Farrell: The G-20 Bounce & Beyond
He talked and it rallied!
It's been a long time since we had our President speak and the market rally, but we saw it on Thursday when President Obama had a news conference at the G-20 meeting and the market went up 50 or so points on the Dow Jones average.
The President looked, well, Presidential, and the media seemed to love him and so did the markets. It became academic to me if the gain held since we are well into a rally that needs a rest. Just that he could speak and not send the market into a tailspin was enough.
The G-20 kids played well in the sandbox. Sarkozy didn't walk out, Merkel said enough stimulus already (but nicely), and by and large they all said most of the right things. Most importantly, they agreed to meet again, and international dialog continuing is always a positive. I could have used more assurances about anti-protectionism, but I don't think that's where their heads are at.
Back in the US, the FASB did relax the mark-to-market accounting rules, and massive accounting write-offs are less likely. Soleil clients should be sure to get Carole Berger's summary of how the rule changes could boost capital ratios. The report is concise and very much to the point. Another good call was from Mike Ward of Soleil/Ward Transportation Research who sees more activity in auto showrooms, a pickup in used-car prices, and more available financing for qualified customers looking to buy a car. The latter point will only be helped by the continued rollout of the TALF program, the effects of which are already starting to show. Car sales reported yesterday showed an anemic 9.8 million annual rate of sales, but, as noted by Mike, the trends at the end of the reporting period were more encouraging.
China reported a surprising jump in their Purchasing Managers Index to 52.4 from 49 in February, and, while still low, it does indicate expansion of that critical economy. Freddie Mac announced last week's average 30-year fixed-rate mortgage was set at 4.78%, the lowest on record. We are close to a point where every mortgage in America could theoretically be refinanced. Many will be under water as the house price has collapsed and can't be refi'd, but there are a lot that can be. That is good for consumers and for bank profits as well.
Another indication of the likelihood of better bank profits came from my pal, Doug Kass, who in addition to being Lola Jane Farrell's honorary uncle, called this most recent rally to the day. Dougie noted that Bank of America sold three-year debt backed by the government at only 100 basis points over the comparable Treasury rate. At such a low cost of financing, bank lending will be very profitable.
The market finally showed a little fatigue at the end of the trading session on Thursday, but the S&P 500 still closed at 834, up 23 points for the day or about 2.8%. The average closed just above the 100-day moving average at 832; wasn't it only two days ago that we were wrestling with the 50-day at 789? The VIX, a measure of fear and volatility, closed below (that's the direction we want this index to go) its 200-day average, finishing at 42.65, with the 200-day at 44.90. The S&P has rallied 25% from its intraday low in early March, and a pause is in order. Remember the missive the other day that detailed how well markets do one year after a "breakout" month? That was for one year after, and 17 out of 20 times when we had a monthly gain of more than 8%, the market was nicely higher a year later. The month immediately following a big move has been decidedly mixed.
I'm guessing—and if you were to rely on me for trading advice, your career would be short and very painful—that we will consolidate some of our recent gains.