Bad Bank Bailout Triggers Financial Stock Rally

[Excerpted from Bill Cara's Daily Report]

Buoyed by the "bad bank bailout" the new administration is floating, financial stocks shot ahead from the opening gun, lifting the broad market to 2% gains in early morning trading. Goldman Sachs (GS) exploded over 7.7 points on the opening before settling up +12.6%; Bank America (BAC) gapped up 15% and closed +13..69%; and Wells Fargo (WFC) opened 25% higher and closed up +30.88%.

By the end of the session, the DJIA (+200.72 +2.46% to 8375.45), S&P 500 (+28.38 +3.36 to 874.09) and NASDAQ Composite (+53.44 +3.55% to 1558.34) all closed sharply higher. So too did the Toronto Composite (+146.60 +1.67% to 8906.23), but not the Venture Board (+2.05 +0.24% to 869.92). On a strong week otherwise, the Venture Board is up +1.0%.

But the equity market may have moved to a new, higher trading range. The S&P 500 broke out above 850-855, and the NASDAQ is now above many short-term Moving Averages that are important points of resistance for technically-oriented traders.

Overnight, the equity markets were mixed: the Nikkei 225 gained +1.79% to 8152.1; Australia was up +0.76% to 3461.3; and Hong Kong, which had been closed three days for Chinese Lunar New Year celebrations, soared +4.58%, in catch-up mode. But Shanghai, which also had been closed, dropped -0.71% to 1990.7, despite monetary authorities there pointing to a +8% economic growth pattern for 2009. India’s Sensex BSE 30 was down -0.23% to 9236.3.

Earlier in the day, at 7:30am ET, the European bourses were selling off (taking profits is the expression): French CAC down -1.3%; German DAX -1.0%; and UK FTSE 100 -1.8%.

On balance, traders are focused on corporate earnings reports, which are more negative than positive. The fact that the FED maintained the same basic posture on monetary policy and rates was already discounted in the market.

Volume in NY was still low, but did pick up a bit.

The winning sectors were Financials (XLF +12.8%) and Consumer Discretionary (XLY +4.3%). Utilities (XLU +0.6%), although rising, was the laggard.

Among industry groups, the action was mostly in the financials: Banks ($BKX +14.4%); Broker-Dealers ($XBD +10.4%); and REITS ($DJR +8.8%), were well ahead of the rest. Goldminers ($XAU -1.6%) were soft, as expected.

As for the Cara 100, there were 92 winners and just 8 losers. The losers included precious metals companies Goldcorp (GG -2.9%), Kinross Gold (KGC -0.6%), and SLW -0.5%. Bristol Myers (BMY -3.3%) was the weakest. The leaders were mostly banks: Germany’s Deutsche Bank (DB +23.6%), India’s ICICI Bank (IBN +15.0%), Korea’s Kookmin Bank (KB +12.9%), and the UK’s HSBC (HBC +10.4%).

Nucor (NUE +11.9%) was also hot. NUE was down -5.0% the previous day when I noted that “traders were told steel demand is lowest now in years, dropping rapidly”. This is yet another example of media being used as a take-out party by deceitful traders.

Thursday, WSJ reported that Ford Motor (F) announced a 4Q08 net loss of -$5.9 billion, but reiterated their position the company doesn't plan to seek a government bridge loan unless it is hit by "a significantly deeper economic downturn or a significant industry event," such as the bankruptcy of a competitor.

Wednesday, US Treasury Bonds pulled back again. The 30-year $USB dropped sharply -1.74% to 128.92. Yield on the 30-, 10- and 5-year Treasuries ended at 3.434%, 2.656%, and 1.681%, respectively. T-Bill yields have lifted (a lot) from 0.100% to 0.180%.

The $USD strengthened +0.37% to 84.64, and the Euro also lifted +0.08% to 131.77. That is the second day in a row where the $USD and Euro both moved in the same direction. The Yen dropped, losing -1.44% to 110.78, but the Pound soared again +0.91% to 142.70, for an incredibly volatile two-week ride. The Loonie also soared +1.56% to 82.62.

The gold futures ($GOLD) dropped for the second day in a row, -$9.30/oz on Tuesday and -$11.40/oz on Wednesday, closing at 890.00. As I pointed out two days ago, when I started selling out my gold positions because I didn’t like the risk, “This is a crucial level, which if it holds could challenge the 935 level next, but could also back down here to shake traders’ confidence in precious metals.”

Crude Oil (March) futures today are lower at 9:10am at 40.60, down from 40.95 at 7:30am.

Spot prices for gold, palladium, platinum and silver, at 9:27am ET (compared to 7:30am are): 881.68 (880.05), 189 (188), 951 (947), and 11.85 (11.77), respectively. Actually, because of the currencies, looking pretty good, despite the added risk.

The $USD futures has backed off a tad (compared to 7:30am), to 84.855 (84.885), and the Euro has lifted a bit as well at 131.45 (131.30) in the past two hours.

This Thursday morning (9:30am ET), the DJIA futures are down -88 at 8234, down from 8264 at 7:30am.

Qualcomm (QCOM) earnings disappointed.

Comments

[Prudent Man...:]

We have a "Bad Bank" that has worked: The FDIC. I guess those geniuses on Wall Street never heard of it and what it did in the eighties, a tougher economy than we see now.

We don't need another super bureaucracy when we have an operation already in place unless the Congress and Administration want jobs for their political hacks.

I am trouble with that so-called bastion of Capitalism rallying on every move our government makes to Socialism. Maybe just bear traps.

Jan 29 10:40 AM