Daily Market Reports | Oct 22 2009
 By Greg Peel
The Dow closed down 92 points or 0.9% while the S&P lost 0.9% to 1081 and the Nasdaq lost 0.6%.
It was shades of October 2008, in which Wall Street feared the “three o’clock wave”. At 3.15pm, the Dow was up 34 points. By 4pm, it was almost down 100. In 2008 it was all about managed fund redemption selling. This year it’s a different story.
Just before 11am, the Dow was up 78 points. Stocks rose on a combination of well-received earnings reports from Yahoo (the night before), Wells Fargo and Morgan Stanley, and a weaker US dollar.
The dollar set the tone for early trade following the release of the minutes of the recent Bank of England monetary policy meeting. They revealed unanimous agreement that no changes should yet be made to the BoE’s 175bn pound asset purchase plan (quantitative easing), and that drove the pound 1.5% higher against the dollar.
Dow component Boeing posted its earnings result. Boeing decided this quarter to take a big hit on write-downs based on the delay of its 787 Dreamliner roll-out, thus turning last year’s US96c third quarter earnings per share into this year’s US$2.23 loss. Wall Street had expected a loss of US$2.12. The company subsequently reduced 2009 guidance from its original $4.70-5.00 per share to US$1.35-1.55. Boeing shares closed down 2.5%.
Morgan Stanley posted a similar result to its main rival Goldman Sachs, revealing earnings of US38c per share to Wall Street’s US27c estimate. Once again it was all about making money out of trading in a volatile environment, along with underwriting profits. Morgan shares were up 5% at their peak.
Wells Fargo similarly posted US56c to the Street’s US37c, but this time traditional banking was behind the earnings jump. Wells Fargo’s acquisition of Wachovia last year introduced a whole new mortgage business. But the trend among the big commercial banks this season – JP Morgan, Citigroup, Bank of America – has being ever growing loan losses. In the third quarter ’08 Wells posted loan losses of US$2bn. In the second quarter ’09 it posted $4.4bn. And in the third quarter ’09 it posted US$5.1bn, or 2.5% of the loan book.
Wells’ management nevertheless attempted to put a more positive spin on the situation than its aforementioned counterparts. It suggested loan losses would peak in 2010, and credit card losses perhaps would peak early in 2010. Wells shares initially rose 2%.
So the early trade was clearly to the positive side. But the tide began to quietly turn after the Fed released its Beige Book.
The Fed’s monthly survey of its twelve regions revealed that 10 of the twelve were experiencing a recovery in economic activity. This news was initially well received. Beige Book results have been quietly becoming more positive as the year has progressed, but given the stock market has priced in a V-shaped recovery, Wall Street was not thrilled to read the Fed’s qualification this month. “Reports of gains in economic activity generally outnumbered declines,” the Fed noted, “but virtually every reference to improvement was qualified as either small or scattered”.
As traders absorbed the guts of the report, Wall Street gains began to wane. But the US dollar was still dropping fast, sending its index below the psychological 75.00 mark for the first time in a year. Having met resistance on Tuesday, the euro punched through US$1.50.
The day-session for oil on the Nymex ends at 2.30pm, and at that point the US dollar index was still below 75. Oil settled up US$2.25 to US$81.37/bbl – it’s first close above US$80 in this run (note that we rolled into the December delivery contract last night). Aiding oil’s rise was another weekly drop in US gasoline inventories, more than the analytical dart-throwers had expected, and it was again all to do with refinery maintenance shut-downs and nothing whatsoever to do with rising demand.
I have mentioned on odd occasions in this Overnight Report that 2009 has been very different to 2008 with regards to oil. In 2008, as oil pressed ever higher towards its ultimate US$147 peak, each up-day was met with a down-day in stocks. Energy is the major input for all industry, and higher oil simply means higher costs and lower margins. But in the stock market rally that began in March, oil was rising from its low point of US$32. Each rise was seen as a return to demand, particularly from China, and thus a healthy economic signal, so each time oil rose, the stock market rose.
At some point, however, enough would have to be enough. The question was: At what point does a higher oil price stop being a healthy economic signal and start becoming an economic drag?
Well I think we can answer that now – US$80/bbl. As soon as oil pushed meaningfully above 80 last night, the stock market lost its drive. A 78 point Dow rally began to ease back to only 34 points by 3.15pm.
And then at 3.15pm, a bank analyst report hit the net. One of the more respected Wall Street bank analysts, Dick Bove, had downgraded Wells Fargo to Sell on the back of its earnings report, citing a “serious erosion in loan quality” in the quarter. Suddenly all banks, which had been leading the rally on the day, turned tail.
The indices fell like a stone and the Dow passed back through 10,000. Wells Fargo had been up 2% and closed down 5%. Citi, B of A, JP Morgan and Goldman Sachs all closed down 2-3%. Morgan Stanley shares slipped back from their high. But the selling was nevertheless widespread across sectors.
In the last half hour of trade, the dollar index crept back up to close at 75.04. The euro has pulled back and is sitting on US$1.50. Gold had peaked at around US$1064 but is back to US$1057.10/oz, up US$2.35. The Aussie is up half a cent to US$0.9270 over 24 hours, but was trading above 93 at the dollar’s nadir.
London base metals markets make their final “kerb-side” settlement at 7pm local, or 2pm New York time. Thus overnight metal price moves reflect the US dollar at its low point and have missed the late Dow retreat. Copper rose 4% to close above the important US$3.00/lb mark. Aluminium jumped 2%, nickel 4%, zinc 5% and lead 7%.
Metals were also boosted by a report from the World Bureau of Metal Statistics. The report noted that while inventory levels at LME and Shanghai warehouses remain high, actual production/consumption levels in the eight months to August have swung significantly back in favour of consumption compared to the same period last year. This just goes to show that last year’s commodity price peaks were very smoke and mirrors, and basically US dollar-related. This year has seen actual buying (as we know, from China in particular). But of course the question still remains as to whether the stockpiles will be used up quickly or not. And we are now back in US dollar-related buying mode.
Returning to Wall Street, mention must also be made of the VIX volatility index. It traded to a 14-month low of 20.10 last night, and as often noted in this report, Wall Street considers a number under 20 to be a harbinger of complacency and a possible indicator of a market top. The late market plunge nevertheless sent the VIX back to a close of 22.36.
So to sum up what was a very interesting night on Wall Street: The S&P 500 traded to just over 1100 before pulling back; the US dollar index fell below 75 before pulling back; the euro passed through US$1.50 before pulling back; the VIX hit 20 before pulling back; oil hit US$80/bbl before the stock market pulled back; the Dow fell back through 10,000..
Toppy?
The SPI Overnight fell 33 points or 0.7%.
After the bell, US pharma leader Amgen posted an EPS of US$1.49 on revenue of US$3.81bn, against expectations of US$1.27 and US$3.79bn. But it was not enough for a now nervous Wall Street, and Amgen shares are down 3.5% in the after-market.
Ebay also reported after the bell, and its numbers were US38c on US$2.24bn against US37c on US$2.14bn. Looks good enough, but Wall Street did not get as good an upgrade to guidance that it expected, and eBay shares are down 5.5% in the after-market.
Tonight sees reports from 3M, AT&T, American Express, Amazon, Xerox and possibly McDonalds. But stand by today in Australia for the release of China’s third quarter GDP. The consensus forecast is for 9% growth.
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