[Excerpted from Bill Cara's Daily Report]
For the first three hours Friday in NY, a quadruple witching day, equity market prices side-tracked, then poof!... another slide into the close caused by uncertainties over the Toxic Asset Plan (TAP). Taxpayers are saying they are all tapped-out and traders are saying they don’t know what Treasury Secretary Geithner is cooking up, but they think it might not be a tasty meal.
Markets hate uncertainty, and nowhere more so than in the financial sector because of the immediacy from action to reaction. For instance, a tenth of one percent change in the Treasury Bond yields has immense implications for global portfolio values and management decisions. So whenever DC alerts us to change without explicitly outlining the change, the entire Financial sector (banks, broker-dealers, insurance, REITs, etc) is going to be hit. After TAP was said to be coming, the Financials (XLF -13.0%) collapsed in just two days. Traders are on tenterhooks.
In New York at the close this Friday (compared to the prior Friday’s close), the DJIA (-122.42 -1.65% to 7278.38) (7223.98); S&P 500 (-15.50 -1.98% to 768.54) (756.55); and NASDAQ (-26.21 -1.77% to 1457.27) (1431.50) were a tad higher but basically range-bound.
The Toronto Composite (-184.14 -2.12% to 8506.35) (8303.39), and Venture Board (-1.77 -0.20% to 901.80) (848.97) were a bit more positive because of (i) the Wednesday decision of the FOMC to reflate, which will help the natural resource sector of the country, and (ii) the fact that Canada’s banks are not up to their necks in toxic assets.
The US market had no winners on Friday. The best performing sector, healthcare (NYSEARCA:XLV) was flat. Drugs ($DRG +0.7%) lifted a bit. REITs ($DJR -8.5%) and Banks ($BKX -5.0%) led the Financials south.
You might be surprised to know that the prior Friday was almost a carbon copy: “the winning sector (Healthcare) was led by Healthcare Products ($RXP) and Drugs ($DRG), both up +3.2%. The losing sector (Financial) was led south by REITs ($DJR -2.4%) and Banks ($BKX -1.4%).”
Among the Cara 100 stocks that lifted, this Friday, there were just 12, and the leaders were Tata Motors (TTM +5.1%), Johnson & Johnson (JNJ +3.2%) plus a couple precious metals companies, Silver Wheaton (SLW +2.2%) and Goldcorp (GG +1.1%). With 88 losers, the losses could be expected to be higher: Brunswick Corp (BC -12.4%) and Nokia (NOK -7.6%) led these stocks south.
Something’s up with bonds. For the second straight day, the prices lifted and so did the yields. There was not much of a change on Friday ($USB +0.11% to 130.97), but let’s compare Friday’s close to Wednesday’s close (Monday through Wednesday were normal!):
Over two days, $USB lifted from 129.17 to 130.97, but the yields on the 30-, 10-, and 5-year Treasury bonds and notes also lifted: from 3.572 to 3.654; from 2.533 to 2.625; and from 1.515 to 1.638, respectively. All of this came out of the FOMC announcement at 2:15pm ET Wed., and probable market transactions, which carry the intent to reflate the US economy by selling to the banks T-Bills and buying their longer-dated bonds.
The 30-year T-Bond ($USB) lifted from a close on Tuesday of 125.55 to Friday’s close of 130.97, which is a gain of +4.32% in three days in the long-bonds. With the significantly lower yields (from Tuesday, prior to the FOMC announcement), the impact ought to be lower mortgage rates, which will allow Americans to re-finance with some comfort, taking pressure off the foreclosure problem, which helps the banks, making their assets less toxic. Of course, Tim Geithner is now going to say that traders will get more govt help in buying those toxic assets, so I am guessing that the buyers of those sub-sized and less-toxic assets will be DC and Wall Street insiders and wealthy investors.
But, at least, once this fire as been put out, the equity market will soar. Equity prices at this point have little to do with corporate earnings, or the macro-economic data that economists like Nouriel Roubini have been hammering into your head, and, in my view, they certainly are not going to crash -30% from here as Roubini seems to be shouting daily from his soapbox on financial entertainment TV. Once the toxic assets have been rendered atoxic, the credit default swap insurance problem that is presently sinking the global financial system soon becomes an historical footnote.
Life returns to normal – with a few new realities anyway: (i) US Treasury paper and the USD are garbage –- gold is the new money, (ii) it will be many years before Americans again trust their politicians or their bankers, and (iii) Beijing now calls the shots in the political power structure of the world because they are now America’s banker as the Fed ipso facto, like Fannie Mae and Freddie Mac, has become an agency of Treasury. Some even hold the opinion that the Fed (ie, private sector) has co-opted Treasury and has installed their New York general manager as Treasury Secretary.
The US Dollar managed a small bounce on Friday ($USD +0.97% from 83.03 to 83.83) after falling from 89.17 at the close a week ago Monday, which had been seven losses in the previous eight sessions. The other major currencies all closed significantly lower on Friday (Euro -0.61% to 135.82), Cdn Loonie (-0.07% to 80.61), Yen (-1.51% to 104.20), and Pound (-0.57% to 144.24). A week ago Monday, however, these prices were 126.12, 76.89, 101.10, and 137.70, respectively, so the trend is still $USD down and the others up. The futures for the $USD and Euro/USD closed the week at 84.34 and 135.52.
Oil prices ($WTIC +$0.03/bbl to 52.07) closed Friday largely unchanged, but up from 47.03 the previous Friday.
After a huge rally the previous day, $GOLD closed Friday down -$6.52/oz at 952.34.
Precious metal spot prices closed the week (compared to the previous Friday in brackets) for gold, palladium, platinum and silver at: 951.90 (927.20); 205 (197); 1105 (1051.5); and 13.73 (13.19), moving higher as the $USD sank from 87.36 to 83.83 over that same time period.
The closing DJIA futures were: 7215 (compared to 7232 a week earlier).
Earlier in the day Friday, Asia-Pacific equity markets closed with mostly lower prices, as traders there sense the uncertainty in DC. Japan was closed. Hong Kong (-2.26% to 12833.5), Shanghai (+0.68% to 2281.1), Australia (0.35% to 3405.5), and India (-0.39% to 8966.7) were mixed. At the close in Europe, the French CAC (+0.51% to 2791.1), German DAX (+0.63% to 4068.7) and UK FTSE (+0.68% to 3842.9) had turned a bit stronger from the morning, which had been weak.