The Capital Market Ceased to Be a Value Discovery Mechanism

[Excerpted from Bill Cara's Daily Report]

In Friday’s post-U.S. Thanksgiving shortened session, volume was the lowest of the year, prices did sidetrack until 11:20, and there was an upward bias into the close, rising +120 points in the DJIA in the final 100 minutes.

At the close Friday, the DJIA (+102.43 +1.17% to 8829.04), S&P 500 (+8.56 +0.96% to 896.24) and NASDAQ Composite (+3.47 +0.23% to 1535.57) were very strong.

Before the day started, I remarked that equity prices were lifting, yet most traders were far too negative. In fact, the NYSE has just had the strongest four-day rally since 1933. After the half-day close, the five-day performance was the best since 1987.

Closing 3 hours later, the Toronto Composite and Venture Board were both much stronger as the flourish at the close in NY at 1pm and the powerful rally in the final 15 minutes in London (11:30am ET) carried on. At the close, the Toronto Composite (+516.85 +5.90% to 9270.62) and the Venture Board (+18.12 +2.42% to 766.35) were soaring.

On Friday in NY, the leading sector was: Financial ((XLF) +2.5%), while the only loser was Energy ((XLE) -1.6%).

Among the industries, Banks ($BKX +3.2%) and Broker-Dealers ($XBD +2.7%) were the leaders, while NatGas ($XNG -2.6%) and REITs ($DJR -2.1%) were losers. The REITs loss was an anomaly.

Goldminers ($XAU +0.84%) closed at 101.59 in NY but the Toronto stocks were much stronger with the 4pm ET close. In fact, Goldcorp (GG) closed up +0.67% in NY, but up +4.17% (for G.TO) in Toronto three hours later.

In the Cara 100, the winners included Teck (TCK) +24.7% and Silver Wheaton (SLW) +16.6%, after I had opined that both would do well on their own merits – if only the Bay Street Bandits would leave them alone.

Sorry, that was Thursday. Haha. On Friday the top two winners for the Cara 100 were (drum roll)… TCK (+16.0% to US$4.92) and SLW (+14.2% to US$3.45). TCK.B.TO closed at C$6.00 (-0.83%) and SLW.TO (+9.1% to C$4.32). The discrepancies account for the fact the Toronto market was open and very strong on U.S. Thanksgiving Thursday. Nevertheless, traders of widely-followed, dually-listed Canadian stocks ought to be conscious of the forex and open trading hours factors.

The Cara 100 losers on Friday were: Brunswick (BC) -9.7%, Votorantim Celulose e Papel (VCP) -8.7%, China Telecom (CHA) -6.0%, Petroleo Brasileiro (PBR) -5.3% and Research in Motion (RIMM) -5.0%. Volume in NY was almost non-existent.

The U.S. long bond ($USB) gained a further +0.40% to 128.56 as yields dropped across the board. The U.S. T-Bill yield plunged again to 0.02% annually, which means that traders would rather seek a safe haven than high yield. The corporate bonds are being killed, and the credit market spreads between corporate and treasuries are at record levels.

Until this credit market issue is resolved, the Trade of the Generation I called two weeks ago will not REALLY take off. There is still too much repatriation of USD, which happens when foreign securities are sold (selling the foreign currency) and the proceeds are left in $USD. That move keeps the $USD from crashing, but it is on the precipice. Forex traders are waiting for the repatriation move to end, which will kill the U.S. Dollar and the U.S. Treasury bond market. Already the other end of the trade, i.e., buying gold, has paid huge returns. As Bloomberg reported after the close Friday, “Gold futures for February delivery rose $7.70, or 0.9 percent, to $819 an ounce on the Comex division of the New York Mercantile Exchange. This month, the price rose 14 percent, the most since September 1999. In the week, the metal climbed 3.4 percent.”

As I remarked in Friday morning’s report, if the Depository Trust Corp system in the U.S. were functioning properly, banks would trust one another to properly settle their trades and bond prices would likely fall as capital would move faster into equities.

Crude Oil ($WTIC) was flat on Friday, closing at 54.43, down 1 penny.

Earlier in the day Friday, the Asia-Pacific equity markets were higher except for Shanghai (-2.44% to 1871.2). The Japanese Nikkei (+1.66% to 8512.3), Australia (+4.10% to 3672.7), Hong Kong (+2.48% to 13888.2), and India (+0.73% to 9092.7) traded higher.

On Friday morning, at 7:50am ET, I reported “the three main bourses were weak: French CAC was down -1.74%; the German DAX -1.78%; and the UK FTSE -0.64%. There were two selling waves (4:15am ET for 30 minutes, and another from 7:00am ET for 30 minutes). The market there is nervous awaiting the opening of the U.S. market to see if the banks are looking ok.” I had been concerned that the US T-Bill yield was plunging again, which would not help U.S. equity prices until after the European close. But with the early U.S. close (1:00pm), I noted that traders played the rally that started at 11:20am ET in NY at the same time in London, except that in London (from 11:15am to 11:30am ET or 4:15-4:30pm London time), there was a phenomenal push of +1.5% in the FTSE 100.

At the end of the session in Europe, the French CAC was up +0.38% to 3262.7; the German DAX up +0.09% to 4669.4; and the UK FTSE up +1.46% to 4288.0.

These are interesting times. Capital markets (equities, bonds, commodities, forex) are not trading on the basis of fundamental, quant, technical or macro-economic data. Hence, the capital market ceased to be a value discovery mechanism. The credit ring among the lending banks has broken, trades are not settling, and banks do not trust the counter-parties to their trades. A week ago, confidence in the capital market system sank to a low unseen since 1933.

Comments

[Prudent Man...:]

The Capital Markets only need transparency in order for it to discover price and value. We have gone through fifteen years of manipulation. One only has to look at LTCM, Enron, WorldCom, Tyco, etc. and ask: "Has there been any change?". Just the contrary. We don't need any new rules, regulations, regulators, etc. just enforce what is now on the books. What do the "Independent " Auditors" and Boards of Directors (see Robert Rubin) do for their fat pay checks? Then of course our non-term-limited pathetic Congress whose activities are virtually criminal adding more poison to the mix.

In the fifty years I have spent as an investment professional, the turning point in the industry started to sour when the broker/dealers were allowed to be investment advisers and have their own mutual funds and other horrible products. The fee income became so great, as is the well-spent lobbying money, that a culture is now nurtured (political and private) where anything goes resulting in Glass-Steagall being removed as well as the uptick rule, a couple of obvious perversions that are just the tip of the iceberg. Conflicts of interest abound and "Chinese Walls are a joke as manifested in any Wall Street cocktail lounge after the close of business..

Are current financial debacle has been caused by Wall Street with Congress as the co-conspirators. A generation of confidence has been destroyed which hopefully will be a catharsis. Do we really need the New York Stock Exchange? My first visit in 1962 questioned its honesty and certainly with the advent of the cathode ray tube the NYSE became an anachronism and it now is more so regardless of the sophistry espoused by its self-serving supporters.

2008 Nov 30 12:09 PM