Wall Street Wrap

The Markets – little movement after the Rate Hike

By Robert Perrego, at 4:58 pm on February 19th, 2010

The surprise hike in the discount rate by The Federal Reserve after the close yesterday turned into much ado about nothing today.  Pfizer Inc. (NYSE: PFE) was the largest gainer in the Dow Jones Industrial Average today, rising a mere 26 cents (+1.46%, $17.99).  The markets traded themselves to a standstill with the areas you might expect to see impacted; gold, oil and stocks ending up pretty close to where they were at yesterday’s close.  The Dow Jones Industrial Average saw all component stocks but three finish with less than a 1% move up or down with an even split of 15 logging gains, 14 losses and 1 unchanged.

The Dow Jones Industrial Average finished with a gain of 9.45 points (+0.09%, 10,402.35) while the S&P 500 tacked on 2.42 points (+0.22%, 1,109.17).  The Nasdaq 100 closed down less than a point at 1,823.32.

Traditionally, the stock market rises as The Fed raises rates.  The fact that rates are going up is signaling the economy is heating up and this is good for stocks.  The one bogeyman we have in the mix this time is that with interest rates coming off a base of near zero, the dollar has been used for the carry trade for the first time in history.  In the after-market yesterday, the dollar traded up as much as 1% (a big move for the greenback) and if there are still large carry positions on, unwinding them to buy the dollar shorts in could cause significant selling pressure.

The PowerShares DB US Dollar Index (NYSE: UUP) opened up 0.76% ($0.18) this morning and traded as high as up 1.06% ($0.25), before declining for much of the day to close up only 0.29% ($0.07).  The response to the move in the dollar was that when the dollar was near its highs, the S&P 500 was logging its low trading range of the day.  This leads me to believe that the carry trade is still an important factor in the stock market.  As The Fed fired this ’shot across the bow’ of the carry trade cowboys, the best outcome possible would be that these carry trade positions are unwound in an orderly fashion over time and do not create heavy selling that brings the market down. New York Fed President William Dudley commented after the hike yesterday that the current accommodating interest rate policy will remain in place for an ‘extended’ period of time.

Goldman Sachs upped their outlook on discount brokers and specifically upgraded Charles Schwab Corp. (NSDQ: SCHW) to neutral from sell, causing the stock to jump 5.16% (+$0.92, $18.73).  Tradestation Group Inc. (NSDQ: TRAD) gained 50 cents (+7.65%, $7.03), Options Express Holdings Inc. (NSDQ: OXPS) added 60 cents (+4.02%, $15.49) and Ameritrade Holding Corp. (NSDQ: AMTD) finished higher by 44 cents (+2.50%, $18.03).

The online broker with the hilarious baby and “the lottery is not a retirement plan” commercials, E-Trade Financial Corp. (NSDQ: ETFC), seems to still be mired in toxic trouble with their mortgage portfolio as the market only saw fit to buy the stock higher by a penny (+0.64%, $1.58).  Could the more favorable outlook for the business of online brokerage bring buyers calling at E-Trade’s door?  This still remains to be seen as rumors have floated around trading desks for months about Ameritrade swooping in, but there has been no official action thus far.

New York spot gold was up $8.10 an ounce to $1,116.20 (+0.73%, 4:04 p.m.), and note that the later ‘close’ of the gold market after the stock close yesterday included the rate announcement.  Gold was up as much a $18.60 an ounce during the day.  Nymex crude closed strong to finish up 88 cents a barrel (+1.11%, $79.94, 4 p.m.) and is tickling $80 a barrel again.  News out of the Middle East regarding surface to air defensive missile sales to Iran is putting a window on when a nuclear facility air strike could be launched by anyone.  This could be either adding to the strength in oil this cycle up, or could just be a very good reason why you should not get short oil now.

Finally, Tiger Woods was on TV today apologizing for what happened in Vegas that did not stay in Vegas.  President Obama was also in Vegas today hanging out with shady characters (other politicians) after dragging the town’s name through the mud over the past year.  I doubt Obama is going to have as much fun as Tiger did there.  What Tiger did, or did not do, is none of my business and hopefully he just gets back to playing golf and minding his own business – much like all the rubbernecks that have been watching his life collapse are not.  Given the choice I would take the billion dollars, golden golf stroke and public ridicule, and I think you would too.

Have a great weekend.

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News

Market Jumps in the Afternoon, Fed Raises Rates after the Close

By Robert Perrego, at 5:03 pm on February 18th, 2010

The Dow Jones Industrial Average jumped about 50 points within 15 minutes at 2:15 p.m. this afternoon, adding to slight gains earlier in the day to finish up a solid 83.66 points (+0.81%, 10.392.90).  Travelers Companies Inc. (NYSE: TRV) led the Dow higher gaining 1.91% (+$0.99, $52.).  Wal-Mart Stores Inc. (NYSE: WMT) reported $1.17 per share in earnings before the open this morning, with analysts expecting $1.12.  The world’s largest retailer missed on revenues though ($113.65 billion vs. 114.56) and the market sent the stock into the penalty box, dropping it 1.09% (-$0.59, $53.47).

The S&P 500 gained 7.24 points (+0.85%, 1,106.75) on the day with gains in most all industries except transportation and finance.  The Nasdaq 100 climbed 12.53 points (+0.51%, 1,823.39).

The market traded slightly higher early in the day but with no volatility or major movements.  At 2:15 p.m. there was a jump that one market player attributed to possible short covering.  A software engineer in Texas flew a small plane into a building containing an IRS office, and with the market these days, there were short positions put on in the event a terrorist connection was found.  It turns out that the pilot was more than a little frustrated with the IRS (what a surprise) and left a seven page online rant describing what was (or was not) going on in his head.  As soon as it was apparent that the plane crash was not a hidden terrorist cell or something more sinister, the market pop could have been a short squeeze as all those speculative short positions ran for the exits.  Who says the IRS and short side traders are bad?  On a down note, the IRS is expected to announce new taxes on software engineers to pay for a new building (just kidding).

Microsoft Corp. (NSDQ: MSFT) and Yahoo Inc. (NSDQ: YHOO) got clearance from regulators in both the United States and Europe to combine their search and advertising mojo in an attempt to mount a real challenge to the Goliath of the space, Google Inc. (NSDQ: GOOG), which controls some 66% of the market.  Microsoft gained $0.38 (+1.32%, $28.97) and Yahoo closed higher by $0.10 (+0.65%, $15.54).  Analysts think this combination could have legs as Microsoft’s ‘Bing’ search seems to deliver the goods and Yahoo can now free up some extra time to figure out why they passed on the $34/share buyout offer from Microsoft in 2008.

With today’s gain, the DJIA has closed significantly higher than its 50 day exponential moving average and has some clear sailing ahead of it to the upside.  There is minor resistance in the 10,430 area, but after that it looks like blue skies back towards the 52 week high at 10,725.  It looks like the U.S. stock market has broken free of the Greek tragedy, finally.

Looking at the gold chart shows it is right up against resistance formed by an island reversal, which involves horizontally lined up gaps.  A close above $1,130 in the spot price or $111 by the SPDR Gold Trust (NYSE: GLD) should signal a breakout and a run at its all time highs.  New York spot gold gained $14.20 an ounce today (+1.28%, $1,121.00, 4:16 p.m.)

Nymex crude jumped $1.85 to $79.18 a barrel (+2.39%, 4:19 p.m.).  It is looking like the February 9 call of trading the trend channel of the United States Oil Fund (NYSE: USO) between $35 and $41 is working out.

**********

BREAKING NEWS – The Federal Reserve just raised the discount rate by 0.25% to 0.75%.  This is not the more important federal funds rate.  To put this in perspective, the federal funds rate is what banks lend to each other at for overnight loans, while the discount rate is what rate the Fed lends to banks at.  While raising the discount rate does increase the cost of money, the fact that the federal funds rate is still at 0.25% still allows depository banks access to the cheaper loan.

The big news here is the surprise jack in rates.  The Fed used to always make these changes after a Fed meeting in order to be more predictable.  With the bottom dropping out of the credit markets in 2008, the Fed cut rates without meeting and now it seems they are going to raise them in the same manner.  This is one tool Bernanke can use to keep market players from getting too juiced up on the all the liquidity that has been injected into the system.  Also, this unexpected rise will put the carry trade cowboys on notice to stop shorting the dollar as now they will be less sure as to when a hike in the federal funds rate will come.  This uncertainty will scare them into lightening up on their dollar shorts.

The bad news is, if these cowboys buy their shorts in as now they are afraid of higher rates (which strengthen the dollar), they will be selling their ‘riskier’ assets – stocks and commodities.

Remember those comments earlier in this article about the clear sailing to the old highs – WHOLE NEW BALLGAME NOW FOLKS.

New York spot gold was at $1,121 before the announcement – now it is trading $1,110.90.  The Dow ‘Diamonds’, the ETF for the Dow Jones Industrial Average closed today at $104.17 and are now trading $103.45 in the after-market – translates to down about 72 points on the DJIA.

Do you think those guys that put the short positions on when they heard a plane hit a building with the IRS in it wish they were still short?

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News

Market Posts Gains on Economic Data, No Bad News from Greece

By Robert Perrego, at 4:49 pm on February 17th, 2010

Housing Starts came in above expectations and the Industrial Production number was also higher than expected today, and so was the stock market.  Home Depot Inc. (NYSE: HD) was one of the stronger stocks in the Dow Jones Industrial Average, rising 1.97% (+$0.58, $30.02), as the home improvement retailer’s stock broke out to its highest level in over 17 months.  The Federal Reserve released the minutes from their last meeting, shedding more light on the end of the quantitative easing program and the $1.425 trillion of toxic mortgage and Fannie and Freddie debt they have accumulated over the past year.

The Dow Jones Industrial Average gained 40.43 points (+0.39%, 10,309.24) with 20 of 30 stocks up on the day.  The broader S&P 500 added 4.38 points (+0.38%, 1,099.24) with biotech (+1.63%) leading the way.  The tech heavy Nasdaq 100 closed up 8.80 points (+0.48%, 1,810.86).  DJIA component Home Depot broke out of a small bullish head and shoulders pattern yesterday and, with today’s move, is most of the way to the $30.68 target price level of the pattern.

Philadelphia Fed President Charles Plosser has been the dissenting voice on interest rate policy (he voted to raise rates this past meeting) and he is not a big fan of the fact that The Fed owns more toxic mortgage related paper than anyone else.  Both these stands on issues may be working towards the same goal, as when the Fed stops buying toxic mortgage securities soon AND if they started to sell them to decrease their holdings, the most likely result would be rising mortgage rates.  The Treasury market fell today (rising interest rates) with the 30-year rising by 7 basis points to 4.71%.  The 30-year fixed mortgage is currently at 5.08% and if you are thinking about refinancing or buying a home, the sooner the better.

There was a lot of news out about gold as George Soros, John Paulson and pension funds are reported to be buyers.  Soros commented last month that gold was in a bubble and turned around and bought so much of the SPDR Gold Trust (NYSE: GLD) he became the fourth largest holder.  I don’t think I will believe what he has to say too much anymore.  Paulson upped his exposure to gold by 10% and was buying the banks, as was Soros.  Yesterday, the euro strengthened against the dollar and gold was up over $16 an ounce.  Today the euro dropped back down to its lowest level against the dollar since May of 2009, giving up all of yesterdays gains, and New York spot gold dropped $3.80 an ounce.  This leaves the dollar-euro relationship right where it was last Friday with gold up $12+ an ounce.

Breaking News – 4:54 p.m. EST – New York spot gold drops another $8 an ounce ($1,106) as the IMF announces they will be selling the remaining 191.3 tonnes of gold in the open market.  Last fall India bought 200 tonnes from the IMF out of an allocated 400 tonnes to be sold.

Nymex crude was up again, rising 43 cents (+0.53%, 4:12 p.m.) to $77.44 a barrel.  Since October, oil has risen to over $80 a barrel twice and then retraced to $70.  The latest move back above $75 looks like another inevitable move to $80+.

Tomorrow’s economic reports are the Producer Price Index (0.8%, 0.1%) and Jobless Claims (440k) at 8:30 a.m., Leading Indicators (0.5%) and the Philadelphia Fed Survey (17.0) at 10 a.m. and a whole lot of bond auctions for the 3-Month, 6-Month, 2-Year, 5-Year, 7-Year and 30-Year TIPS maturities.  Two Fed Presidents and one Fed Governor will be speaking Thursday as Elizabeth Duke speak at 5 p.m., Dennis Lockhart at 7 p.m. and James Bullard at 9 p.m.

Selected earnings estimates for February 18, 2010:

AEE 0.27 before market open, APA 1.96 bmo, ABX 0.57 bmo, CBS 0.25, DAI 0.02, DDR 0.32 after the close, HRL 0.52 atc, IM 0.52 atc, KEG -0.13, PDE 0.17 bmo, PEG 0.60 bmo, RS 1.02 bmo, SFY 0.28 bmo, WMT 1.12 bmo, WCG 0.44 bmo, WMB 0.34 bmo.

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Wall Street Wrap

Yo-Yo Market Back Down on China and Greece

By Robert Perrego, at 4:34 pm on February 12th, 2010

Remember the days when the U.S. stock market was about the U.S. economy and companies?  If not for a Chinese credit tightening and the Germans deciding the Greeks need to get their own house in order, I might be writing about Warren Buffet and the fact that Berkshire Hathaway closed the Burlington Northern Santa Fe deal.  Instead, the topics du jour are China raising their bank reserve requirements and that the deal out of Europe everyone was expecting might be falling apart.  The bottom line is that your portfolio most likely dropped in value today as the stock market closed lower on news from two OTHER continents.

The Dow Jones Industrial Average lost 45.05 points (-0.44%, 10,099.14) today and the S&P 500 gave up 2.95 points (-0.27%, 1,075.51).  The Nasdaq 100, the strongest of the three over the past two days, closed up 3.37 points (+0.18%, 1,779.11)

After the credit markets fell apart last year the Federal Reserve dropped interest rates to near zero making the dollar a shiny new candidate for the carry trade.  China tightened credit, Asian and European stock markets dropped, Merkel caught flak from the German voters not to keen on bailing out another country and the European markets dropped lower.  Then, before our markets even opened, the carry trade cowboys were buying in their dollar short positions and entering sell orders for stocks here at home.

The market opened lower and the DJIA dropped 144 points in the first 10 minutes of trading.  Market players started putting a positive spin on the news as analysts said the gradual tightening in China would be a good thing over time and Blackrock Inc. came out and said they are increasing their Greek bond holdings.

Market players tried to put a positive spin on the China news saying a gradual tightening will keep a bubble from forming.  Another factor cited in the tightening of credit in China is that investment money is flooding in and the reserve raise is trying to sop up some of that extra cash.  It looks like money is chasing investments looking to catch that near vertical phase before the bubble pops.  If that is supposed to be the good news, here is the bad news – 50% of the commercial space in Beijing is vacant.  They are building buildings just to build something and keep the jobs.  This means there is already a bubble in China and that business is not keeping up with the stimulus generated building supply.  No tenants means no rent collected, which means no payment back of the loan taken to build the building.  When that loan comes due – crash.

Surprisingly, Caterpillar Inc. (NYSE: CAT) was up today (+$0.05, $56.20) after my picking it as a proxy trade for China yesterday.  CAT opened over a point lower and spent the rest of the day trading up.  My other China-economic news proxy trade, the iPath Dow Jones-UBS Copper ETN (NYSE: JJC) lost 1.40% (-$0.60, $42.10) but is up nicely this week (+6.91%).  The Chinese markets closed today for two weeks for New Year’s celebrations and the tightening after the close yesterday was a pretty sly move by the government.

The dollar shot up on the news that the German’s were backing away from the deal with Greece.  This caused commodities to drop as New York spot gold traded as low as $1,076.10 an ounce but spent all day recovering as the dollar dropped.  NY spot was last trading down 50 cents at $1,092.10 (4:25 p.m.).  The PowerShares DB US Dollar ETF (NYSE: UUP) gapped up on the market open and traded as high as $23.74 (+$0.19) before closing at $23.63 (+$0.08).  This is the highest close for the UUP, excluding last Friday’s close at $23.65, since July 29, 2008.  Gold holding in here solid while the dollar inches up is showing some very solid relative strength.

Nymex crude dropped $1.15 a barrel to $74.13 (-1.53%, 4:14 p.m.).  A slower China means less oil demanded and possibly the two week New Years vacation over there will also crimp demand as factories are shut down.

Next week the markets are shut for Presidents’ Day so that means a THREE DAY WEEKEND!  Hope you have the day off Monday and have a great weekend.

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News

Germany and France step up to the plate for Greece – Market Rallies

By Robert Perrego, at 5:02 pm on February 11th, 2010

The yo-yo we call the stock market went back up today as news came out of Europe that will help Greece get back on track handling their debt load.  While the European Central Bank itself is prohibited from lending Greece money, individual countries can and finance ministers are working on setting up a lending facility with each country chipping in according to their percentage of EU GDP.  This is more important just as a political and structural statement that the EU will keep its economic house in order and the framework being set up for Greece can be used for other problem economies.  Currently, Ireland, Spain and Portugal are on economic life support with large budget deficits and debt loads.  As details were sparse, the euro fell early in the day but rallied as market players gained confidence a solid plan was forming.

The Dow Jones Industrial Average gained 105.81 points (+1.05%, 10,144.19) powered by strong gains in Caterpillar Inc. (NYSE: CAT) which climbed 5.64% (+$3.00, $56.15).  The S&P 500 closed up 10.34 points (+0.97%, 1,078.47) and the Nasdaq 100 was the strongest of the three adding 25.98 points (+1.48%, 1,775.74)

Two hot Chinese stocks today, JJC and CAT, were strong on news inflation in China eased in January.  Traders were betting the drop in inflation to 1.6% from 1.9% in December would mean that officials may not tighten credit as much allowing the economy to run.  CAT, of course, is Caterpillar and as American a company as you can get, but this stock fires up every time good economic news comes out of China.  Of course the downside to this is that CAT also craters when news of government credit tightening hits the tape.  The iPath Dow Jones-UBS Copper ETF (NYSE: JJC) jumped up 4.58% (+$1.87, $42.70) today as everyone knows China builds everything out of copper – or so the market would have you believe.  The move in copper may have been magnified as the plumbing and wiring staple has been beaten down badly since peaking on January 6th.

The market vectors Gold Miners ETF (NYSE: GDX) gained 4.13% (+$1.64, $43.99) as New York spot gold fired up $22.60 an ounce (+2.11%, $1,093.30, 5:13 p.m.) and the companies that dig the shiny yellow stuff out of the ground usually find a lot of copper right next to it.  NY Spot traded as high as $1,097.60 today and is knocking on the door of $1,100 again.  After backing off to bottom out on support at $1,060, gold looks poised to break out and revisit its highs at $1,214 for a variety of technical reasons.

Looking at the chart of the SPDR Gold ETF (NYSE: GLD) we see that the close today at $107.13 is just 82 cents below its 50 day exponential moving average at $107.95.  At almost the same level is the down trendline gold has been following since its top on December 3rd of last year.  This trendline is a three point ‘confirmed’ trendline, which means when it is broken the computer buy programs will spit out higher probabilities of success associated with a long gold trade and buy more.  If gold closes above $1,100 the GLD will be through the trendline and at the 50 day EMA, and any climb higher from there has breakout written all over it.  Throw in breaking through a round number ($1,100), the fact that the GLD has been forming a descending bullish wedge formation and that the euro might strengthen more against the dollar as more details come out of the Greece deal and you have a recipe for $1,200 gold and $118 or so on the GLD.

Home builders were strong on good housing data and Lennar Corp. (NYSE: LEN) jumped 8.84% (+$1.38, $16.99) and pulled off a great trade by buying into about $1.2 billion of distressed mortgages at 20 cents on the dollar.  As these loans are secured by the homes themselves, Lennar just bought a slug of houses and being a housing company you would think they know how to sell any homes they repossess (if it comes to that).  Lennar stock broke out today through the $16.40 level and has a loosely defined ascending triangle that could be pointing to the stock rising to as high as $21.40.

Nymex crude advanced 85 cents (+1.14%, 5:05 p.m.) to $75.37 a barrel.  Traders figured with all the good economic news out of Europe, China and solid housing data here at home, owning the slippery black stuff that powers the economy is not a bad idea.

On top of all this good news, Washington D.C. took the day off yesterday and this means none of our politicians spent a gazillion dollars on a bridge to nowhere or an airport without passengers.  Now that is great news.  Of course today they got right back into the swing of things and started working on spending another $87 billion on creating jobs.  The Republicans seem to be getting on board as the plan also comes with tax cuts.  When these guys play nice we get spent to death and when they don’t we have to listen to them argue!  We need jobs but even the Administration says the $87 billion would only create jobs on the margin and The Congressional Budget Office estimates that for every $1 million in taxes cut, 8 to 18 jobs will be created.  Assuming that they just cut taxes by the full $87 billion (yeah, I know – fat chance of that with these guys), this creates 696,000 to 1.566 million jobs.  That is not a bad start but leaves me with one question; what happened to the $787 billion we spent last year?  At 8 to 18, that money should have created 6.3 million to 14.1 million jobs and if that had happened we wouldn’t be in this mess in the first place and needing to spend another $87 billion!

This is why I am rooting for about 787 more snowstorms to be headed straight at Washington D.C.

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