Interdum stultus opportuna loquitur...

Monday, August 23, 2004

Pretty Mixed.

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The Federal Reserve's Open Market Operations desk performed an $8.25 billion overnight repurchase ("repo"); anyone who just looked at the headline would have thought "that should guarantee a decent rally... say, 6-8 points on the S&P".

However only $5.9 billion of that repurchase was in Treasury-backed collateral, and it is the T-backed number which gives the signal to "buy at midnight" (Australian time). An overnight repo with T-backed collateral in excess of $5 bill is the trigger, with the expectation of gain linked to the amount by which the T-backed repo exceeds $5bill. So a $0.9bill excess is only good for a couple of points.

And lo, the gain from buying at midnight was... 3 points over the ensuing 15 minutes. The "Repo Pump" continues to be the absolute best intraday indicator for the period from midnight to 1 a.m., Aussie time.

The only better intraday BUY signal is a TICK reading under -1000; these don't happen often.

The little spurt upward at midnight was all given back by 3:30 a.m., and the market closed well below its high (the S&P futurs closed 1.5 points above the low, which was set just before 5:30 a.m. Aust time). However the Nasdaq100 never revisited its pre-repo low - an indication of "beta chase rotation".

By the close, things looked pretty bland - which is not a great sign considering it was Monday and the herd forgets everything over the weekend.

The Dow Jones Industrial Average lost 37.09 points (0.37%), closing out the day at 10073.05 points; the broader S&P500 Index lost 2.67 points (0.24%), finishing the session at 1095.68.

A lot of the damage to the Dow was done by Wal-Mart (which lowered earnings forecasts); WMT dropped $0.85 (1.56%) to $53.80; because it has a relatively high share price (and because the Dow is share-price weighted) it had a marked impact on the Dow.

Multiplying the $0.85 share price decline for WMT by the (inverse) of the Dow divisor (0.1356 and a bit), WMT alone contributed about 6 points, or almost 1/6 of the decline in the Dow.

The price-weighting algorithm also hurt the Dow as a result of a steepish fall in United Technologies (one of the Carlyle Group's big holdings) which has the largest share price in the Dow and therefore the greatest weight. UTX shares fell by $1.12 (1.19%) to $92.90, and contributed 8.3 points to the decline in the Dow.

In fact between IBM, WMT and UTX, fully half of the decling in the Dow is explained.

In TechLand, where stratospheric PEs, excess capacity and a mature industry are no impediment to the faithful, the Nasdaq Composite eked out a gain of 0.68 points (0.04%), to close at 1838.7. Most of the buying was in the larger-cap stocks in the tech sector, with the Nasdaq100 Index adding 4.17 points (0.31%), to end at 1370.9 points.

I call this phenomenon "flight to trash"; when

  • the Nasdaq Composite outperforms the S&P; and
  • the Nasdaq100 outperfroms the Nasdaq Composite; and
  • the Semiconductor index outperforms the Nasdaq100.

The broader stock market measures lagged the blue-chip Dow: NYSE Composite Index lost 29.23 points (0.46%), closing at 6385.44, while the broadest measure of US equities, (the Wilshire Total Market Index ) dropped 33.5 points (0.31%), finishing the session at 10631.83

NYSE Volume was below average, with 1.03 billion shares crossing the tape. Nasdaq Volume was modest, with 1.22 billion shares traded. That's not too surprising given the time of year, with trading floors pretty sparsely populated

Bonds fell at the long end, with the benchmark US 30-year bond yield dropping 22/32nds, and its yield rising 0.041 points to 5.07%. The 10-year bond fared somewhat better, losing 11 ticks.

The market's subindices showed some quite interesting setups; Wal-Mart's earnings outlook was revised downward, citing slow back-to-school sales. This pressured consumer stocks, although not by as much as you might expect. Furthermore, computer stocks - like Dell, IBM and Compaq - were not adversely affected, and nor were the stocks that make inputs into PCs. Kind of odd when you consider that apart from the mythical "business upgrade cycle" the biggest period for computer manufacturers is the back-to-school retooling.

The Banks Index was a little soft, but not outlandishly so. It lost 0.18 points (0.18%), finishing the session at 97.48; within the index,

  • the Derivative King - JPMorganChase lost $0.10 (0.26%) to close at $38.55; and
  • Citigroup lost $0.13 (0.28%) to close at $45.82

The Broker-dealer Index was quite a lot weaker than the overall market, dropping 0.94 points (0.75%), finishing the session at 123.96; the ticket clippers lined up as follows -

  • Merrill Lynch lost $0.55 (1.06%) to close at $51.32
  • Morgan Stanley Dean Witter lost $0.10 (0.2%) to close at $50.20
  • Goldman Sachs lost $0.31 (0.35%) to close at $87.50
  • Lehman Brothers lost $0.52 (0.71%) to close at $72.62

The mighty mighty SOX (Semiconductor) index bucked the trend, continuing its bounce from a deep oversold condition. It added 4.09 points (1.06%), finishing the session at 390.09

  • Triquint lost $0.05 (1.18%) to close at $4.20
  • Micron Technology gained $0.20 (1.67%) to close at $12.16
  • Intel gained $0.27 (1.25%) to close at $21.89
  • Altera lost $0.15 (0.73%) to close at $20.45
  • JDS Uniphase lost $0.03 (0.94%) to close at $3.17

Other indices popular with the beta-chasers also outperformed the broader market, with the

  • Biotech Index lost 6.41 points (1.3%), finishing the session at 487.87
  • the Hi-Tech Index gained 2.78 points (0.66%), finishing the session at 424.92

What this seems to show is that so long as the market appears set to continue its little bounce, money mis-managers are prepared to rotate out of "utility-like" stocks (consumer stocks, cyclicals, and the like) and into "beta"... that is, riskier stocks that will outperform a rising market.

Gold softened by $2.40 (0.48%) to 411.30, and Gold Lease Rates were lower except at the 1-month point. This contributed to the Gold Bugs Index losing 4.64 points (2.21%), finishing the session at 204.85 while the Gold and Silver Index (XAU), which contains more hedgers lost 2.02 points (2.11%), finishing the session at 93.8.

Oil lost ground, although the rollover to the new front-month (October) fooled a lot of commentators... particularly those looking for "good news" stories. You will see a lot of dumbassed commentary talking about how the oil price fell from Friday's high of $49.40 to around $46.07. A 6.7% drop.

How impressive it would be if it was true.

However the truth is that the high on Friday for the October contract was $48.36; yes, Martha... oil was in backwardation (where forward prices are lower than front-month prices). So oil did fall, but by fully $1 (about 2%) less than is being claimed by the media - by 4.75% to be exact.

Regardless, it was obvious to Blind Freddie that oil was going to fall. Ask Timbo or Mav if you don't believe me (although I made the call waaaay too early and got stopped out thre times in three days last week).

The fall in Crude hurt the Oil and Gas Index (XOI) which lost 6.22 points (0.99%), finishing the session at 623.32, and Oil service stocks (OSX) Index lost 1.75 points (1.63%), finishing the session at 105.33.

Defensives wereweaker with the Cyclicals (CYC) Index sliding 5.88 points (0.87%), finishing the session at 672.15, while the Consumer (CMR) Index held up relatively well, losing just 0.89 points (0.16%), finishing the session at 553.1.

In Europe, the "cheese eating surrender monkeys" bid up their stocks in anticipation of a rise in the US (because like most idiots they misread the Crude Oil rollover). France's benchmark CAC-40 Index gained 51.67 points (1.46%), finishing the session at 3589.69.

The Krauts also played "catchup" to gather up the balance of the Friday session (the US continued to rise after teh European markets closed). The German DAX-30 Index gained 59.53 points (1.6%), finishing the session at 3772.14.

Even the Poms had their upper lips loosed into a buying-frenzy-induced battle whoop.In the UK, the FTSE-100 Index gained 36.1 points (0.83%), finishing the session at 4405.3.

Currency-wise, the bounce in the US Dollar Index that I was looking for last week, finally arrived (it bounced a weensie bit last week, but nothing worth writing home about). The USDX rose 1.08% last night to 89.18; when I told Mav and Timbo my prognostications it was under 88 (if you know them, ask them).

The damage centred on the Euro, which dropped 1.3% to 1.2143; oddly, the Yen has held quite tough recently - it's hovered between 11075 and 108.75 for a week, which must be driving position traders crazy (and clipping currency-market newbies to pieces).

People obviously are betting that Japan is going to survive the coming global economic catastrophe relatively well. They're wrong, since Japan is printing money at the same monumentally stupid rate as everybody else.

More later...