Thursday Roundup: Goldman Drives Equities Higher

 |  Includes: AAPL, GOOG, GS, OIH, SPY, USO
by: Vikram Saxena

The equity markets continued where they left off yesterday and closed higher across the board, with the Russell2000 and the Nasdaq making new 2009 highs. The markets were led by two calls related to Goldman (NYSE:GS): the first an upgrade of the financial sector including Goldman, and the second, Goldman’s new target for crude oil for 2009 ($85) and 2010 ($95). Goldman also predicted a sub-500K loss in non-farm payroll numbers due tomorrow. Consequently the equity markets were led up by the energy, the financial sectors and large cap technology stocks.

Treasuries, Mortgages and the Dollar Sell-Off

The currency markets had a particularly volatile day today. The Euro sold off after the ECB kept its rates and quantitative easing policy unchanged. The British Pound was hit by a false rumor that Prime Minister Brown had resigned. The dollar also strengthened after retailers reported large drop in sales. The Jobs Report came as expected, but in a bullish tape was interpreted quite positively, leading to a subsequent sell-off in the dollar.

The currency markets have ignored the failure of the bond auction in Latvia, and the re-emergence of risks associated with the non-Euro European economies on the European financial system.

Apart from equities, the story of the day was the sell-off in long dated treasuries and mortgages. Any chance of a pull-back in mortgage rates is decreasing and will continue to have a negative effect on housing. The spread between 2yr and 10yr treasuries reached a new record today of 278.66bp, the steepest the yield curve has been for a long time.

Financial Markets and Economic Recovery

The financial markets are now pricing in either a very weak dollar or a very strong recovery. However the foundation neeeded to drive the economic recovery is being shred into pieces.

Energy prices are rising aggressively, based primarily on speculation of a supply-demand mismatch in the future. A weak dollar is aiding this run. This is eerily similar to last year’s run in oil prices, when a weak dollar, lead to oil spiking to $145, even though there was no sign of any real physical shortage of oil. Big banks have accumulated a lot of oil and are now driving the prices up with their reports. JPMorgan has hired a brand new super-tanker to store heating oil off the coast of Malta, the company’s first such booking in five years. As gas prices start approaching $3/gallon, they are again likely to pinch the consumer.

Long term interest rates are also likely to have a detrimental effect on mortgages and corporate spending. But the equity markets are ignoring all those signals. The market wants to go higher since there are a lot of underinvested managers. It is going up on hope that an economic recovery will materialize to justify the prices. It is ignoring the risks to economic recovery by collateral damage caused by the current market structure.

Market Outlook

The market continues to be in a very strong bullish trend. With Russell2000 and the Nasdaq making new highs, it is very likely that the S&P500 will also make a new yearly high Friday. The SPX may have been waiting for the Non-Farm Payroll numbers to get out of the way before it charges ahead. Unless there a major negative surprise, I do not expect the bullish bias to change.