Commentaries

Dow hits 10K

OK, it’s finally happened so hopefully talking heads can stop obssessing about this magic number. Traders in the more esoteric spaces, like non-agency mortgage bonds, are even feeling the love. We get another round of bank earnings tomorrow, including Goldman Sachs, which if they’re anything like JP Morgan, could ignite even more euphoria in markets.

Still, the Dow needs to close above 10K for everyone to truly feel like the good times are finally here to stay. While it pierced 10K, it’s since bounced lower.

I’m still not sure I buy that any of this really matters in the grand scheme of things since it’s all coming due to the artificial support of government money. Free markets indeed.  That said, it’s sure to bolster confidence and if the U.S. economy is lucky, that will be enough to keep things on stable footing. Then again, there’s that thing called the dollar that also hit another 14-month low again today.

For those who love historical stats, here’s some from S&P’s Howard Silverblatt.

March 29, 1999  first time the DJIA closed above 10,000 (10,006.78), then crossed the 11,000 on April 5, 1999 (11,014.19; 24 trading days)

October 3, 2008 last time the DJIA closed above 10,000 (10,325.38), dropped 18.15% over the next 5 days (all down)

The DJIA set a high on October 9, 2007 at 14,164.53, the same day the S&P did at 1565.15; the NASD high close was on March 27, 2000 at 4704.73

Automatic debt-to-equity swap?

That’s what Fed Governor Daniel Tarullo seems to be advocating in his speech, which you can find here.

Here’s the graph, emphasis mine:

We must also adopt new regulatory mechanisms to counteract the systemic and too-big-to-fail problems that became so embedded in our financial system. One possible approach is a special charge–possibly a special capital requirement–that would be calibrated to the systemic importance of a firm. Needless to say, developing a metric for such a requirement is a new, and not altogether straightforward, exercise. Another proposal, which strikes me as having particular promise, is that large financial institutions be required to have specified forms of “contingent capital.” One form of this proposal would have firms regularly issue special debt instruments that would convert to equity during times of financial stress. If well devised, such instruments would not only provide an increased capital buffer at the moment when it is most needed. They would also inject an additional element of market discipline into large financial firms, since the price of those instruments would reflect market perceptions of the stability of the firm.

Yeah, who cares about the bondholder as long as the bank is OK. These are likely to be a tough sell and the banks most likely would have to pay, as they should, a hefty premium to get investors to agree to such a provision.

Gold’s run impressively up

All the goldbug fever, not withstanding today’s pullback in the yellow metal’s price, got me thinking about just how well has gold stacked up against say stocks and oil over the longer term. I picked 2004 as a starting point for no other reason than it gives enough distance from the mania of the credit bubble and the distortion of its popping.

Gold’s trajectory is pretty impressive. Now whether you think that means it’s bubble that never fully burst or whether it’s indicating a longer term trend in which enough investors want a hedge against inflation further down the line is another matter. But, since 2004, it’s been mostly up.

Check it out.

Gold

Oil

That didn’t take long…

Turn the calendar to September and markets are fixated about potential problems at the banks again. The obsession with September being a bad month for stocks and for the world in general has nothing to do with it, I’m sure.

I’m certainly the last person to downplay the still tough road ahead given the state of the U.S. consumer, commercial real estate and the excesses that still need to be wrung out of the system, but the fickle trading, especially in the stock market this summer, has made it difficult to read too much into the daily moves.

But the worry does look real, at least for today, given the flows.

The DJIA and S&P 500 are down around 2% and the S&P dipped back below 1,000. Meanwhile, funds are being redirected into shorter-dated Treasuries with 2-Yr through 7-Yr yields down around 5.5BPs to 6.8BPs. The flattening of the year curve is telling you this has to do with fear, not a reach for yield (especially when the 2-Yr note is trading below 1% now.)

That this is happening on a day of solid economic data – the ISM manufacturing report not only came in much better than expected but it indicated expansion for the first time since Jan. 2008 – makes the behavior more noteworthy, even if it is coming during the last week of U.S. summer.

Trash is king as Lehman shares surge

It’s either a sign of sheer boredom on Wall Street, or an early celebration of the one-year anniversary of Lehman Brothers’ demise, but shares of the fallen invesment bank were red hot today.

The stock rose some 200%. Take that AIG.

For some inexplicable reason, shares of the bankrupt investment bank, which trade on the loosely regulated over-the-counter Pink Sheets, changed hands some 73 million times on Friday. That’s a lot of trading in a stock that’s been worthless for nearly 12 months.

Indeed, on a typical day, the average trading volume in Lehman shares is about 2.6 million. The last time Lehman’s stock came anywhere close to today’s trading volume was way back in October, about a month after the Wall Street firm filed for bankruptcy.

Then again, today’s trading surge boosted Lehman’s closing stock price to 15 cents. It had been sitting around 5 cents for months. Better yet, Lehman now has a respectable market cap of $103 million–not too shabby for a small-cap company on the Pink Sheets.

Of course, this trading in Lehman is just crazy. There’s not good explanation for it. Just as there is no good explanation for the big surge in shares of American International Group.

Maybe this is just a case of traders trading trash financials to score a quick profit because they can’t find anything else to trade.

It’s a long way from 950 for the S&P 500

It’s hard to believe that little over a month ago, investors were holding their breath to see if the S&P 500 had enough momentum to burst through 950 – a psychological level that had held firm since November of last year. Carry through buying Monday from last week’s renewed cheer that the U.S. and global economies were leaving recession behind has pushed the S&P 500 to 1033, its highest level since Oct. 6, 2008 when it traded at 1056.89.

But as I noted here last week, markets continue to be pretty fickle when it comes to betting on recovery vs. continuing slump.

Bespoke Investment Group, however, notes that it’s getting harder to argue that the more than 51% jump in stocks since March is just a Depression-like rally within a longer-term down trend.

The current rally is now bigger and longer than any of the rallies seen during the 1929 to 1932 crash.  The biggest rally during the ’29 to ’32 period was 46.77% over 148 days.  The current rally is up 51.68% over 165 calendar days.

That being said, I’m not sure history is the best guide for anything at this point given the unprecedented nature of the credit crash and the global response to keeping financial markets on life support. The consumer continues to be key and “Cash for Clunkers” aside, it’s still an open question whether Americans are up to the task of reflating the U.S. economy. Further deterioration in the jobs picture or even a whiff of sagging confidence (as unreliable an indicator that it may be to gauge near-term spending) is likely to crush optimism in the market.

And then there’s  China. The swoon on the Shanghai exchange last week shook global financial markets as fear that a stumble by this emerging powerful engine could set back the world recovery.

Barry Ritholtz over at The Big Picture, posts the thoughts of Andy Xie, a former Morgan Stanley economist now living in China, who expects the A-share market (stocks denominated in renminbi) to crash in the fourth quarter.

S&P 500 takes a round trip

After all the handwringing earlier this week about the consumer and the global economy, it looks like the S&P 500 is back to exactly where it started, more or less, a week ago.

But don’t get too comfortable. U.S. markets are still following the volatile Chinese stocks and the current optimism on the U.S. economy – thanks Philadelphia Fed – can quickly turn sour with the next data point showing consumers are still feeling blue.

S&P 500 up 1.09% at 1007.37 – on Aug 13 it was at 1,012.73.

Don’t be fooled by global stock stumble

Don’t blame global stock markets for being skittish. It is August, after all, a month that has spelled trouble in the past two years.

Recall that, a year ago, Fannie Mae and Freddie Mac started wobbling at the precipice while AIG, desperate for cash, began paying junk-like yields in the corporate bond market. A month later, all hell broke loose.

In August 2007, a shutdown in short-term lending markets forced global policy makers to rush in with a flood of liquidity to keep the lifeblood of the financial system from clotting.

So it’s only natural that, this year, sellers are trigger-happy at the slightest whiff of trouble.

Problems surfaced in the United States last week, when a double-whammy of soft retail sales followed by a drop in consumer sentiment reignited worries that for all the good cheer about an emerging recovery, the exhausted American shopper is still unfit to carry the economy.

These concerns carried over into Monday trading in Asia, where they mingled with homegrown worries. In China, a drop-off in direct foreign investment helped fuel a nearly 6 percent decline in the Shanghai stock index and concerns about the Japanese economy helped trim more than 3 percent from the Nikkei.

U.S. stock indices have followed suit, with the S&P 500 off 2.43 percent and the Dow Jones Industrial Average off 2 percent.

Easy does it on the exuberance

If it keeps going like this, Ben Bernanke will have to give an irrational exuberance speech.

Today, stocks jumped to fresh multi-month highs and Treasury yields climbed after a report on July manufacturing activity made investors feel even more optimistic about the future. Sure, manufacturing is still contracting, but that’s only a minor detail for those convinced that a burgeoning economic recovery is the real deal.

The giddiness helped push the S&P 500 above 1,000 for the first time in nine months and knocked more than a point off the benchmark Treasury note, bringing the yield to 3.64 percent.

If it were just Monday, it would be easy to chalk up the gains to a sleepy summer day of trading in August when second string traders are left in charge. But this stock rally has legs, and long ones at that.

The S&P index has been on a winning streak since March and, since mid-July, when the markets began to turn on better-than-expected earnings reports and improving economic data, it’s gained more than 13 percent.

But it’s not just stocks that have been showing investors the love. In July, corporate debt and mortgage bonds — even those backed by commercial real estate loans – booked impressive gains.

Moreover, the futures market is pricing in not one, but multiple quarter-point rate increases (that’s presuming the Fed sticks to the game plan from earlier this decade and gradually raises rates by such fractional increments) by April of next year.

Stock market bulldozes the bears

Yowza is the word that comes to mind when looking at the major stock gauges. The DJIA has burst through 9,000 and the S&P 500, up 2.2%, at 975. Reuters is chalking it up to strong second quarter earnings and a pop in existing home sales. The pace of the rally in recent weeks, however, is starting to send signals that this may be overdone.

David Rosenberg, chief economist over at Gluskin Sheff, notes that that the pop so far in the second quarter is pricing in unrealistic economic growth.

The S&P 500 surged 15% in the second quarter and what we did was go back in the history books to see what happens to the economy the very next quarter typically after such a big bounce and the answer is … just over 3% real GDP growth. So consider that de facto what is being discounted at this time for current quarter growth — it better be a humdinger of an inventory build. Now, for the market to build on such a rapid advance in the current quarter, history again suggests that we would need to see 5½% real GDP growth, which we give near-zero odds of occurring.

The Big Picture points out, that in the Nasdaq at any rate, the gains are also being driven by very few stocks.

In the Nasdaq-100 index, for example, one stock, Apple, accounts for nearly one-fifth of the 11-percent gain. It has also pulled much more than its already hefty weight in the index. Otherwise, just nine stocks are responsible for more than half the move in the technology-laden bellwether.

While that doesn’t mean the rally can’t carry on, it’s another reason to be cautious on reading too much into the advance we’ve seen so far.