Sunday, May 10, 2009

Weekly Market Wrap Up

The government's financial sector stress tests consumed markets this week, with rumors, leaks and then official results dispelling some of the uncertainty hanging over the financial sector. Corporate results continue to be mixed as earnings season winds down, while April same-store sales showed a few patches of green among the dying weeds of the US retail sector. Housing and jobs data indicated again that the steep declines in these two key sectors are moderating somewhat. On Monday the March Pending Homes Sales index rose for the second straight month and March Construction Spending grew slightly after five straight months of decline. Wednesday's April ADP employment data and Friday's non-farm payrolls reading were both better than expected, with the latter coming in below 600K for the first time in five months. The unemployment rate rose to just shy of 9%, still its highest level since late 1983. For the week, the S&P 500 rose 5.9%, and the DJIA climbed 4.4%; the Nasdaq Composite lagged other indices but still managed a 1.1% gain, rising for the ninth straight week.

After days of speculative media stories citing sources, most of the stress test results were leaked to the media on Wednesday, helping to take the edge off the official disclosure the following day. Before the results dropped Treasury Secretary Geithner told PBS that none of the banks being tested were at risk of insolvency, and insisted that the results would be "reassuring." Regulators found that nine of the 19 banks being tested have enough capital to withstand a deeper recession, while the other ten need to raise a total of $75B to withstand potential future losses under the "adverse scenario." Bank of America, Wells Fargo and Citi were told to raise a total of more than $53B, with BoA alone requiring $33.9B. Banks in need of capital moved quickly to begin launching debt and equity offerings to satisfy government demands, with Morgan Stanley and Wells Fargo announcing offerings in the minutes before the official stress test results were released.

Wards of the state GM, Fannie Mae and AIG reported titanic quarterly losses this week. General Motor lost $6B, which is at least a bit better than its $9B+ loss last quarter. AIG managed to trim its loss down to the smallest seen in the last six quarters, to a mere $4.4B. Fannie posted a loss of $23.2B and asked for another $19B in government aid.

In line with many other economic indicators, April same-store sales showed a few green shoots, with selected retailers outperforming analysts estimates thanks to the warmer weather and glimmers of economic improvement. Wal-Mart led the pack, reporting April SSS of +5%, nearly twice estimates, with Costco reporting flat comps versus -6.5% estimates. Several mall chain apparel retailers also exceeded estimates (GPS -4% v -7.2%e, AEO -5.0% v -7.6%e, ANF -22% v -26.5%e). However, commentators are noting that estimates were badly beaten down in the wake of all the pessimism in the first quarter, making it easy for some retailers to outperform. Luxury retailers still struggled with sharp sales drops.

Other names with broad consumer exposure posted strong quarterly results. CVS was more or less in line with the Street, and also reported firm quarterly same-store sales growth. Kraft Foods beat earnings estimates and reaffirmed a solid full-year outlook, with executives noting that they are starting to see some signs of economic recovery. Molson Coors bested earnings estimates, doubling its quarterly profit over last year's levels. Gaming stocks had mixed results, with Wynn and MGM reporting quarterly losses thanks to travails in Las Vegas, and in Wynn's case, trouble in Macau. On the conference call, MGM's CEO said the quarter was "quite brutal" in Vegas. On the other hand, Las Vegas Sands and Boyd both beat earnings expectations, with LVS eking out a tiny profit on an adjusted basis after last quarter's loss.

The Nasdaq has lagged the other major US indices, with profit taking hitting tech names across the board after eight weeks of sustained gains. Cisco offered a solid quarterly report Thursday afternoon, with earnings and revenue slightly ahead of analysts' estimates, although that did not keep shares of CSCO from slipping from last week's nearly six-month high. Chipmaker NVIDIA lost a bit less than expected and beat revenue targets. Computer security firm Symantec reported solid results, although its big $413M goodwill write down prompted a round of analyst ratings cuts. Garmin missed estimates. Also note that Amazon made a splash this week with its new large-screen Kindle device, though question remain about the steep retail price of the unit. NYSE-listed Sprint surprised investors with a small quarterly profit, although this was overshadowed by the company's biggest ever quarterly net loss of wireless customers, which was blamed on the growing impact of pre-paid plans.

In fixed income, treasuries found themselves at the mercy of growing economic confidence this week as the "flight to safety" trades so prevalent in recent months continued to unwind. The benchmark 10-year yield moved out to fresh 2009 highs above 3.30% as investors scrambled to add risk to their portfolios. T-bill yields inched higher while interbank lending rates steadily improved, with 3M USD Libor notably fixing below 1.00% for the first time in history. Inflation hawks noted that 5- and 10-yr TIPS breakeven spreads were moving back to pre-crisis levels as the week drew to a close. The 3- and 10-yr note offerings went reasonably smoothly early in the week, but stock and bond traders alike highlighted the substantially higher yield needed to attract demand for the first 30-year bond to include a second reopening on Thursday. The Long Bond re-opening drew an almost unheard of yield tail of 9bps. The 30-year saw its yield top 4.30% along an ever-steepening curve. Note that across the pond, bunds and gilts both broke key support levels in the wake of QE announcements from the BoE and ECB, with 10-year yields in both markets reaching their highest levels of 2009.

In currencies, traders ignored the EU Commission's downgrades of its 2009 and 2010 GDP forecasts for the entire 27-member Union and the smaller Euro Zone, instead focusing on continued improvements in economic data from emerging market countries and PMI readings from around the world. Better PMI data in Europe and Asia, with PMI levels in China and India moving above 50, helped stimulate risk appetite. Brazil's April trade balance beat expectations. with exports rising more than expected. Naturally the rate decisions in Britain and Europe were central factors, with traders awaiting details on qualitative easing strategies.

The Bank of England left its key interest rate unchanged at 0.50%, as expected, and increased its quantitative easing spend to £125B from £75B. The GBP saw significant weakness in the aftermath of the announcement, with GBP/USD falling from the 1.5170 level to test 1.5030 and EUR/GBP moving back above the 0.8800 key intra-day chart level. Over on the Continent the ECB lowered its refi rate by 25bps to 1.00%, as expected, and said it would begin purchases of euro-denominated covered bonds. EUR/USD tested lower toward the 1.3280 level following this initial round of QE, but bearish euro sentiment quickly eroded gains when the bank admitted the operation would only be €60B for now. On the press conference, ECB President Trichet stressed that the bank is "not embarking on a quantitative easing policy."

The greenback began the week at its best levels against the European pairs, aided by holidays in Japan and the UK. But the rising risk appetite though the week kept both the USD and JPY softer, with European and commodity-related currencies firmer. The EUR/USD moved from its 1.3225 low seen on Monday to probe above 1.3520 by Friday and tested above its 200-day moving average for the first time since August of last year in the wake of the stress test results. USD/JPY maintained its recent range for the most part. Former Japanese Official Sakakibara (aka "Mr Yen") amended his view on the JPY, noting that he now sees the yen weak against the USD and likely to trend toward the 110 level (compare this to his USD/JPY around 100 prediction back in early March). The CAD and AUD commodity pairs were firmer on higher commodity prices and risk appetite. CAD was also aided by its first month increase in its employment data since last September.

In Asia, the commodity drivers of the Far East growth engine dominated headlines for much of the week, with a generous portion of strong economic data coming out of Australia. On Monday, March Building Approvals figure showed a second straight increase in housing activity (after nine months of contraction), while Tuesday saw Aussie consumer traffic register another big gain in monthly retail sales. Despite the prior month's accelerated unemployment growth and disinflationary trends, the Reserve Bank of Australia chose to put on the breaks to the pace of monetary easing and stood pat at 3%. In Japan, traders returning from the Golden Week holiday shrugged off disinflationary pressure and official growth downgrades from the prior week, sending the index above 9,400 - its best level since early November - even as Japan currency sellers continued to struggle with pushing USD/JPY above centennial mark.

As noted, the rebound in confidence and optimism about Chinese stimulus continued to bolster commodity prices this week. Crude futures rose steadily throughout the week, posting a 10.2% gain, and reaching their best level in six month. Natural Gas finally joined in the energy complex rebound, with the generic futures rocketing up 22% on the week and moving above the 90 day SMA for the first time since July 2008. Spot gold also posted gains, ending up 3.4% on the week at $916.50.

Trade The News Staff Trade The News, Inc.

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