Daily Market Reports | Oct 23 2009
 By Greg Peel
The Dow rose 131 points or 1.3% to return above 10,000 while the S&P gained 1.1% to 1092 and the Nasdaq added 0.7%.
It was simply a one-way Street last night, recovering all the losses of Wednesday and some. The disparity of gains from the Dow through to the Nasdaq reflected a welter of well-received Dow-component earnings reports offsetting a poor result from eBay announced after the bell on Wednesday.
Among the Dow components, Travelers quadrupled its profit from last year and raised guidance, AT&T’s earnings were boosted by its iPhone deal but revenue was down on last year, Merck tripled its profit following its acquisition of Schering-Plough, 3M beat on earnings and revenue, and McDonalds beat on earnings and suggested same-store sales would remain positive.
Discretionary clothing retailer J-Crew blew the Street away when it beat on both earnings and revenue, demolishing the belief that consumer discretionary is a sector to avoid in a high unemployment environment. Its shares jumped 15%.
J-Crew provided a boost for the discretionary sector while Wal-Mart also provided impetus for consumer staples. Wal-Mart announced its expectation that 2009 sales would ultimately rise by 1-2% while 2010 sales would rise by 4-6%. Wall Street liked the news, but has now seemed to overlook a declaration from Wal-Mart earlier in the week that it would be slashing prices ahead of Christmas to get those sales numbers up. This is the sort of talk that puts the fear of God into Wal-Mart’s competitors which, given the sheer range of Wal-Mart lines, is a very big pool.
But it wasn’t all beer and skittles. Earnings reports from Black & Decker and Potash included downbeat assessments of sales figures moving forward, while United Parcel Service suggested it was preparing for a grim Christmas. As a parcel service, UPS is a good bellwether for the state of the economy.
Wall Street also overlooked this week’s new jobless claims number. Economists had pencilled a rise of only 1,000 new claims but the figure came out at 11,000. Prior to reporting season Wall Street was very jumpy about jobless claims, although a very slight drop in the four-week average and a 98,000 fall in continuing claims to 5.92m were more encouraging signs. These figures are, of course, highly volatile.
Better news was provided by the Conference Board, which noted its index of leading economic indicators rose 1.0% in September compared to 0.4% in August and against a 0.8% expectation. The rate of index growth in the six months to September was 5.7% – the strongest since 1983. But economists were nevertheless circumspect, noting the 5.7% average suggests annual GDP growth of 8%, and America just ain’t China. Free money and other Fed measures are no doubt distorting the numbers, economists suggested, while clearly unemployment is still acting as a drag.
The US dollar continued its slide early in the proceedings against the European currencies, but recently it has picked up a bit of ground against the yen. If you consider the mid-point of the Fed’s current cash rate range to be 0.125%, Japan’s rate is 0.1% so in theory it is still the carry trade winner. The US dollar index began higher but waned as the day progressed, forced down by a rising stock market. It finished only a tick higher at 75.07.
With the dollar index as good as unchanged the Aussie was also as good as unchanged at US$0.9272, while gold ticked up US$1.80 to US$1058.90/oz.
When the dollar was stronger earlier in the session, oil fell to US$79.84/bbl to perhaps reinforce the notion that US$80 is a bridge too far. But as the dollar fell back oil rallied once more, closing down only US12c to US$81.84/bbl.
As we recall from yesterday, base metals had closed in London prior to the late sell off in the Dow and the subsequent rebound in the US dollar. Thus Wednesday’s big gains were set to be trimmed, but a strong US stock market helped metals maintain their levels. Copper fell 1% and lead and nickel 2% but the others were little changed.
The VIX volatility index fell 7% last night to 20.69, remaining above Wednesday’s low of 20.10, but still threatening to drop into the “complacent” teens.
US bonds have been notably ticking back up in yield of late, with the ten-year reaching 3.45% last night having been under 3.20% only a couple of weeks ago. Next week sees yet another round of record US Treasury bond auctions – a greater volume than economists were expecting. This is creating some nervousness in Bond Land.
A rather interesting statistic which has come to light is that of 2009 US domestic money flows. We note that the stock market has soared, but bond prices also remain elevated, which is not how the two investment options usually relate. They usually move in contrast. But figures show that on a net basis, money flows in stocks have remained steady in 2009 while flows into bonds have increased considerably. This seems to belie a soaring stock market, and is a good challenge for the “so much cash on the sidelines” argument.
The stock market bulls have assumed that levels of money still held in the supposed parking lot of cash investments must eventually have to find its way into the stock market, albeit at a late hour. However, net investment flows suggest Americans have learnt a lesson from their own greed of 2004-2007 and decided that an old-fashioned balanced fund – one based on a conservative mix of equity, fixed interest and cash positions – is in retrospect a more sensible bet than chasing risky bull markets with overweighted equity portfolios. Once bitten, twice shy. Thus it would seem many battle-weary investors have opted to reweight back into Treasury bonds in particular, and may well remain in cash accounts as well.
A more conservative (with a small “c”) America going forward?
Although the Australian stock market showed little reaction to yesterday’s fall in the Dow (mostly because of metals) the SPI overnight jumped 41 points or 0.9% last night.
That was all the before-the-bell news. The after-the-bell news was somewhat spectacular.
If virtual auction house eBay’s poor result yesterday challenged economic activity in cyberspace, virtual bookshop Amazon’s late result today spun all of that around. Amazon posted earnings per share of US45c on US$5.45bn revenue against Wall Street expectations of US33c on US$5.03bn. If you think that might be a good “beat”, note that Amazon shares are up 12% in the after-market.
Credit card leader American Express (if you can call Amex a credit card) also beat expectations, posting US54c on US$6.0bn against expectations of US38c on US$5.92bn. That might look like an even better “beat” but revenue only slightly beat and earnings of US54c were down from US74c in the same quarter last year. Amex shares are only up 1% in the after-market.
Tonight in the US brings us earnings from Microsoft and Honeywell, while the UK will release its first estimate of third quarter GDP, potentially impacting on the US dollar.
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