Week ends lower amid best Q2 since ’03

Stocks fell for the third week following worse than expected job report and despite a better ISM number, which showed contraction was not as bad as last month.  The DJIA fell 158 points or 1.9 percent to 8,280.74 and the broader index Standard & Poor’s 500 saw a bigger decline of 2.5 percent to 896.42.  Nasdaq was in the middle with a decline of 2.67% to 1,796.52.

Some of the biggest losers include American Express, Alcoa and Caterpillar, each of whom lost greater than 6 percent.  National Oilwell Varco, the larget maker of oilfield equipment in the US National Oilwell Varco closed at $30.84, a 6.8% drop while Hess, the fifth- largest U.S. oil company, lost more with 8.5 percent to $49.65.

The commodities joined the decline, with oil dropping more than 3% to 66.72 per barrel.  This, however, may be partly have been a result of the rogue trader who lost $10million from trading oil futures.

From the FT:

Oil traders in London and New York said the “unauthorised trading” explained the exceptional spike in business activity and prices in the early hours of Tuesday that some initially thought must have been caused by a geopolitical event. “Trading volumes rose overnight and prices jumped more than $2 a barrel without apparent justification,” a senior oil trader in New York said.

The same publication identified the trade to be Steve Perkins.

Read the story via FT HERE.

Even with such a market correction, the markets still saw its best quarter since 2003 after the significant drop to its lows back in March 9.  The Dow saw a spike of 838 points or 11% while the S&P climbed 15% for the same period.  However, both indexes still have a lot of work before they can reach their all-time highs in October 2007.  But as the close of the week has indicated, the best Q2 is no cause for celebration.

After we have fallen tremendously and risen back up again so quickly, the market should definitely have expected a correction and this might be the beginning of it.  The VIX has fallen to under 30s but it is still much higher than historic averages.  That could only indicate there is still a lot of volatility that lingers in the market. Hard evidence of a better and improving economy would have to be released before we can believe the rally we have witnessed (and just ended a couple of weeks back when the indexes have begun falling again).

One such evidence is the earnings.  The financials have been the best performing stocks after seeing obliteration of their stock prices, unlike anybody else in the market.  The rally of the group, along with the broader market is boosted by the first quarter earnings.  Many of the biggest firms have reported much higher numbers, with the exception of Morgan Stanley which reported a loss.  The question now is whether these banks will sustain their earnings.  Many doubt they can.  A big contributor to the profits of banks have been the one-time charges, gains from fixed income investments, and to some degree even accounting tactics.  As earnings season kick off in less than 2 weeks’ time, many will be looking at the banks’ figures.

From WSJ:

Bulls and bears alike generally agree that for stocks to post a significant rally during the second half will require convincing evidence not only that the U.S. economy’s decline has slowed but that activity will begin to turn higher by year-end. Corporate profits, meanwhile, will need to at least match forecasts for an upswing through the rest of the year to even justify current market values.

Read the whole story via WSJ HERE.

I would honestly be surprised if the banks yet again report much better numbers than estimates, although a part of me feels they will. After all we’ve just seen the best quarter in a while.  We have to consider the fact though that some TARP recipients also decided to pay back the funds just a couple of weeks back.  That led some people to believe at least Morgan Stanley may report losses again.

The onset of the new quarter doesn’t promise much.  Unemployment would still be rising, real estate prices declining, and manufacturing probably still contracting. But the hopefuls do have a reason to think the third quarter and the rest of the year for that matter could be better.  Maybe the stock market would still be declining but some of the numbers I expect to be better.  Inventories have already come down significantly and new orders are on its way back up.  This could only mean restocking, thus higher demand and better revenue prospects for many.  Retail sales, however, would still probably be low as the group of the unemployed, which is still expected to grow until 2010, hopes to keep their savings intact by spending less.

On to the other side of the market, I’m not sure there are many who are worried about inflation and the interest rates.  Both will remain low for some period of time, particularly the latter.

Just to end this post, here’s a little chart from WSJ:

Q2 story

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