The euphoric state that was present yesterday was no where to be found today. This morning I thought we were going to continue yesterday’s rally thanks to Morgan Stanley’s good earnings report, but the market turned south as investors sold their positions in energy, basic materials, and commodity stocks.
Crude oil slipped $5 and gold declined $60! Exxon was down 4.6%, Transocean was down 5%, Potash was down 10.4%, Mosaic was down 11.4%, Monsanto was down 11.8%, Agrium was down 7.6%, Freeport-McMoRan was down 11.2%, Alcoa was down 7.7%, and Rio Tinto was down 8.1%. What happened? Let’s go back to yesterday and the recent Fed moves intended to help the struggling banks.
People were looking for a 100bp cut or even a 125bp cut from the Fed, but we only got 75bp. Prices of stocks and commodities had to adjust for this discrepancy, but this smaller-than-expect cut is not too important compared to the Fed’s newfound agenda to prevent bank failures by using tools other than rate cuts. In the past few weeks, the Fed has introduced multiple new instruments to allow for easier access to capital. In the recent Fed statement, more attention was given to inflation and many people are speculating the Fed is done cutting rates (CNNMoney.com article). We’ll have to wait and see how these new tools work, but I don’t expect anymore steep rate cuts.
For the last few months the Fed has been cutting aggressively and ignoring short term inflation causing the dollar to decline significantly, and gold, oil and other commodities (a hedge against inflation) have rallied. Now, future rate cuts look unlikely because of the Fed’s aggressive action to help out the struggling banks. Therefore, the dollar should rally and gold, oil, and other commodities should sell-off because there isn’t the same threat of inflation as there was a few weeks ago. The dollar has rebounded the last two days and will continue to rebound as long as investors get proof the Fed’s new instruments are working. With the dollar rebounding, oil, gold, and other commodities look more expensive, so in the near term I expect them to decline even more.
Back to today’s events: Morgan Stanley’s (MS) better-than-expected earnings report eradicated some investors’ fears regarding troubled banks access to capital. MS reported Q1 net income of $1.55B, or $1.45 per share – a 42% from last year. The average analyst EPS estimate was $1.01 per share. Return on equity (how efficiently a company reinvests its earnings) for Morgan Stanley “dropped to 19.7% from 30.9% a year earlier. That compares with 15% at Goldman and 8.6% at Lehman” (Source: Bloomberg.com).
More relief came from the government today when the surplus capital requirement for Fannie Mae and Freddie Mac “was cut to 20% from 30% by the Office of Federal Housing Enterprise Oversight. The government-sponsored enterprises (Fannie and Freddie)…also agreed to raise ‘significant’ new capital.” This move will allow Fannie and Freddie to buy more home loans and it will provide $200B in liquidity (Source: Bloomberg.com).
Visa had its initial public offering (IPO) today and the stock finished the day at $56.50, well above its $44 offering price. Visa sold 406M shares for a total value of $17.9B making it the biggest IPO in history. MasterCard, one of Visa’s close rivals, has gone up over 450% since its IPO in 2006 and this is just one reason why investors are so bullish on Visa (Sources: Bloomberg.com, CNBC.com).
The huge sell-off that occurred today, as well as the rally in Treasuries (the 1 month T-bill went from yielding 0.71% yesterday to 0.26% today) could suggest there is still some de-leveraging going on by hedge funds to meet margin calls (Source: CNBC TV).
In other news…
- Tomorrow, the weekly initial jobless claims number will be reported
- The only major earnings report tomorrow is from FedEx
- After hours, Nike is up 4% thanks to a strong earnings report (Source: Marketwatch.com)
- Home Depot was downgraded and Countrywide Financial was upgraded
- “Merrill Lynch sued XL Capital Assurance Inc. to force the bond insurer to honor $3.1B of guarantees on CDOs” (Source: Bloomberg.com)
- Investment banks have already used the Fed’s discount window – Lehman Brothers has already borrowed $2B, Goldman said they plan on using it soon, and Morgan Stanley said it has already borrowed money (Source: CNBC.com)
DJIA 12,099.66 -293.00 (-2.36%)
Nasdaq 2,209.96 -58.30 (-2.57%)
S&P 500 1,298.42 -32.32 (-2.43%)
NYSE Volume 5,439,844,000
2-Yr Bond 1.54% -0.04
10-Yr Bond 3.38% -0.10
30-Yr Bond 4.22% -0.13
Crude Oil (Apr) 104.48 -4.94
Nat Gas (Apr) 9.024 -0.390
Gold (Apr) 945.30 -59.00
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