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The Swagger Is Back On Wall Street!-Outlook For Stock Markets-VRK100-19102009
The Swagger Is Back On Wall Street!-Outlook For Stock Markets-VRK100-19102009
The Swagger Is Back On Wall Street!-Outlook For Stock Markets-VRK100-19102009
The world’s financial markets are on a sweet pot, except the value of US dollar,
which has been on the back foot for quite some time now. Though the earnings
from the US have, so far, been a mixed bag, for the third quarter; investors have
been quite sanguine about the direction of stock markets the world over. As a
result, all the major stock indices, including the Dow, FTSE 100, India’s Sensex,
DAX, Nikkei 225 and Hang Seng have all been pushing to their one-year high
levels. This piece of article analyses the various issues involved here and the
outlook for world markets in a brief and lucid manner.
3,600
4000 3,200
2,500
3000
1,900
1,640
2000
US D m illion
1000 101
-1000 Bank of Citigroup Goldman Sachs JP Morgan General Electric Google Intel
-2000 America
-3000 (2,200)
As depicted above, the important first results of American companies are a mixed
bag. While Bank of America has made a net loss of USD 2.2 billion for the third
quarter of this year, Citigroup made a modest profit of USD 100 million. On the
contrary, Goldman Sachs, JP Morgan and Google have surprised the markets
with their better-than-expected earnings and net income for the third quarter.
Tech kingpins, Intel and IBM have surpassed Wall Street’s estimates. As a result,
the Dow has reacted extremely positively to the earnings/net income and the
Dow has tested 10,000 and it reached its yearly high of 10,100 on Monday close.
One common thread that runs through these results is this: Banks have shown
resurgent profits, not due to any increase in their core businesses, but as a result
of strong showing in their investment desks, led by rallies in the commodities and
stock prices the world over. Banks that relied more on consumer finance have
suffered with severe write offs being effected by them as shown below:
Bank of America:
It reported a loss of USD 2.2 billion for the quarter. The loss is after dividends are
paid to preference shareholders. It set aside USD 11.7 billion for credit losses
during this quarter and made losses in credit cards, mortgages and insurance
biz; while the global markets division, which includes ex-Merrill Lynch business,
made good profits.
Citigroup:
It is much more exposed to consumer loans and naturally it could show a profit of
only USD 100 million. It has written off USD 8 billion of credit losses in third
quarter.
Goldman Sachs: Investment Banking is the biggest contributor to profits.
JP Morgan: Strong performance in investment banking division.
General Electric:
Net profit fell by 44% y-o-y while revenues were down 20%. The conglomerate is
seen as a barometer of the US economy and is the only co to have continued in
the Dow Jones for more than a century. It's a microcosm of the S&P 500 INDEX.
Google:
Profits are up 27% y-o-y. Google has no competition as of now. The internet ad
industry is beginning to show signs of strength and Google is the biggest
beneficiary of that.
Intel: Profit is down 5% year on year.
Apple: Latest media reports suggest that Apple has made good profits at USD
1.7 billion, nibbling away at market share of giants, like, Microsoft and Nokia with
its Mac computers and smarter iPhones. Moreover, Steve Jobs is back at Apple.
Powered by some good corporate results as shown above, for the first time in a
year, the Dow (DJIA 30) has pushed above 10,000 last week and has closed a
tad below 10,100 Monday.
This week is going to be an important week for the US markets as more than
130 companies, which are part of the broader S&P 500 index, will report
results during this week, which include 13 Dow components. The standouts
are: American Express, 3M, Microsoft, Merck, Pfizer, Coca-Cola, Yahoo,
Wells Fargo, Amazon.com and eBay.
Stocks across the globe, right from Australia, Asia Pacific, South Asia to Europe
have been on a roll on Monday with optimism abounding about the so-called
‘Road to Recovery’ in world’s financial markets. The Hang Seng is hovering
around 22,200; Sensex at more than 17,300 (Mumbai had a trade holiday on
Monday); the FTSE 100 at close to 5,300; France’s CAC at 3,900 and Germany’s
DAX at around 5,850. The world is awash with liquidity and the stock markets are
currently reflecting that optimism. Japan’s Nikkei 225 is also on a roll due to good
earnings from exporters, such as, Honda Motors, Mitsubishi UFJ Financials and
other banks.
Led by the stock market surge in the US and other countries, crude oil has
jumped from a level of USD 65 a barrel a few weeks back to nearly USD 80 on
Nymex on Monday. The optimism about the prospect of a strong economic
recovery across the globe has helped boost sentiments in the oil market. The oil
price is also at one-year highs. A weak dollar also has helped the rise in prices of
commodities to some extent. Even Gold prices are more than USD 1,050 an
ounce.
Even stock market volatility, represented by CBOE Vix, is also showing signs of
some stability with the CBOE Vix at 21.50 (during the height of the global
financial crisis, the CBOE Vix touched all-time high of around 80 in November
2008). CBOE Vix is a key measure of the market expectations of near-term
volatility conveyed by stock option prices in the S&P 500.
GOLD
Indian Rupee has strengthened a lot against the US dollar in the last 10 days
with the rupee gaining more than 150 paise from a level of 48 to 46.25. The
rupee appreciation is led by strong inflows from Foreign Institutional Investors
(FIIs) which have pumped in more than USD 13 billion this year alone in to Indian
stock markets with the benchmark-Sensex rising by more than 100 per cent in
the last six months to the present level of 17,300. And the fact that India has
been showing a GDP growth of six to seven per cent amidst a wall of worries for
the developed world, like, the US and other big European countries.
Of course, much depends on the earnings picture of the corporates around the
world with more 130 companies in the S&P 500 index dishing out their quarterly
results this week. Investors will be reacting wildly to the forthcoming
announcements – as we have seen on Friday, when US markets reacted
negatively to the high loss of Bank of America at USD 2.2 billion for the
September quarter. The same wild reaction may continue to happen this week
depending on the progress of the corporate announcements.
What may, however, spook the markets may be some nasty announcement from
policy makers about taking out the excess liquidity in the system earlier than
anticipated or a resurgence of inflationary pressures led by surging commodity
prices. Australia raised its interest rates a week back, becoming the first G-20
country to do so in more than a year. Though the announcement was not wholly
unexpected, given the rising inflationary pressures in that country, markets are
beasts when it comes to the breaking of the consensus view. Markets usually do
not like their consensus view getting ruptured so easily.
With this all-round buoyancy, the swagger is back not only on the Wall Street, but
also on Dalal Street of what the author would like to call as Bombay, the
happening city. As a pointer to the expected things, JUST CONSIDER THIS!
With the global markets in a sweet spot, the Sensex is in a bullish mood, with the
Sensex level of 17,300 on Moorat trading day. There is still an upside for Sensex, which
may reach a target of around 19,000 by the end of this calendar year. Of course, we
need to watch the stance of RBI Governor toward the monetary policy when he presents
a half-year review of the Annual Policy at the end of this month. The consensus view is
that RBI may continue with its accommodative policy for some more time till the end of
this financial year. Amidst a sea of mediocrity as far as GDP growth is concerned, India
has attracted the investors around the world with a robust growth of six to seven per cent
this year. The surging rupee may impact different companies differently, depending on
One big concern for India could be the prospect of rising inflationary pressures and the
concomitant surge in interest rates amidst supply of huge paper from the Government
Securities market (huge government borrowing, which has already borrowed more than
Rs 3 lakh crore from the bond market this financial year alone) and in the form of
Qualified Institutional Placement (QIP) by several companies in the secondary capital
market. However, one soothing factor for the markets could be less than expected
growth (a meager five to six per cent at that) in credit off-take in India, which have given
some sort of a boost to bond markets in India in the last three to four weeks.
Chart and data courtesy: Financial news websites, newspapers and Google
FINALLY…
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