Interdum stultus opportuna loquitur...

Tuesday, October 18, 2005

USRant: It Kept Going... 1200 In View

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The market is really quite bloodthirsty at times. Today's session was dominated by a huge boost upwards in the stock price of General Motors (although interestingly GM's highest traded price during the day was in the opening 5 minutes... way to go, news-traders, you got your arse kicked yet again).

The reason? Simple, silly... GM has arranged with its key trade union, to welch on its health care obligations to retired workers. Simple as that.

Now, you and I might think it's a disgusting act of piracy for a company to attempt to weasel out of paying a worker's entitlements well after the worker retires. After all, if a worker joined the company in the knowledge that he was entitled to lifetime health care at some specific level of cover, that would have been part of his expected return... thus reducing his money wage demand. 

In other words,  GM's pool of retirees have been "macked". Sure, the welching may only be partial, but it is no less an act of blatant swindling than the behaviour of other firms who renege completely on their defined-benefit plans.

This incident - along with others that relate to defined-benefit plans - shows that all the provisioning that happens in corporate accounting for worker entitlements ought actually to require cash deposits into entitlement accounts, not simply a book entry recognising the liability. I remember (during a period working in the construction industry) thinking that the building trades unions were being 'militant' for insisting that the premiums for all worker long-service and health-care entitlements be paid monthly to a pre-defined service provider. Now their actions look prescient.

After all, the entitlements that GM is about to welch on were a defined part of the pay of the workers who are now retired (and the 'deal' also includes non-retired workers). These folks did the hours in exchange for a mix of cash and 'deferred compensation' (i.e., their retirement package). Now they find that they are being shafted on the deferred compensation part of the deal... I bet things like that never happen to ex-CEOs like Dick Cheney.

The market rewarded GM's management for this act: the unilateral breach of an obligation which would be a crime if performed by an individual with regard to their obligation to a bank.

Oh - and I do believe that a search for the term 'defined benefit' and/or 'pension plan' in the old IWL archives from about 2001, will yield an several articles I wrote which forecast that defined benefit pension plans were the next big accounting black hole...

Philip Morris (I refuse to call it 'Altria') benefited from a Supreme Court ruling which rejected the government's attempt to go after Big Tobacco using RICO (Racketeering) statutes: in short, the DoJ asserted that the Big Tobacco companies had engaged in an ongoing criminal conspiracy - namely, the suppression of information about the ill effects of smoking.

That's a good call, in my view: if individuals are stupid enough to take up smoking despite the logical fatuity of the habit (breathing in deliberately-polluted air... how could you ever think that is not bad for you?), then woe betide them.

You might think I'm being inconsistent - requiring cigarette-addicts to ignore cigarette-company advertising and propaganda that contradicts known health research, while not requiring the same skepticism from GM's workers. There's one difference: the GM workers had a covenant with GM... that is, they had a contract which ought to be able to be relied on. If cigarette addicts had received contractual obligations from Big Tobacco that insured them against harm, then I would be all for taking Big Tobacco to the cleaners. 

Actually, I favour complete drug decriminalisation - despite the fact that I have never used any recreational drugs (unless you count anabolic steroids). Why? Simple. Remove the risk-premium profits from the supply side, and mitigate the harm from inconsistent supply quality on the demand side. Reducing the embedded risk premium in the supply will lower prices, which will bring heroin down to an affordable everyday item (like it was in the pre-WWI period, when it was an over-the-counter medicine), and addicts won't have to commit small-scale burglaries to fund their habits.

Note also - those 'risk premium' profits ramify up the food chain - all the way to the actual sponsors of analgesic-criminalisation... Big Pharma. You see, if easy-to-produce, low-margin drugs are illegal, and you require pain relief, who do you have to go and see? that's right... Schering-Plough, or GlaxoSmithKline - and they're sure to have a fix for you... for a price.

If you think that my view on 'Third World' analgesics (cocaine, heroin, cannabis) is irresponsible, I have one phrase for you: Cox-2 inhibitors (e.g., Celebrex). Cox-2s kill about 100,000 people a year... not bad for a legal drug. The death toll from all forms of illegal narcotics is measured in the hundreds rather than the hundreds of thousands... most of those deaths are the result of contamination or variable purity ratehr than the actual emtabolic effects of the active ingredient. And besides... keeping cheap rugs illegal doesn't stop drug addiction anyhow - it just moves it to the povince of Big Pharma... so fat conservative windbag Rush Limbaugh wound up addicted to OxyContin instead of speed or coke or marijuana or smack.

Federal Reserve Open Market Operations

The Fed's Open Market Operations desk performed 1 repurchase operation - a $6.25billion, overnight repurchase with $0.15billion in T-backed collateral undertaken at a 1 basis point discount to the Fed Funds Rate (FFR).

Major US Indices

The Dow Jones Industrial Average posted a rise of 60.76 points (0.59%), closing out the day at 10348.1 points. The index hit an intraday high of 10350.99 (10350-ish), and fell as low as 10269.81 during the session. 

Within the blue-chip index, 16 stocks rose, the biggest gainers being General Motors (GM, +7.54% to $30.09) and Altria Group (MO, +6.09% to $74.96), which accounted for 51 Dow points between them. Losers in the Dow numbered 13 and were led by Verizon Communications (VZ, -1.67% to $29.40) and Johnson & Johnson (JNJ, -1.10% to $63.00), with these two stocks contributing -10 Dow points worth of downward pressure on the index. Volume traded was tilted in favour of the gainers by 197.6m shares to 175.5m.

The broader S&P500 advanced 3.53 points (0.3%), at 1190.1; as I mentioned in a mid-session update last night, the fact that the futures finished above 1190 means that the futures are likely to hit 1200 in the forthcoming session. Once that's done, I would not immediately look for the short side again, but neither would I particularly hold on to a long position. Look at Citigroup (down in the Bellwethers' section: it's telling a different story to the broader market... and as I've so often said, it's the most highly-manipulated large-cap stock in the world. The folks who run it (the floor guys who run the stock price, not management of the company) are the ultimate Street insiders.

Within the S&P500, gainers numbered 301, while 174 S&P500 stocks fell for the day. Volume was tilted 1.7:1 in favour of the winners with 1028.99 million units traded in the winners as compared with 622.61 million traded in the losers.

Over at Times Square, the Nasdaq Composite rose 5.47 points (0.26%), to close at 2070.3, while larger-cap technology issues fared better with the Nasdaq100 adding 5.59 points (0.36%), to end at 1549.88 points. Within the tech benchmark, gainers numbered 51, while 44 Nasdaq100 stocks fell for the day. Volume was tilted 1.2:1 in favour of the winners with 290.92 million traded in the winners compared to 252.86 million in the losers .

NYSE Volume was super-chunky, with 2.05 billion shares changing hands, while Nasdaq Volume was about average, with 1.31 billion shares being shifted from one online brokerage account to another (and back again, in all likelihood).

Major Market Statistics
Dow Jones Industrial Average10348.160.760.59%
Nasdaq Composite2070.35.470.26%
NYSE Volume2.05bn--
Nasdaq Volume1.31bn--


My 9-stock "bellwethers" group rose by an average of 0.30%

  • General Electric (GE) -$0.33 (0.96%) to $34.01;
  • Citigroup (C) -$0.23 (0.51%) to $44.81;
  • Wal Mart (WMT) +$0.20 (0.44%) to $45.24;
  • I.B.M. (IBM) +$0.24 (0.29%) to $82.59;
  • Intel (INTC) +$0.23 (0.99%) to $23.46;
  • Cisco Systems (CSCO) -$0.10 (0.58%) to $17.17;
  • eBay (EBAY) +$1.14 (2.87%) to $40.84;
  • Fannie Mae (FNM) +$0.07 (0.16%) to $44.68; and
  • Freddie Mac (FRE) +$0.01 (0.02%) to $59.48.

Market Breadth & Internals

NYSE advancing Issues exceeded decliners by 1765 to 1499 for a single-day A/D reading of 266; and Nasdaq losers exceeded gainers by 1587 to 1414. The 10-day moving average of the A/D line rose to -378.8 on the NYSE, while the 10dma of the Nasdaq A/D rose to -299.6.

NYSE advancing volume exceeded volume in decliners by 1330.1 to 676 million shares; Nasdaq advancing volume was greater than volume in decliners by 750.4 to 531.5 million shares.

31 NYSE-listed stocks rose to new 52-week highs, and 142 posted fresh 52-week lows, while on the Nasdaq there were 45 stocks that hit new 52-week highs, and 89 which fell to fresh 52-week lows.

Market Breadth Statistics

Advancing Volume (m)1330.11750.44
Declining Volume (m)676.03531.45
New Highs3145
New Lows14289

Market Sentiment Statistics
CBOE Volatility Index14.67-0.2-1.34%
CBOE Nasdaq Volatility Index16.22-0.01-0.06%
Equity Put-Call Ratio0.74-0.18-19.57%
10-day PCR0.71-0.01-1.39%
SPX-VIX Ratio81.11.331.66%

Bond Market Analysis

Bonds rose marginally at the long end, with the yield on the benchmark 30-year Treasury bond shedding 0.5 bps to 4.707%. The 30-year bond futures were basically unchanged - they are now overdue for a bounce, sitting at 112-19/32.

The middle of the yield curve was mixed: five year yields rose to 4.348%, and ten-year yields fell to 4.489%.

Spreads between short-dated (2-yr) Treasuries and high-grade corporate bonds of similar maturity profiles were 10.0 bps wider at 15.0 basis points; spreads between longer dated Treasuries and their corporate AAA counterparts rose to 47.0 bps for 10-year AAA, and 71.0 bps for 20-years.

Credit spreads (spreads between corporate bonds of the same maturity profile but different creditworthiness) were broadly tighter with the AAA-A spread on 20-years 12.0 bps tighter at 36.0 basis points and the 10-year AAA-A spread 9.0 bps tighter at 11.0 bps.

Treasury Yields
UST 13wk (yld)3.697-0.005-0.14%
UST 2Y (yld)
UST 5Y (yld)4.3480.0030.07%
UST 10Y (yld)4.489-0.002-0.04%
UST 30Y (yld)4.707-0.005-0.11%

The Banks Index shed 0.13 points (0.14%), closing at 95.1; within the index,

  • Regions Financial (RF) -$0.52 (1.63%) to $31.41;
  • M&T Bank Corp (MTB) -$1.18 (1.14%) to $102.75;
  • North Fork Bancorp (NFB) -$0.27 (1.11%) to $23.98;
  • US Bancorp (USB) -$0.29 (1.04%) to $27.67; and
  • Suntrust Banks (STI) -$0.67 (0.99%) to $67.27.

The Broker-dealer Index rose 1.66 points (0.98%), to end the session at 171.34; the ticket clippers lined up as follows -

  • Ameritrade (AMTD) +$0.43 (2.2%) to $19.96;
  • Goldman Sachs (GS) +$2.50 (2.18%) to $117.05;
  • Lehman Brothers (LEH) +$2.14 (1.98%) to $110.45;
  • Charles Schwab (SCH) +$0.21 (1.6%) to $13.34; and
  • Merrill Lynch (MER) +$0.73 (1.21%) to $61.09.

The Philadelphia SOX (Semiconductor) index rose 2.03 points (0.46%), to 444.72

  • Freescale Semiconductors (FSL-B) +$0.48 (2.23%) to $21.97;
  • Xilinx (XLNX) +$0.49 (2.2%) to $22.79;
  • Altera (ALTR) +$0.33 (1.88%) to $17.90;
  • Marvell Tech Group (MRVL) +$0.55 (1.26%) to $44.09; and
  • Micron Technology (MU) +$0.14 (1.09%) to $13.01.

Gold & Silver Markets

Gold rose a sharp $4.80 (1.02%) to close at $476.60 per ounce.

The Gold Bugs Index advanced 5 points (2.18%), to end the session at 234.77

  • Gold Fields (GFI) +$0.60 (4.41%) to $14.22;
  • Freeport McMoran (FCX) +$1.79 (3.88%) to $47.94;
  • Harmony Gold (HMY) +$0.31 (2.91%) to $10.95;
  • Randgold Resources (GOLD) +$0.40 (2.7%) to $15.21; and
  • Meridian Gold (MDG) +$0.54 (2.64%) to $21.02.

Silver rose $0.01 (0.17%) to close at $7.88 per ounce, and looks to be running out of steam. 

The Gold and Silver Index (XAU) gained 2.59 points (2.42%), at 109.54 points.

  • Durban Rooderpoert Deep (DROOY) +$0.06 (4.44%) to $1.41;
  • Gold Fields (GFI) +$0.60 (4.41%) to $14.22;
  • Freeport McMoran (FCX) +$1.79 (3.88%) to $47.94; and
  • Placer Dome (PDG) +$0.57 (3.52%) to $16.77.
Precious Metals and Indices
PHLX Gold and Silver Index109.542.592.42%
AMEX Gold BUGS Index234.7752.18%

Oil Market

Oil was firmer thanks to yet another storm risk in the Gulf of Mexico. Oil added $1.73 per barrel, closing at $64.36 per barrel which, when you look at a chart, is annoyingly just above the previously-broken neckline of the head and shoulders pattern previously identified here (in fact, I identified that it would form, a week before it formed... neat). As Edwards and Magee's charting Bible points out, the H&S is one of the most reliable chart patterns in existence - so I wouldn't be too enamoured about being long oil just yet. This is yet another example of news-traders jumping on a journalists'-eye-view of the world... which is a recipe for disaster as an investment strategy, and even worse as a speculation strategy.

The Oil and Gas Index (XOI) added 14.01 points (1.45%), to end the session at 981.24

  • Occidental Petroleum (OXY) +$2.50 (3.44%) to $75.23;
  • Marathon Oil (MRO) +$1.69 (2.83%) to $61.44; and
  • Amerada Hess (AHC) +$2.78 (2.36%) to $120.79.

The Oil service stocks (OSX) Index gained 1.4 points (0.88%), at 161.03

  • National Oilwells/Varco (NOV) +$1.80 (3.19%) to $58.15;
  • Transocean (RIG) +$1.26 (2.27%) to $56.81; and
  • Rowan Companies (RDC) +$0.61 (1.99%) to $31.22.
Energy Complex
Reuters CRB336.312.010.6%
Crude Oil Light Sweet64.361.732.76%
Heating Oil1.98350.031.72%
Natural Gas13.8870.675.05%
Unleaded Gas1.81530.073.81%
AMEX Oil Index981.2414.011.45%
Oil Service Index161.031.40.88%

Currency Markets

USD Exchange Rates
US Dollar Index89.870.50.56%
Australian Dollar0.7499-0.0022-0.29%
Swiss Franc1.29230.00810.63%
Canadian Dollar0.84760.00410.49%