Daily Market Reports | Apr 17 2012
By Greg Peel
The Dow rose 71 points or 0.6% while the S&P was flat at 1369 as the Nasdaq fell 0.8%.
This is probably a good time to recap and note that the Dow Jones Industrial Average is a non-weighted price average of the 30 “top” US stocks, as determined by the Dow Jones company, while the Nasdaq is a market-cap weighted index of the top 100 stocks listed on the Nasdaq, and the S&P 500 is a market-cap weighted index of the top 500 stocks listed on either the NYSE or the Nadaq, as determined by Standard & Poor's.
As is the case with the local S&P ASX 200 and other indices, on a regular basis the publishers periodically undertake promotion and relegation of stocks in both the Nasdaq and S&P 500 to reflect market movements, M&A etc. Dow Jones alters the make-up of its average very rarely by comparison. The last Dow Jones rejig came after the GFC when Citigroup, for example, lost its mantle. (Citigroup posted a mildly decent earnings result last night, by the way.)
Since that last change, Apple's share price has risen parabolically to take over the Dow's largest cap Exxon and currently represents around 25% of the cap weighting of the Nasdaq 100. Its influence in the wider S&P 500 is significant but more diluted. Despite now being the biggest stock in the world, the tag “blue chip” will probably not sit comfortably with a tech stock which can be notoriously volatile, survives in a somewhat intangible sector of technological development, and can live or die by its next innovative product or the innovative products of its competitors. Microsoft made it into the Dow a while back, where otherwise the tech names include hardware makers like Intel and IBM and more a tangible database management software firm in Cisco. Google is not in the Dow. Will Apple soon have to be included, or will Dow Jones resist? And next month sees the listing of Facebook – a company which could list at a cap of US$100bn.
What does this all mean for the Australian market? Well not a lot, considering we don't have our own big tech names. But it does mean local investors have to be more considered in drawing conclusions from overnight moves on Wall Street. With Apple having run up over 50% in value this year alone, the suggestion now is that in the vacuum left by the release of the iPad 3, and no sign of a new product for many months, one can now diversify into the broader US market by using Apple profits for funding. For no particular reason other than it ran too far in a short period, Apple shares have now been down five sessions in a row for an 8% fall.
While “the Dow” dominates the media's interpretation of Wall Street moves, US fund managers dismiss the average as an anachronism and follow the broader S&P 500. The conclusion last night would thus be that Wall Street was flat, but one cannot dismiss this notion that traders are looking to buy blue chips (Dow up 0.6%) and the S&P is only flat due to this Apple profit-taking/funding effect. The Dow was up as many as 137 points last night.
The impetus for the ex-Apple positive mood was a lot to do with the release of the March retail sales figure, which showed a third straight month of good gains with a 0.8% rise. Consensus had 0.4%. There is now a lot of debate on Wall Street, however, on the impact of the unseasonably mild winter which has held on all the way to spring. This has had Americans out shopping when they would otherwise have stayed home snowbound, rather stuffing up the effect of seasonally adjusted data.
The data suddenly look very good because they are otherwise adjusted up to compensate for the winter effect and smooth the trend, so now the fear is 2012's data have been “front-loaded” and we're about to see quite a correction in spring. Sell in May? And it's not just retail sales. Many solid US economic data readings have been “blamed” on the weather, including the jobs data, and even the Fed has voiced its caution. The fear then is that America's apparent solid economic recovery is all a bit of a furphy and not quite as solid as assumed. Witness last night's release of the monthly housing sentiment index. This index rose five straight months to February and reached 28 – its highest level since June 2007. But in March it fell to 25.
Spring is typically the best season for home sales, but in the US it was spring all winter. More “front-loading”? Wall Street is beginning to get a little worried. And last night the zero-neutral Empire State manufacturing index fell back to 6.6 from 20.2 last month.
Oh and by the way, the housing sentiment index is 50-neutral.
Spanish bonds yields are the global focal point du jour and they pushed above 6% last night, only to meet some bond buying interest and see a slight easing at the death. Perhaps bond vigilantes are happy to cover their shorts over 6% on a belief a certain central bank might be forced to step in above that line in the sand. Fear over Spain is mixed across the globe, one might say, with the fact Spain is the fourth biggest economy in the eurozone being offset by the fact its debt-to-GDP ratio is not nearly as bad as that of Greece and the other basket case peripherals.
That hasn't stopped the renewed popularity of US bonds which only a month ago were no-go zone. From over 2.40%, the US ten-year bond yield is now back to 1.97% with Europe writ large in the minds of the buyers. Yet the VIX continues to hang in there under 20, at 19 last night.
The US dollar, meanwhile, has simply been bouncing back and forth in a range with the index never getting much past 79 either way. Last night it was down 0.4% to 79.53, while the Aussie slipped a tad to US$1.0353. Gold fell US$5.80 to US$1652.10/oz despite the weaker US dollar, but that might have had a bit to do with oil.
As is now well understood by most, the reason West Texas crude has been trading that much cheaper than Brent crude is because it is stranded in Oklahoma where limited storage is pushing up storage costs. West Texas crude cannot reach the Gulf refineries or ports unless it's expensively trucked. Hence Brent has become the world oil price benchmark, and it is more directly impacted by potential Iranian export sanctions.
Fresh negotiations between Iran and the US now seem to have eased some of the tension. As a result, a request has been made for the planned pipeline reversal – that which take West Texas to the Gulf instead of Gulf oil to Oklahoma – be brought forward by several weeks. On anticipating of such move, the West Texas-Brent price spread crashed last night by 15%. Brent fell US$2.53 to US$118.58/bbl for the new June delivery month and West Texas rose US30c to US$103.13/bbl, still in its May delivery month.
If the oil price gap can close with Brent easing rather than West Texas rising, then relief is provided for the global economy.
The SPI Overnight was up 9 points.
Stand by today for the release of the RBA minutes.
All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit. Click here.
All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.
