Throughout the day, the Dow and crossed between positive and negative territory almost a dozen times, but ended on a positive note. Just as with yesterday, there was no single defining event to point to, but appears to be nothing more than increased optimism about the economy.
Market Activity for August 13, 2009
On the plus side, there were three pieces of good news to look at. First, the market was happy to see the WMT news. Analysts had expected the retail giant to report earnings of $0.85 per share and instead WMT surprised the market to the upside and announced actual earnings of $0.88 per share. The stock gained $1.37 per share, or 2.71 percent.
I am often asked why the market gets so excited over just a few pennies. The answer is that it is a few pennies per share. WMT has almost 3.9 billion shares outstanding, so this earnings announcement means that WMT’s profit for the quarter was $117 million more profit than analysts had expected. That’s why those pennies are worth so much!
The second piece of good news was that John Paulson of the bought $168 million shares of Bank of America (BAC). Who is John Paulson, you ask? He is a renowned hedge fund manager who not only foresaw the subprime crisis, but turned $2 billion of his client’s money into $15 billion in 2007 by betting against housing. His results were more modest in 2008, earning only 37.6 percent while the market fell 37 percent.
In short, it’s a big deal when he makes a move. Unlike a lot of the bets on the subprime market which were done with securities without much transparency, he had to file his new ownership stake in BAC. He is now the fourth largest shareholder and he has already made a good deal of money on the buy.
Just because he has bought shares, doesn’t mean they are a buy today, though. His purchases were between $6.82 and $14.17 (the high and low during the second quarter) and the stock now trades at $17. That means he has earned between 20 and 150 percent on his trade, which isn’t bad for a $1 billion plus investment.
The third factor in yesterday’s jump was the continued evidence that credit markets are getting back to normal. One of the more technical measures of credit markets is the LIBOR-OIS spread. While it’s probably not critical to explain what these two rates are, suffice it to say that spreads have tightened to what most consider normal levels.
The negative factors weighing on the market were the retail sales and jobless claims data. As we mentioned yesterday, retail sales were expected to be positive, but fell by 0.1 percent instead. Even worse, retail sales ex autos, fell by 0.6 percent. This is considered a broad measure of consumer spending, which, in turn makes up roughly 70 percent of economic activity. Obviously, consumers are still concerned about job losses and stagnant incomes and are continuing to tighten their belt.
The jobless claims showed that 558,000 Americans filed initial claims for jobless benefits last week. While you can’t get more timely than last week, initial jobless claims are discounted to some degree because they can be so volatile. Plus, economists were expecting 545,000 claims, so the number wasn’t too far from expectations. The four-week moving average was 565,000.
Futures are unchanged following the release of the Consumer Price Index (CPI) data, which showed that the cost of living in the U.S. was unchanged month-over-month. Year-over-year the index that tracks inflation fell 2.1 percent, a bigger decline than expected. Peter will pick apart the releases for you on Monday. Until then…
Have a great weekend!
David Ott, Partner
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