Daily Market Reports | Dec 11 2009
 By Greg Peel
The Dow closed up 68 points or 0.7% while the S&P gained 0.6% to 1102 and the Nasdaq added 0.3%.
The tumbleweeds were rolling through the NYSE last night as operators were heads down over their crosswords or chatting in groups about the unseasonable cold snap. Volume barely registered, once again indicating that more and more funds are simply shutting up shop for the holidays, content to lock in their profits for the year. Exogenous shocks aside, this will probably be the scene for the next three weeks ahead of the new year. Santa’s also quite happy with his portfolio and is unlikely to attempt any late buying.
It will be back to business in January however, with a clean slate. The northern hemisphere only breaks briefly for Christmas while downunder the metaphorical tumbleweeds will roll through the ASX for the best part of the summer break. Stock analysts will hit the beaches ahead of the busy February reporting season.
Wall Street jumped on the open after the release of the October US trade balance. Economists had expected the trade deficit to widen – suggesting imports would outstrip exports – but the opposite was true as the deficit shrank 7.6% to US$32.9bn. A weak US dollar provided a fillip for US export industries while imports slowed to a trickle. The deficit for the calendar year has now fallen to US$304bn compared to US$611bn this time last year.
The trade deficit reduction is a two-edged sword. The US government desperately wants to reverse America’s propensity to overspend on imports at the expense of exports, which leads to a global imbalance with the traditional saving economies of Germany, Japan and China. It also wants the rest of the world to buy US goods. But while the fact this is actually happening is a good sign, the reason it is happening is not. The US dollar is weak because the cash rate is zero. The cash rate is zero because the US economy is weak. The fact that import demand has collapsed only indicates a lack of consumption.
In other words, the trade deficit is contracting because the economy is weak. What the US really wants is for the economy to strengthen AND for the deficit to contract as Americans keep a lid on their profligacy. At the moment one can safely assume an economic recovery will only bring a reverse into a wider deficit once more, just when the government is desperately trying to contain its own fiscal deficit.
Nevertheless, the Dow jumped over 100 points from the bell, despite the mood being tempered by a surprise jump in weekly jobless claims, albeit offset by a fall in continuing claims. That was the high for the day, and the remainder of the session was aimless.
In the early afternoon, the US Treasury auctioned US$13bn of thirty-year bonds and received a poor response. This came hot on the heels of Wednesday’s US$21bn auction of ten-years, demand for which was also lacklustre. Demand for three-years on Tuesday was a lot brighter, and the world just can’t get enough of short-dated bills. The thirties finished the day on a yield of 4.49%, and the tens are now back at 3.48%. The participation from foreign central banks in the long bond auctions has fallen to 40%.
This means we now have a spread from the one-month bills at 0.00% to the thirty-year bonds at 4.49%, or 449 basis points – a record. The traditional yield curve measure of the twos-tens is also at record levels at 273 basis points. This is again a two-edged sword. The steeper the yield curve, the greater the profit opportunities for banks which borrow short and lend long, eg borrow at the Fed’s 0-0.25% funds rate and lend into mortgages at a rate just under 5%. And America wants its banks to recapitalise. But it also implies that while the world and local investors are still happy to see US Treasuries as a safe haven investment, they are becoming less inclined to risk longer date investment and prefer to keep things short. The implication is fear of monetary inflation brought about by excessive government debt.
The US financial sector remained weak today as Citigroup finally announced it would attempt to raise US$10-15bn in new capital, diluting existing shareholders by 6%. This is putting downward pressure on the share price, although Wall Street is quite keen on the issue, noting institutional investors only hold 20% of Citi and this underweight position will need to be seen to. The fact that Citi will be using the money to pay back its TARP funds, subsequently allowing it to pay Christmas bonuses, doesn’t seem to bother anyone.
But Goldman Sachs might have put a spanner in the works of Citi’s bonus aspirations. Having copped the heaviest of criticism lately, America’s most successful former investment bank has shocked Wall Street by announcing last night it will pay its Christmas bonuses not in cash, but in “risk stock”. Goldman’s cowboys will receive a number of stock options based on an assessment of risk-weighted performance, not just absolute performance (meaning higher risk profits are not treated as favourably). The options will vest over a five-year period.
This is exactly the sort of bonus-system concession many cooler heads among the bonus critics have been calling for. Anyone who believes governments can cap executive pay by legislation is living in La La Land. The Goldman system ties executives to ongoing performance, not just periodic performance, and provides a risk tempering mechanism. The question now however is: Will this become the new model for Goldmans and everyone else into the future? Or is this a one-off PR exercise that will quietly be phased out as memories of the GFC fade?
Offsetting a weak financial sector last night was a surprisingly strong retail sector. Those traders left playing emerged from the subway in the morning into an icy cold, sparking them into expectations of a late season jump in winter clothing sales. Previously the US had experienced unseasonable Autumn warmth, affecting weak retail sales.
The US dollar index meandered during last night’s session before ending little changed at 76.05. Gold rose US$3.20 to US$1130.30/oz. Oil fell for its seventh straight session, down US13c to US$70.54/bbl after having traded below US$70 intraday. The big news in the energy space of late, however, has been the huge resurgence in the natural gas price. Natural gas had wallowed there for a while as oil flirted with US$80/bbl, but the aforementioned cold snap has seen a sudden big draw on gas supplies and the natural gas price jumped 8% last night alone. Natgas is up 18% since late November.
Base metals in London were once again quietly mixed, with only aluminium sparking interest. Another 1% rise has taken aluminium to a 14-month high, driven almost entirely by technical momentum trading.
The Aussie has jumped 0.8 of a cent over 24 hours to US$0.9168, which can be attributed to yesterday’s shock unemployment number and anticipation of further rate rises in the new year.
The SPI Overnight gained 26 points or 0.6%.
Stand by today for the release of China’s monthly economic data.
I would like to take this opportunity to wish my colleague – our esteemed editor Rudi Filapek Vandyck – a Merry Christmas and Happy New Year. Rudi leaves us after today for a well-earned break and will return in mid-January. Rudi’s popular editorial columns will go into hiatus for that period. For the next two weeks the FNArena ship will be competently steered by…oh dear…me.
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