Best Market Day in 5 Years, Fed Cuts 75bps, Rice Hits Record High, Iraq Anniversary, and More!
Visa’s record-breaking IPO… why odds say that buying this float is a losing venture
Morgan Stanley shocks the street
Fed cuts rates… U.S. stocks enjoy best day in five years
Oil backs off record highs… the other energy source still booming
Chris Mayer on another skyrocketing commodity… so hot it could be “a source of social unrest”
What credit crisis? Visa — despite all the spooky credit horror stories permeating Wall Street — managed to scrounge up nearly $18 billion last night for its IPO. As expected, it was the biggest float in the history of the U.S. stock market.
Visa — ticker “V” — was supposed to open this morning on the NYSE for $44 a share. But strong buying pressure pushed up prices to open to the everyday investor at $60.
While the mood on the Street is incredibly optimistic for V, thanks mostly to MasterCard’s breakout IPO in 2006, the newly minted share faces stiff head winds. The Renaissance Capital IPO Index, which tracks public companies from their debut to two-year birthday, is down 23% this year… twice as bad as the performance of the S&P 500.
Visa’s IPO will be icing on the cake for an already sweet week for J.P. Morgan Chase. As the primary underwriters of the offering, JPM can look forward to a $1.1 billion check from Visa.
Morgan Stanley announced that it enjoyed (or suffered?) a similar first quarter as Goldman and Lehman revealed yesterday.
Morgan Stanley crushed Wall Street earnings estimates today, reporting net income about 45% above analyst expectations. But like its financial brethren yesterday, despite beating estimates, Morgan also admitted that first-quarter earnings were nearly chopped in half compared with the same period last year. Year-over-year quarterly net income fell $1.5 billion, or 42%.
But traders gobbled up shares anyway. MS shot up 19% yesterday in anticipation — its best day in 10 years — and leapt another 8% at this morning’s opening bell.
Unless you live in a cave and are just now checking your e-mail at an Internet cafe in town, you know the U.S. Federal Reserve slashed rates by 75 points yesterday. For the sixth time in as many months, Bernanke and his brood pulled the lever labeled “easy money” in the corner of the FOMC meeting room. Eight of the governors standing around cheering Uncle Ben voted to pull the lever down 75 points. Two governors — Fisher and Plosser — wanted less.
“Recent information indicates that the outlook for economic activity has weakened further,” explained the FOMC in a typically bland release. “Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.
As usual, the FOMC would like you to forget about inflation. “The committee expects inflation to moderate in coming quarters,” continued the statement, “reflecting a projected leveling out of energy and other commodity prices and an easing of pressures on resource utilization.” While the Fed admitted that inflation uncertainty “has increased,” it did little more than assure us that they would “monitor inflation developments carefully.”
CNN/Opinion Research released a poll yesterday showing that “the rising rate of inflation” is Americans’ No. 1 economic concern. Ninety-one percent of all folks polled by CNN listed the dollar’s devaluation as their primary fiscal worry. Worry over the value of the bucks in their wallets beat our job growth, the stock market or housing concerns in the poll.
Yet in an act of sheer defiance, the dollar index surged off near-record lows after the Fed’s release hit the wire:
We can only assume traders had priced in 100 points, rather than the paltry 75 they drummed up. The dollar index currently rests at 71.7, about a full point above its all-time high. Hooray!
The euro trades for $1.57 this morning, a penny short of its record high. The pound has fallen a bit, down 2 cents, to $2.00. The yen is back to 98, and the loonie has retreated to parity with the greenback — $1 even.
The Swiss franc, we note today, has reached parity with the U.S. dollar for the first time in history. The franc — a destination currency in the global “carry trade” — is up about 17% on the greenback in the last three months.
The stock market loved the FOMC’s cut yesterday too. Already elated with Goldman Sachs and Lehman Brothers earnings announcements, the Dow had rallied 250 points before the Fed’s announcement. Despite a sharp pullback within minutes of the release, by the end, U.S. stocks enjoyed their best day in five years:
The S&P 500 and Nasdaq skyrocketed 4.2%. The Dow mustered a gain of 3.5%.
The Dow’s 420-point gain was the fourth best in the index’s history, and you’ll have to look back to 2002-2003 for bigger one-day gains for any of these major U.S. indexes.
We weren’t surprised to see financials lead the way yesterday — just about every bank, broker and lender soared to double-digit gains yesterday. Bear Stearns is even getting in on the action:
Since it’s “acquisition” for $2 per share on Sunday, BSC has more than quadrupled.
Gold got shellacked during yesterday’s stock market rally and again this morning. Spot prices fell to around $995 after the New York close, and are sinking to $950 as we write.
We’re inclined to think, at least in the short term, the “easy money” has been made in the gold trade. But in terms of trading gold stocks, our gold adviser Ed Bugos thinks there is plenty of money yet to be made. He just published a report on the five gold stocks that have yet to catch up with $1,000 gold. You can learn more about them here.
Oil crept back up to $109 per barrel, $2 shy of its all-time high this morning before falling back to $104. While the world’s eyes have been fixated on rising crude costs, coal prices are quietly setting records, too. Check this out, from today’s New York Times:
“China’s coal consumption is mind-bending,” writes our Byron King. “China is currently building giant, 500-megawatt coal-fired power plant systems in an almost assembly line fashion. And China is installing and commissioning these coal burners at an astounding rate of THREE per WEEK!!!
“Each year as of late, China has added more electrical generation capacity than the entire nation of Germany. And Chinese electrical generation capacity has been growing at a steady rate of over 15% per year for the past five years.”
In the U.S., coal accounts for about 50% of American electricity production. The U.S. also has more coal deposits and proven reserves than any other nation. If you’re interested in investing in coal, Byron’s your man.
Rice shot up to a 34-year high this morning. Thai rice, largely considered the global standard, has risen 72% in the last three months to $640 per tonne this morning. Rice in the Philippines is selling for $702, up 50% in a little over a month.
“Some of this is weather related,” explains Chris Mayer, “but it also speaks to the larger issues of increasing resource scarcity. We see it in the energy markets; we see it in food prices. Rice is particularly important because of its central role in the diets so many people. And for many of them, a doubling in price since January is keenly felt. It’s also a potential source of social unrest.
“There is no easy way out of this. It’s going to take time and a lot more investment in agriculture. All of this spells opportunity for the number of agricultural plays out there.”
Chris’ Special Situations readers own Viterra, one of the largest grain handlers in North America. Since he recommended it in August 2006, its up over 80%. Discover the rest of Chris’ blockbuster MSS portfolio, here.
Sovereign wealth funds (SWFs) invested a record $48 billion in U.S. companies in 2007, says a Dealogic report on Monday. That’s a 165% increase from 2006, the study showed. What’s more, despite SWFs moving out of the spotlight this month, Dealogic estimates that SWFs have already spent $24 billion on U.S. securities this year… well on pace for a record 2008.
Again, we suspect these funds are going to be a key component in any investor’s successful retirement strategy. If you haven’t checked out Christopher Hancock’s work on these funds, you can do so here.
We end today lamenting the anniversary of the war in Iraq.
Five years ago today, U.S. troops unleashed “shock and awe” on ancient Babylon. Then-Secretary of Defense Donald Rumsfeld fully expected the troops would be “greeted as liberators.”
The U.S. government now estimates the total costs of the war are up to $2 trillion… give or take a trillion. And as a popular documentary last year illustrates, there’s “no end in sight.”
“No one would argue that this war has not come at a high cost in lives and treasure,” President Bush said this morning, “but those costs are necessary when we consider the cost of a strategic victory for our enemies in Iraq.”
Yeah. “I would argue,” says David Walker in the opening lines of I.O.U.S.A. “that the greatest threat to our national security is not some guy hiding in a cave in Afghanistan or Pakistan, but our own fiscal irresponsibility.”
“The dollar is depreciating against gold,” postulates a reader with a forecast of his own, “because of a fundamental change in pricing of the value of goods in the world. Commodities are priced against each other, and only because of tradition are we still quoting commodities in U.S. dollars.
“Until quite recently, gold, oil, copper, lead, agricultural commodities, etc. were priced in U.S. dollars. They are still quoted as such, but in reality, the commodities are valued against each other, just as it was done during early civilization. Of course, the one major difference is it’s all done electronically. Currencies have become irrelevant. Unbelievably, we are still in awe when we hear a report that gold went up by US$20 or crossed the US$1,000 barrier. It’s really no big deal in terms of other commodities. The price of gold over the last few years actually went down against most other commodities.
“The same is true for oil. As in the good old days of early civilization, a commodity value is now strictly based on the available supply. Today, if corn is in short supply, it will appreciate against wheat if there is an excess. Of course, when the prices of basic commodities like oil and energy are appreciating against the U.S. dollar, it will affect the people who pay for their daily needs in that currency. But the rest of the world really doesn’t care unless their currencies go down too.
“In the foreseeable future, some commodities will be in much shorter supply, in particular, the commodities that are used up and cannot be replenished. An obvious one is oil. Once we use it up, it’s gone. The supply is constantly diminishing. Not so with gold. Other metals will also become rarer, but only because high-grade ore bodies are more difficult to find and costlier to develop. The price of the rarer metals will appreciate against other commodities that are more readily ‘available.’ Gold will likely be among them.”
The 5 Min. Forecast