Yesterday the kind of day that I really like: anytime you have a huge up market day like Tuesday, you really expect to give back at least half of it the very next day, so when that doesn’t happen, it feels like a gift.
Despite the far worse than expected $821 million loss for Freddie Mac (plus some write-downs in the billion dollar range), the Dow Jones Industrial Average rose 40.30 points, or 0.35 percent, to close at 11,656.07. The real stock market winner of the day was the Nasdaq, which gained 1.21 percent after Cisco Systems, Inc (ticker symbol: CSCO) announced stronger sales and net income.
Additionally, oil was lower for the third day in a row as inventory data showed that U.S. consumers are changing their driving habits in response to higher prices (kind of like what you would might remember from Econ 101: prices go higher and demand fall leading to lower prices). At the low point, oil had fallen to $117.11 per barrel.
Market Activity for August 6, 2008
At Acropolis, we have had the view that oil was overpriced. That’s the good news. The bad news is that we started saying it before it had crossed $80 per barrel so we’re still way above what we think it ought to be.
Having said that, however, oil has had such a precipitous drop just in the month of July that it does lead one to believe that oil prices are clearly not operating on fundamental factors alone.
Although the U.S. is consuming less crude, Saudi Arabia has increased their deliveries and demand growth in India and China hasn’t changed in the last 30 days. The obvious change was in trader sentiment. It is widely believed that one of the largest trades among Wall Street hedge funds is “long oil and short financials.”
This strategy was no doubt a winner for most of the year – energy prices are still high compared to Jan. 1 and financials have obviously been a disaster. However, in July, when Wells Fargo came out with better than expected earnings and increased their dividend, the trade turned upside-down as financials had a 50 percent rally from their lows, which undoubtedly forced a lot of short covering and unwinding long positions in energy.
This morning, futures are pointing lower this morning as the insurer American International Group (ticker symbol: AIG) posted a worse than expected $5.36 billion loss on even more mortgage related write-downs.
This is the third consecutive multi-billion dollar loss for the insurer related to mortgage investments. Obviously this kind of write-down, along with the news from Freddie Mac yesterday is enough to keep everyone on edge with respect to the bottom in housing.
In similar news, mortgages issues in the first part of 2007 are already going bad a much faster pace than mortgages issued in 2006. The data goes through April 30 of last year and shows that 0.91 percent of prime mortgages from those four months are seriously delinquent after 12 months, which means that they are either in foreclosure or 90 days past due. The data from 2006 shows that 0.33 percent were in serious delinquency.
The only good news on that data is that the lending really did tighten up by the end of the year, so there is some sense that there could be an end point to the lax lending standards.
In semi-related news, July same-store sales fell short of expectations for the second straight month, but discounters like Wal-Mart continued to pick up the slack. Again, this seems like Econ 101 – in tight times, it seems obvious that consumers would forgo $50 jeans at The Gap and buy $15 jeans at Wal-Mart (disclosure: I have no idea what jeans cost at either store, but you get the idea).
Initial jobless claims just came in higher than expected at 455,000. We will get into more specifics of the jobs number tomorrow, but it looks like we may give back some of the gains made in the last two days.
Have a great day!
Dave Ott, General Partner
Despite the far worse than expected $821 million loss for Freddie Mac (plus some write-downs in the billion dollar range), the Dow Jones Industrial Average rose 40.30 points, or 0.35 percent, to close at 11,656.07. The real stock market winner of the day was the Nasdaq, which gained 1.21 percent after Cisco Systems, Inc (ticker symbol: CSCO) announced stronger sales and net income.
Additionally, oil was lower for the third day in a row as inventory data showed that U.S. consumers are changing their driving habits in response to higher prices (kind of like what you would might remember from Econ 101: prices go higher and demand fall leading to lower prices). At the low point, oil had fallen to $117.11 per barrel.
Market Activity for August 6, 2008
At Acropolis, we have had the view that oil was overpriced. That’s the good news. The bad news is that we started saying it before it had crossed $80 per barrel so we’re still way above what we think it ought to be.
Having said that, however, oil has had such a precipitous drop just in the month of July that it does lead one to believe that oil prices are clearly not operating on fundamental factors alone.
Although the U.S. is consuming less crude, Saudi Arabia has increased their deliveries and demand growth in India and China hasn’t changed in the last 30 days. The obvious change was in trader sentiment. It is widely believed that one of the largest trades among Wall Street hedge funds is “long oil and short financials.”
This strategy was no doubt a winner for most of the year – energy prices are still high compared to Jan. 1 and financials have obviously been a disaster. However, in July, when Wells Fargo came out with better than expected earnings and increased their dividend, the trade turned upside-down as financials had a 50 percent rally from their lows, which undoubtedly forced a lot of short covering and unwinding long positions in energy.
This morning, futures are pointing lower this morning as the insurer American International Group (ticker symbol: AIG) posted a worse than expected $5.36 billion loss on even more mortgage related write-downs.
This is the third consecutive multi-billion dollar loss for the insurer related to mortgage investments. Obviously this kind of write-down, along with the news from Freddie Mac yesterday is enough to keep everyone on edge with respect to the bottom in housing.
In similar news, mortgages issues in the first part of 2007 are already going bad a much faster pace than mortgages issued in 2006. The data goes through April 30 of last year and shows that 0.91 percent of prime mortgages from those four months are seriously delinquent after 12 months, which means that they are either in foreclosure or 90 days past due. The data from 2006 shows that 0.33 percent were in serious delinquency.
The only good news on that data is that the lending really did tighten up by the end of the year, so there is some sense that there could be an end point to the lax lending standards.
In semi-related news, July same-store sales fell short of expectations for the second straight month, but discounters like Wal-Mart continued to pick up the slack. Again, this seems like Econ 101 – in tight times, it seems obvious that consumers would forgo $50 jeans at The Gap and buy $15 jeans at Wal-Mart (disclosure: I have no idea what jeans cost at either store, but you get the idea).
Initial jobless claims just came in higher than expected at 455,000. We will get into more specifics of the jobs number tomorrow, but it looks like we may give back some of the gains made in the last two days.
Have a great day!
Dave Ott, General Partner
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