Daily Market Reports | Oct 29 2009
This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB
By Greg Peel
The Dow fell 119 points or 1.2% while the S&P fell 2.0% to 1042 and the Nasdaq tanked 2.7%.
It was the fourth down-day in a row for the broad market S&P 500, which has now fallen 5% from its high. Traders were pleased the index held up above the technical level of 1060 at the close on Tuesday, but it crashed through last night to take out the next level as well at 1050. The last two sessions exemplify why the S&P is the trader’s indicative index of choice, given its greater diversification than the 30-stock Dow average and tech-laden Nasdaq.
On Tuesday the Dow held up against a fall in the S&P and a big fall in the Nasdaq largely due to one large-cap in IBM, which announced a doubling of its share buy-back. Last night the Dow showed that some of the biggest stocks on the NYSE are defensives, including the likes of Coca-Cola, Wal-Mart and McDonalds. That is why the Dow did not fall as hard as the S&P, and why the Nasdaq really took a beating for the second day. Cyclical stocks – those for which earnings are closely linked to the fortunes of the economic cycle – always run higher in rallies and fall further in corrections. Sector examples are financials, materials and tech, which are currently under a good deal of pressure. Defensive stocks have also been weaker, but not by nearly as much.
So is this the correction we’ve been waiting for? As I’ve said often enough in the last few months, courageous is the man who calls the correction. It is noteworthy that during the 60% rally from March, small pull-backs have occurred at the end of every calendar month to an average of about 4%, as funds square-off their books. Tomorrow is the end of October trading. At 5% this pull-back is now beating the average, but it’s still a big call to get to 10% – the arbitrary “definition” of a correction.
Further weakness was fuelled early last night on the release of the September new home sales data. Seasonally adjusted sales totalled 429,000 in August, and economists were expecting a rise to 440,000 in September. Instead, sales fell to 402,000 – down 3.6% – and the August number was adjusted back to 417,000. This was the bad news, and new home sales remain down 7.8% for the year.
The good news, however, is that the median sale price rose 2.5%, which is consistent with Tuesday’s Case-Shiller number, albeit still down 9.1% over twelve months. (Read it and weep Australia: the median price for a house in the US is US$204,800.) The very good news is that the inventory of new homes for sale was down to 7.5 months’ worth – the lowest level since 1982. However, lower new home inventory at this stage of the game is indicative of a building industry which shut up shop. There is still a much greater inventory of existing homes up for sale.
The drop in new home sales is again indicative of a first home-buyer tax credit scheme which has only another month to run, barring extension. Can Obama afford an extension?
Interestingly, back in August Goldman Sachs’ economists decided government stimulus was having a greater impact than they first thought, so they upgraded their third quarter GDP forecast to an annualised 3.0% increase. Last night, however, the same economists decided to downgrade once more, pulling back to 2.7%. Consensus remains around 3.2%, and the figure is released tonight.
Goldmans made its move following the release last night of the durable goods orders numbers. That number actually rose 1.0% in September as expected following a surprise 2.6% drop in August, but remains down 24.1% over the year. While Goldmans was heartened that the rise was not just about defense and transport orders, which can shift the number dramatically with their size, the economists noted that shipments for non-defense capital goods were somewhat weaker. This was the trigger for their GDP downgrade.
Weaker home sales and a GDP downgrade were themselves clear triggers for more buying of the US dollar. This is the irony of the current situation, in which a weaker economy counterintuitively causes a rise in currency. But at a zero cash rate the US dollar is the “carry trade” currency of choice, followed closely by the yen, such that investors borrow in dollars and invest in risk assets such as stocks, commodities, and emerging markets. Now that we are having another risk aversion episode, those investments are being unwound and the dollars paid back, sending the currency higher. The US dollar index rose for the fourth consecutive session last night, up a third of a percent to 76.45.
And this time commodities really took a beating. Copper and lead were down 2%, aluminium fell 3%, nickel and tin fell 4% and zinc fell 5%. Silver fell 3%, and gold fell 1% or US$11.70 to US$1027.30/oz – significant in that it broke back down past the 2008 high of US$1033.
And lo and behold, blow me down, cut my legs off and call me Shorty. Weekly gasoline inventories actually increased when analysts had expected a decrease. I’ve lost track now of how many weeks in a row analysts have not just been wrong, but been completely in the wrong direction. If you were a short-term oil trader, playing against weekly analyst expectations would be money for jam. Oil fell 2.6%, or US$2.09, to US$77.46/bbl.
Given all of the above the Aussie lost its bottle last night, falling almost two cents to US$0.8976.
We mustn’t forget that we are still in the midst of US earnings season, and the results keep flowing in. Last night Goodyear added to weakness by actually downgrading its fourth quarter guidance, citing weaker sales expectations. Coal miner Massey also warned of weakness ahead. Results to date have mostly beaten analyst expectations in both earnings and revenue, but in terms of US dollars, revenues are only slightly above expectation and on face value down around 7% from the third quarter 2008. This is not the stuff of major recovery. Notably Alcoa, which kicked off the season on a positive note by easily beating estimates, is now down 20% from its high.
The question now is: Where is that “cash on the sidelines”. At what point does it kick in? Or will we get a “real” correction this time?
One thing is sure – Treasury bonds have regained their appeal. The second big auction for the week also went off without a hitch last night as the government comfortably put away US$41bn in five-year notes. The benchmark ten-year yield fell by another 4 basis points to 3.4%.
The SPI Overnight was down 80 points or 1.7%.
Tonight is “anything could happen” night as we watch the first spin of the US GDP wheel. A number in the twos could well see a true correction upon us. A number in the mid-threes might just stem the tide. Place your bets.
Following an in-line result from National Bank ((NAB)) yesterday, ANZ ((ANZ)) reports today.
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