Daily Market Reports | Apr 20 2010
By Greg Peel
The Dow rose 73 points or 0.7% while the S&P rose 0.5% to 1197 and the Nasdaq remained flat.
As I write there has just been an alert from UK air traffic control that a fresh and substantial ash cloud has just spewed forth from the Iceland volcano and is drifting towards Britain. The news comes after European markets closed in the knowledge authorities had been ready to begin allowing flights from tonight. One presumes this will no longer be the case.
While arguments rage over whether it is or isn't safe to fly a jumbo through volcanic ash, it is clear that predicting an end to the volcanic disruption of global trade will be as easy as saying Eyjafjallajoekull.
Not that Wall Street seems to care. While acknowledging weakness in airline stocks in last night's session, no commentary from the mainstream US financial media has centred on the trade impact of the volcanic shut-down or any implication for the US economy. Indeed, all attention in the US last night was focused on the case against Goldman Sachs.
Wall Street seized upon the revelation that the SEC committee voted 3-2 to pursue Goldmans, being three Democrats to two Republicans (blow me down). The fact that the decision was not unanimous suggested to traders the case against the bank-that-runs-the-world was not particularly strong. Analysts have pored over the original offer document for the CDO investment in question and found substantial disclosure on Goldmans' part, including warnings of potential conflicts of interest with the bank's own trading activities.
Wall Street is also suspicious of the timing of the fraud charge announcement, coming, as it did, at a time when the government is looking to push through tougher financial sector regulation legislation and the SEC itself is under scrutiny for its failure to foresee the risks which led to the GFC. One could be forgiven for assuming the government is simply trying to fire up even greater public anger at the already much maligned investment banking community in order to coerce more Congressional support for strict regulation.
What ever the realities, it is still a given that this case will not be resolved quickly and that, to quote respected trader Dennis Gartman, where there is one cockroach there will always be many more. In other words, this particular fraud charge will likely not be the only case brought against a financial institution.
So to some extent it was back to business as usual on Wall Street last night. Volume was again strong, with 1.3bn shares turned over on the NYSE compared to 1.8bn on Friday night and the recent average of around 800m. While Goldman shares enjoyed a cautious 1.6% bounce after their 13% drop on Friday, the star of the night was Citigroup with a 7% jump on heavy turnover.
Last night Citi reported US15c earnings per share on revenue of US$25.4bn when Wall Street was expecting a flat EPS on revenue of only US$20.8bn. It was a substantial beat and featured a big drop in loan losses.
The subsiding fear over Goldmans and the Citi result allowed the financial sector to bounce last night, sending the S&P up 0.5%. The big blue-chip sell-off on Friday was also dramatically reversed as exhibited by the 0.7% bounce in the Dow. Tech stocks were nevertheless not in the frame, and the Nasdaq remained steady as it awaited the scheduled after-market earnings report from IBM (which is also a Dow component).
On the economic front, economists had expected the Conference Board measure of leading US economic indicators to increase by 0.9% in March but instead it increased by 1.4%. This suggests an acceleration of growth in the months ahead. It also suggests more pressure on the Fed to raise rates.
Aside from the strong March figure, the February figure was revised from a 0.1% drop to a 0.4% gain and the January figure from a 0.3% gain to a 0.6% gain. I invite any economist to explain to me the concept behind revising previous leading indicators. Is it not the same as changing your footy tips after the final whistle? And it must also be considered that one of the significant leading indicators used within the leading index is the stock market itself, which had a strong March. This implies that if you buy stocks because of the leading index, you are buying stocks because the stock market went up.
As at last week we were expecting news on the Greek front last night, given the Greek government had requested a meeting in Athens with officials from its rescue team – the EU and IMF. Well that meeting has been postponed until Wednesday given none of those officials can get to Athens at the moment, and given the new eruption, who knows when. In the meantime, Greek ten-year bonds have blown out another 21 basis points. And one presumes the volcanic disruption is doing little for Greece's economic fortunes given tourism is a significant contributor to Greek GDP.
The US dollar index ticked up a bit last night to 80.92 as the Goldmans fear supposedly subsided. Gold fell US$1.60 to US$1135.20/oz.
Base metals opened weaker in London but recovered ground later on the Wall Street bounce. Nickel came back with a 1.3% rebound but aluminium was weak, falling 2.3%.
Oil saw another big drop, down 2% or US$1.79 to US$81.45/bbl for May delivery. The news wires are citing “ongoing jitters about Goldman Sachs” for the decline, but this is contrary to the response in other markets. I would suggest a certain consideration for the oil market at present is the amount of avgas not being burned as compared to normal consumption levels.
The Aussie was little changed at US$0.9241 while the SPI Overnight rebounded 33 points or 0.7%.
After the bell on Wall Street, IBM reported earnings per share of US$1.97 on revenue of US$22.9bn against expectation of US$1.93 and US$22.75bn. It was a “beat” but the important number within the result is considered for IBM to be gross margins, which were a little disappointing. IBM shares are down 2% in the after-market.
Look out for the RBA minutes today and then on Wall Street interest will kick off with a before-the-bell earnings report from everyone's favourite – Goldman Sachs.
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