Energy stocks, for example, were weak throughout the day on natural gas (down 14%!), but the minute the commodity market closed at 2:30 pm New York time, they too staged a modest rally and most were up for the day.
The bad news is that financials began dropping the minute prices on the 3- and 6-month Treasury bills began rising mid-morning, a sign that the stock market--and certainly financials--remains at the mercy of the credit markets. Even here, though, there are signs the markets are moving on any piece of news: after Senator Chris Dodd, chairman of the Senate Banking Committee, said on CNBC that he was having a meeting tomorrow with Bernanke and Paulson, the Treasury bill rally reversed, and financials began coming off their lows.
Are stock traders really so naive that they think that Senator Dodd, as influential as he is, is going to sway Mr. Bernanke to cut interest rates? Intellectually, they know this is nonsense; emotionally, they believe it can only help.
The meeting is at 10 am New York time tomorrow; look for some statement from Sen. Dodd around 11 am.
Mid-morning observations: (from earlier Monday)
1) Much more typical August Monday than we have seen in, well, a year: much lower volume, than recently, most stocks fractionally positive. One thing hasn't changed: sell into any strength in financials; brokers down fractionally.
2) There is considerable debate about what to do with earnings estimates for financials, particularly brokerage stocks. Many think current estimates are too high. Quarter is ending for major brokers in next few weeks.
David Bianco at UBS actually RAISED his 2007 earnings estimates for the entire S&P 500 today. He acknowledged a slowing GDP and that financials would be "challenging," but said that was reflected in their 2008 estimates and that he saw strength in techs and industrials.
3) Credit Suisseone of several firms to relate the current situation to the Long Term Capital Management (LTCM) crisis of 1998, when the Fed engineered a bailout.
But things are different that 1998, they note this morning in a note to clients from their London office:
- "Valuations are better now than they were at the time of the LTCM crisis.
- Global growth is more diversified.
- Corporate balance sheets and FCF are much stronger.
- Banks are better capitalised."
4) Finally, Charles Biderman at TrimTabs notes that the U.S. equity market value has dropped $2.2 trillion from its high (total value of the U.S. stock market is now $19.6 trillion). The total of all subprime mortgages--$1.4 trillion, according to Biderman. So we have lost $2.2 trillion of market value worrying about $1.4 trillion in subprime mortgages. Of course, leverage has greatly magnified the effects and needs to be taken into account.
Traders: The Fed's on Our Side(from earlier Monday)
Despite the Fed's action on Friday, Wall Street is clamoring this morning for actual fed funds rate cuts from the Fed. JP Morganfor example, told clients over the weekend that the "cut in the discount rate helps, but is not enough."
At least most traders come in feeling that the Fed is on their side. Many are drawing parallels with the Long Term Capital situation in 1998, where the Fed arranged a bailout and then (beginning in September 1998) proceeded to lower interest rates. This analogy no doubt makes central bankers cringe, since they surely do not want to think that they are going to suddenly accommodate another global equity surge.