resistance point and the euro failed to push through, bringing sellers (dollar buyers) into the market. Interest now surrounds whether or not the dollar can hold US$1.50 against the euro, for a breach of that figure should see a quick burst up to the 2008 high of US$1.60. However, one suspects the European Central Bank might be forced into action were such a breach to occur.
With the US dollar bouncing, stocks also began weak on Wall Street following the release of the September housing starts data. Net starts rose a flat 0.5% to an annualised 590,000, disappointing economists who were looking for a figure of 607,000. Single-family home starts rose 3.9%, but multi-family (apartment block) starts fell 15.2%, reflecting the influence of the new home-owner tax credit stimulus.
Housing starts are now up 21% from their trough in January, but have been relatively flat for the last four months. There is a building groundswell of support for the government to extend the tax credit stimulus package beyond the scheduled end-November expiry. On a year-on-year basis, starts are actually down 28.2%, reflecting a near 70% plunge in new apartment blocks. Building permits – the step before housing starts – fell 1.2% in September, thus emphasising a belief that extended stimulus is now essential.
Wall Street was thus off to a poor start, ignoring Apple’s stellar result released after the bell on Monday. (Apple finished up 5%.) Next up was the release of the September producer price index.
Economists expected the headline PPI to fall 0.3%, and the core (ex-food and energy) PPI to rise 0.1%. Instead, the headline fell 0.6% and the core fell 0.1%. This compares to a 0.2% rise in the consumer price index (CPI) noted last week. The drop in the headline was attributed to lower energy prices in September from August (they will be higher again in October), but the drop in the core suggests deflation, rather than inflation, is still presenting a risk to the US economy.
The result provides every reason for the Fed not to be forced into raising its cash rate any time soon – which is exactly the Fed’s stance. Bernanke has long suggested that slack in the economy (idle capacity and unemployed labour) ensures wage-price inflation is no threat whatsoever. This does not, however, discount the possibility of a rate rise brought about by monetary inflation if the dollar continues to slide lower, but as suggested above, the ECB and also the Bank of Japan are likely to step in to support the US dollar and crimp their own currency rises before the Fed is forced into any desperate measures. The rising euro and yen are hurting European and Japanese exports.
It was a big night for earnings last night, with the “Dow Five” of Caterpillar, Coca-Cola, DuPont, Pfizer and United Technologies all reporting.
Analysts had expected Caterpillar to post third quarter earnings per share of US6c on revenue of US$7.47bn, but instead it posted US64c on revenue of US$7.29bn. It was a big beat on the bottom line, which was put down to cost-cutting and tax credits, but a miss on the top line, given sales fell over 50% in the quarter. Guidance was upbeat, and this quarter’s EPS expectations were raised, so Caterpillar shares finished the day up 3%.
Coca-Cola’s result closely matched estimates on the earnings line, but revenue of US$8.04bn missed estimates of US$8.11bn and the stock was punished – down over 1%. DuPont shares fell 2% after Wall Street recognised cost-cutting as behind a decent earnings result, and company guidance was lowered.
Pfizer’s shares were steady after the company beat on both earnings and revenue, but cited aggressive cost-cutting. United Technology shares were also steady as its results came in around expectation.
In every case, earnings and sales were down on the same quarter last year, highlighting the fact that share prices respond not to nominal results, but to comparison of results and estimates. But as a group the results were mixed at best. With 20% of the S&P 500 stocks now having reported, 79% have beaten on the earnings line and 65% on the revenue line. However, cost-cutting has again been behind earnings results and revenues, while net better-than-expected, have only seen net actual dollar results above estimates of 0.7%.
In other words, the results are not spectacular so far. Cost-cutting can only last so long.
The next highlight of the night was the decision by the Bank of Canada not to follow Australia’s lead and raise its cash rate. While most economists expected the BoC to remain on 0.25%, the US dollar still rallied further in the knowledge that Australia remains the lone stand-out among the commodity producers. The US dollar index ultimately rose 0.3% to 75.60, and the Aussie fell half a cent to US$0.9222.
So it was a standard reversal session of US dollar up and stocks down, with 80% of the S&P 500 still to report over the coming weeks.
Oil briefly hit US$80 early in its session, but ultimately ended an eight-day winning streak by falling US52c to US$79.08/bbl on the stronger dollar. The greenback was also behind falls in base metals, with aluminium, copper, nickel and tin all falling 1-2%. Lead and zinc were steady. Gold was off US$7.35 to US$1054.75/oz.
It was not all a one-way street for stocks however, as the Dow recovered from a 100 point drop at midday when the dollar’s rise stabilised.
The SPI Overnight fell 17 points or 0.4%.
After the bell on Wall Street, Yahoo posted a result of US13c earnings per share against US7c expectation. Yahoo tripled its profit compared to the third quarter last year, but revenues fell for the third consecutive quarter. Yahoo shares are nevertheless up 3% in the after-market on the earnings win.
Tonight sees results for Boeing, eBay, Amgen, and the two big banks Wells Fargo and Morgan Stanley.
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