Interdum stultus opportuna loquitur...

Wednesday, May 11, 2005

USRant: 10250 Support (For Now)...

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For some time now, the US market has been propped up. As I pointed out after the session that the Dow touched 10,000 from above, 10K is not the low of this move, but it was always going to provide a strong support; firstly because of the skittishness of short-term shorts, secondly because of the President's Working Group.

Anyone who dismisses government intervention in the US financial markets as conspiracy whackery, hasn't watched too many sessions tick by tick. There are several that stick in my mind (April 4 2000 being the most obvious). It also makes sense; if all the massive amounts of liquidity created are pushed in the first instance into the financial market, the rate of inflation of stock prices will exceed the rate of inflation in the rest of the economy: add dividends to that and you've got yourself a nice little wealth-transfer scam (whereby, yet again, those who provide patronage and bribes to the political class, are the beneficiaries of a politically-induced 'tilt' to the return spectrum).

However (and there is always a however...)... Money doesn't actually go into the financial market. It goes through it. One person's cash account debit is another's cash account credit. One person exchanges cash for stock, and the other sells his stock for cash. So eventually the money creation results in increased holding of money balances, and those increased money balances eventually find their way to goods prices.

Because the route is circuitous (and because most of the newly created credit is concentrated in the hands of folks who are already near-satiety with respect to consumption goods), the process by which excess money creation leads to goods price inflation has a long lag structure. Tip in a dose of offshore price-competition by countries with comparative advantage in labour-intensive goods, and you've got a recipe for what looks like a low-inflation expansion. However we're already seeing nascent signs of increased goods price inflation (and anyone who operates on a low-savings budget will have been feeling it for some time).

Federal Reserve Open Market Operations

The Fed's Open Market Operations desk performed 1 repurchase operation - a $5.75billion, overnight repurchase entirely in T-backed collateral. That tips past the $5 billion notional threshold that usually provides some juice at 10 a.m., however today there was as near to nothing as makes no odds. 10 minutes after 10 a.m. the market had not moved more than a point, despite having a hard floor at 1170 on the S&P futures.

Major US Indices

As has been the case recently, only a reasonably active bump upwards in the last half-hour saved the markets from genuine technical damage. After setting its intraday high at 10382.94 (an artifact of yesterday's closing number), the Dow dropped softly for the first 2 and a half hours until it hit 10300 (and breached it by a few points just to lure breakout traders into the mix). It then rose almost 50 points in 90 minutes, before turning south at 2 p.m. and subsequently breaking 10300 with conviction.

In my "halves and quarters" hypothesis, the usual stopping point for a late-afternoon decline with moderate momentum, is the next-lowest '50' on the Dow... and the low for the session (registered at 3:30 p.m.) was 10250.23. At 1:30 p.m. the Dow was above its 10:00 level (only by a couple of points), but by 3:30 it was almost 100 points below that level.

On a closing basis, the Dow Jones Industrial Average shed 103.23 points (0.99%), closing out the day at 10281.11 points. Within the blue-chip index, only 2 stocks rose - Boeing (BA, +0.79% to $61.04) and General Motors (GM, +0.64% to $31.53). These two contributed 5 Dow points between them.

Speaking of GM, it's worth thinking again about the timing of Kerkorian's announcement of his intention to buy another big chunk of GM stock. It occurred the day before the two gutless ratings agencies finally downgraded GM and Ford bonds to junk. I'm sure that somewhere in the InvestorWeb archive, a diligent researcher would be able to trawl up my thoughts on GM bonds from about mid-2002, which is about the time I first got sick of the ratings agencies. The bonds were junk then, but ratings-agency inertia (gutlessness) kept them afloat for two years.

But back to Kerkorian's attempt at a good old fashioned RAMP. By making the announcement (and orchestrating a media orgasm over it), KK ensured a pop in the price, which helped insulate his (large) position in the stock from the ramifications of the downgrade. Why is this not illegal? Answer: it is illegal.

If that bloke didn't have a heads-up on the downgrade, then I am a Dutchman. Considering the low esteem with which I view 'dykers' (who had the worlds largest Nazi party in 1943, but nobody was ever a member), I reckon the odds of my name being Jan or Jaap are pretty slim.

There was a very perceptive question posted yesterday about the downgrade - namely, will it remove GM and Ford bonds from the 'investable universe' for bond managters. The answer is 'not really', but it will have the effect of reducing allocations to GM and Ford bonds.

The downgrade will only exclude GM and Ford bonds from the portfolios of managers whose investment mandates require them to hold investment grade bonds. Often, bond managers will have no 'hard' credit-rating constraint on their holdings, except that the holding-weighted average credit rating must be above some level (usually investment grade).

This gives them the opportunity to run 'dumbbell' portfolios, where they have a large chunk of the dough in safe, highly-rates bonds (AAA and AA), very little in the A-BB range, and then another big swag of BBB-C rated stuff. This enables them to 'load up' on higher-yielding bonds at times of expected relative outperformance of junk as compared with the middle of the credit spectrum.

Sometimes bond managers also have a duration constraints (whereby the duration of the portfolio must not exceed some cutoff).

Maybe I ought to have put that bit in the Bonds section... too late now!

Losers in the Dow numbered 28 and were led by Alcoa (AA, -2.45% to $28.63) and American International Group (AIG, -2.40% to $53.27), with these two stocks contributing -15 Dow points worth of downward pressure on the index. Volume traded was tilted in favour of the losers by 316.4m shares to 18.1m.

The broader S&P500 shed 12.62 points (1.07%), to end the session at 1166.22. A break of 1160 would have resulted in genuine technical damage today, but the session low was 1163.01. Within the index, gainers numbered 72, while 422 S&P500 stocks fell for the day. Volume was tilted heavily (5.1:1) in favour of the losers with 1.39 billion units traded in the losers as compared with 269.93 million traded in the winners .

Over at Times Square, the Nasdaq Composite slid 16.9 points (0.85%), to close at 1962.77, while larger-cap technology issues fared worse with the Nasdaq100 losing 13.02 points (0.89%), to end at 1450.36 points. Within the tech benchmark, gainers numbered 27, while 69 Nasdaq100 stocks fell for the day. Volume was tilted 3.7:1 in favour of the losers with 509.06 million traded in the losers compared to 137.35 million in the winners .

NYSE Volume was molto-chunky, with 1.88 billion shares changing hands, while Nasdaq Volume was just chunky, with 1.63 billion shares traded.

Major Market Statistics
Index Close Gain(Loss) %
Dow Jones Industrial Average 10281.11 -103.23 -0.99%
S&P500 1166.22 -12.62 -1.07%
Nasdaq Composite 1962.77 -16.9 -0.85%
Nasdaq100 1450.36 -13.02 -0.89%
NYSE Volume 1.88bn - -
Nasdaq Volume 1.63bn - -


My 9-stock "bellwethers" group fell by an average of 1.25%

  • General Electric (GE) -$0.40 (1.1%) to $35.83;
  • Citigroup (C) -$0.47 (1%) to $46.38;
  • Wal Mart (WMT) -$0.53 (1.08%) to $48.72;
  • I.B.M. (IBM) -$1.68 (2.24%) to $73.30;
  • Intel (INTC) -$0.13 (0.52%) to $24.67;
  • Cisco Systems (CSCO) -$0.00 (0%) to $18.21;
  • eBay (EBAY) -$0.81 (2.41%) to $32.75;
  • Fannie Mae (FNM) -$0.99 (1.78%) to $54.66; and
  • Freddie Mac (FRE) -$0.72 (1.14%) to $62.36.

Market Breadth & Internals

NYSE declining Issues beat out advancers by 2222 to 1073, for a single-day A/D reading of -1149; and Nasdaq losers exceeded gainers by 2020 to 1024. The 10-day moving average of the A/D line fell to 203.9 on the NYSE, while the 10dma of the Nasdaq A/D fell to -37.4.

On the NYSE declining volume (1.51 billion shares) exceeded volume in advancing issues (343.4 million shares); On the Nasdaq declining volume exceeded volume in advancing issues by 1113.1 to 411.8 million shares.

68 NYSE-listed stocks rose to new 52-week highs, and 40 posted fresh 52-week lows, while on the Nasdaq there were 47 stocks that hit new 52-week highs, and 104 which fell to fresh 52-week lows.

Market Breadth Statistics
NYSE Nasdaq
Advancers 1073 1024
Decliners 2222 2020
Advancing Volume (m) 343.44 411.84
Declining Volume (m) 1512.36 1113.13
New Highs 68 47
New Lows 40 104
Market Sentiment Statistics
Index Close Gain(Loss) %
CBOE Volatility Index 14.91 1.34 9.87%
CBOE Nasdaq Volatility Index 18.11 -0.18 -0.98%
Equity Put-Call Ratio 0.53 -0.23 -30.26%
10-day PCR 0.71 -0.05 -6.05%
SPX-VIX Ratio 78.2 -8.65 -9.96%

Bond Market Analysis

Bonds rose at the long end, with the yield on the benchmark 30-year Treasury bond shedding 3.6 bps to 4.578%. the short 30-year is still in profit, but it had a severe profit haircut; the 30-year bond closed at 114 & 22/32, which means there's only 11 ticks of profit in the position at the moment. Given that this position was up over 90% profit at one stage, it would be a sensible idea to take it off and look to fight another day. Better a 25% profit in a week and a half, than holding a $1000 profit all the way to a loss. the bond market is trying really hard to hold itself together, and for now it's working... so if stale shorts get itchy and a bad number comes out, the bond could spike a point and a half in an hour. THEN would be the time to short again!!

The middle of the yield curve was broadly higher: five year yields fell to 3.918%, and ten-year yields fell to 4.222%.

Spreads between short-dated (2-yr) Treasuries and high-grade corporate bonds of similar maturity profiles were 2.0 bps wider at 11.0 basis points; spreads between longer dated Treasuries and their corporate AAA counterparts rose to 63.0 bps for 10-year AAA, and 90.0 bps for 20-years.

Credit spreads (spreads between corporate bonds of the same maturity profile but different creditworthiness) were broadly wider with the AAA-A spread on 20-years 9.0 bps tighter at 42.0 basis points and the 10-year AAA-A spread 17.0 bps tighter at 6.0 bps.

Treasury Yields
Index Close Gain(Loss) %
UST 13wk (yld) 2.822 0 0%
UST 2Y (yld) 3.73 0 0%
UST 5Y (yld) 3.918 -0.065 -1.63%
UST 10Y (yld) 4.222 -0.056 -1.31%
UST 30Y (yld) 4.578 -0.036 -0.78%

The Banks Index shed 1.1 points (1.12%), at 97.45; within the index,

  • JPMorganChase (JPM) -$0.82 (2.28%) to $35.14;
  • North Fork Bancorp (NFB) -$0.60 (2.12%) to $27.76;
  • Golden West Financial (GDW) -$1.33 (2.06%) to $63.22;
  • State Street (STT) -$0.79 (1.67%) to $46.38; and
  • M&T Bank Corp (MTB) -$1.72 (1.65%) to $102.28.

The Broker-dealer Index lost 2.72 points (1.88%), to end the session at 142.05; the ticket clippers lined up as follows -

  • Bear Stearns (BSC) -$3.30 (3.37%) to $94.49;
  • Lehman Brothers (LEH) -$3.09 (3.36%) to $88.83;
  • Goldman Sachs (GS) -$3.39 (3.21%) to $102.11;
  • Morgan Stanley (MWD) -$1.33 (2.62%) to $49.42; and
  • Merrill Lynch (MER) -$1.40 (2.55%) to $53.46.

The Philadelphia SOX (Semiconductor) index declined 4.11 points (1.03%), closing at 394.43

  • Infineon Tech (IFX) -$0.26 (2.86%) to $8.82;
  • Taiwan Semiconductors (TSM) -$0.24 (2.65%) to $8.81;
  • ST Microelectronic (STM) -$0.35 (2.42%) to $14.12;
  • Maxim Integrated (MXIM) -$0.92 (2.38%) to $37.73; and
  • Texas Instruments (TXN) -$0.51 (1.93%) to $25.88.

Gold & Silver Markets

Gold rose $0.80 (0.19%) to close at $427.40 per ounce after peaking (at about noon) at $428.80 an ounce.

The Gold Bugs Index lost 3.29 points (1.78%), at 181.95

  • Agnico Eagle (AEM) -$0.59 (4.42%) to $12.75;
  • Harmony Gold (HMY) -$0.26 (4.06%) to $6.14;
  • Gold Fields (GFI) -$0.33 (3.26%) to $9.80;
  • Iamgold (IAG) -$0.17 (2.66%) to $6.23; and
  • Glamis Gold (GLG) -$0.35 (2.36%) to $14.48.

Silver rose $0.06 (0.85%) to close at $7.13 per ounce.

The Gold and Silver Index (XAU) lost 1.79 points (2.08%), to 84.17 points.

  • Agnico Eagle (AEM) -$0.59 (4.42%) to $12.75;
  • Harmony Gold (HMY) -$0.26 (4.06%) to $6.14;
  • Gold Fields (GFI) -$0.33 (3.26%) to $9.80; and
  • Placer Dome (PDG) -$0.35 (2.51%) to $13.59.
Precious Metals and Indices
Index Close Gain(Loss) %
Gold 427.40 0.80 0.19%
Silver 7.13 0.06 0.85%
PHLX Gold and Silver Index 84.17 -1.79 -2.08%
AMEX Gold BUGS Index 181.95 -3.29 -1.78%

Oil Market

Oil lost ground, shedding $0.32 per barrel, closing at $51.73 per barrel. That followed a big intraday reversal - at one stage during the session, front-month Crude was above $53.

The Oil and Gas Index (XOI) shed 12.18 points (1.45%), to 827.28

  • Occidental Petroleum (OXY) -$1.73 (2.45%) to $68.97;
  • Amerada Hess (AHC) -$2.23 (2.31%) to $94.34; and
  • ConocoPhillips (COP) -$1.86 (1.74%) to $104.90.

The Oil service stocks (OSX) Index shed 3.04 points (2.25%), ending the day at 132.31

  • Smith International (SII) -$1.93 (3.19%) to $58.49;
  • Weatherford International (WFT) -$1.70 (3.17%) to $51.94; and
  • Nabors Industries (NBR) -$1.73 (3.06%) to $54.81.
Energy Complex
Index Close Gain(Loss) %
Reuters CRB 301.44 0.62 0.21%
Crude Oil Light Sweet 51.73 -0.32 -0.61%
Heating Oil 1.445 0 0.17%
Natural Gas 6.69 0 -0.03%
Unleaded Gas 1.502 0.01 0.91%
AMEX Oil Index 827.28 -12.18 -1.45%
Oil Service Index 132.31 -3.04 -2.25%

Currency Markets

USD Exchange Rates
Index Close Gain(Loss) %
US Dollar Index 84.47 -0.14 -0.17%
Euro 1.2871 0.003 0.23%
Yen 105.55 -0.04 -0.04%
Sterling 1.8818 -0.0013 -0.07%
Australian Dollar 0.7762 0.004 0.52%
Swiss Franc 1.2012 -0.0039 -0.32%
Canadian Dollar 0.808 0.0006 0.07%