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Monday, August 31, 2009

Morning Market Report

Equities broke their winning streak on Friday and now they may be looking to start a new streak. All three major indices are down between one half and three quarters of a percent. That's not that bad. One major index in China was off by 6% this morning on price to earnings "fears".
Stocks retreated from Shanghai to Frankfurt on speculation the six-month rally
has outpaced prospects for earnings growth.

These are the sudden "fears" in markets that are always peculiar. After all, stocks generally had the same valuations for months with no fears. Now, suddenly, the market fears that earnings are not keeping up with stock growth. The Chinese economy, in particular, has had a remarkable rise and now some are predicting a "bubble". What no one can ever figure out is how such fears materialize because they are usually, like now, sudden realizations of dynamics that had been going on for months, or in the case of China, years.

Bonds are relatively unchanged, however, most are holding near bests for the last month or so. The Ten Year U.S. Treasury is now at 3.44%. It touched 3.42% last week and that's the lowest in the last three plus weeks. The yield spread between the two and ten year is now at 2.45% which has opened up some in the last week and a half. The 30 year mortgage also continues to be below 5.5%, it's now at about 5.375%. Meanwhile, oil continues to inch down and is now trading just over $71 a barrel at $71.06 a barrel.

The economic data calendar is fairly light. The only number that will come out today is the Chicago Purchasing Managers Index which will come out later today.

As I mentioned, it was a bloody day in the markets across the board. The Hang Seng in China was down 1.86%, the Nikkei in Japan was down .46%, and the Strait Times Index in Singapore was down 1.89%. The broader China Index was down 6.7%, as I mentioned earlier. Things were only slightly better in Europe. The FTSE was unchanged, the DAX in Germany was down .72%, while the Spanish Index was down 1.17%.

Finally, in currencies, the Dollar is up by .2% against the Euro, up by .32% against the British Pound, but weakening by .34% against the Japanese Yen. The Yen looks to be stronger against most other currencies as a vote of confidence with the party change in their elections over the weekend. It was the first party change in nearly 50 years.

Meanwhile, three stocks to watch are Fannie Mae (FNM) Freddie Mac (FRE) and AIG (AIG). All three are essentially government owned now and each, coincidentally or not, have had massive run ups in the last four weeks. So far, no trader has offered a cogent explanation of any of the three's runs. AIG recently did report good earnings for the second quarter however that broke an eight quarter streak of poor earnings and the company still faces a sea of red ink. AIG, after touching single digits in July, recently shot to as high as $50 a share. It's pulled back this morning to just below $46 a share. FNM has had a similar run. It reach pennies in July and now trades at just above $2 a share. All three have been day traders dreams, but their sudden run ups is curious and should be investigated.

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