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MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Friday, May 14, 2010
Summary
Share prices were down on Friday and the major
equity indexes found themselves once again in negative territory at the
closing bell due to a combination of weak earnings from retailers,
Senate backing for limits on credit card fees and concerns over the
sustainability of European public debt. Bank and credit card companies' shares slumped a day
after the Senate voted to limit fees charged on credit and debit card
transactions. The limits added to fears that beefed-up financial reform
legislation could hurt profits in the sector. Visa's stock fell almost
10 percent. Investors who had taken comfort in signs of strength
in the U.S. economy were faced with more below-par forecasts from
retailers such as Nordstrom Inc (JWN.N) and J.C. Penney Co Inc (JCP.N),
casting doubt on the strength of the recovery in consumer spending. Despite Friday's sharp sell-off, all three major
U.S. stock indexes scored their biggest weekly percentage advance in the
last 10 weeks, thanks largely to Monday's gains. For the week, the Dow was up 2.3 percent, while the
S&P 500 added 2.2 percent and the Nasdaq was up3.6 percent. Nonetheless,
after the recent volatility the Dow and the S&P 500 are up just 1.8
percent for the year, while the Nasdaq is up 3.4 percent. As the initial optimism over moves to stem the
euro-zone debt crisis ebbed, investors moved out of riskier assets.
Global shares and commodity prices dropped sharply while the euro sank
to an 18-month low against the dollar. Gold, a classic safety play, hit
a record high before getting caught up in the commodities sell-off. Deutsche Bank Chief Executive Josef Ackermann,
echoing sentiment among many investors, said he doubted that Greece
could repay its debt, but the $1 trillion euro-zone rescue would help
stabilize Italy and Spain. Euro/dollar and S&P 500 25-day rolling correlation
has strengthened to a robust 85 percent, the highest since mid-February
on growing fears that slow growth in Europe will hurt corporate profits. The S&P financial index .GSPF shed 2.7 percent, with
credit card companies among the heaviest losers. Visa fell 9.9 percent
to $77.26, while MasterCard known for its "Priceless" advertising
slogan, sank 8.6 percent to $212.45. Shares of Nvidia fell 11.5 percent to $12.96 a day
after the company forecast sales below estimates. In the retail sector, Dillard's reported profit that
topped estimates, driving its stock up 7.9 percent to $27.76. Energy
companies' shares fell, with the S&P energy index .GSPE off 2 percent as
crude futures prices fell to a three-month low on swollen domestic crude
inventories and concerns about Europe.
Key Seller Last Week During Meltdown
A key, if not the key, seller of futures contracts
during the market meltdown last week was Waddell & Reed Financial,
according to Reuters. Waddell on May 6 sold a large order of e-mini
contracts during a 20-minute span in which the equities markets briefly
wiped out nearly $1 trillion in market capital, an internal document
from Chicago Mercantile Exchange parent CME Group indicated. The e-minis are one of the most liquid futures
contracts in the world, providing exposure to the benchmark Standard &
Poor's 500 Index. The contracts can act as a directional indicator for
the underlying stock index. Regulators and exchange officials quickly
focused on Waddell's sale of 75,000 e-mini contracts, which the document
said "superficially appeared to be anomalous activity." Waddell manages the $22.1 billion Ivy Asset Strategy
fund, which is well-known for hedging with equity index futures when
manager Mike Avery, who is also chief investment officer at the company,
feels uneasy about the market. The Asset Strategy fund is down 2.76
percent this quarter, compared with a 0.80 percent decline in the S&P
500. Gary Gensler, chairman of the U.S. Commodity Futures
Trading Commission, said in congressional testimony on Tuesday that it
had found one sale that was responsible for about 9 percent of the
volume in e-minis during the sell-off in the U.S. markets. Gensler said there was no suggestion that the
trader, whom he did not identify, did anything wrong in only entering
orders to sell. Gensler said data showed that the trades appeared to be
part of a bona fide hedging strategy. It is unclear what impact the trading in the e-minis
had on stock prices during the plunge. However, the document pointed out
that during the sell-off and subsequent rally, other active traders in
e-minis included Jump Trading, Goldman Sachs, Interactive Brokers,
JPMorgan Chase and Citadel. During the 20-minute period, 842,514 contracts in
e-minis were traded. The CME said that between 2 and 3 p.m. Waddell
traded 75,000 contracts. Waddell said in its statement that it often uses
futures trading to "protect fund investors from downside risk," and on
May 6 it executed several trading strategies including the use of index
futures contracts as part of normal operations. The notional value of
the contracts sold by Waddell was $4.2 billion, according to document.
How much Waddell paid for the contracts was not stated, but typically
the cost would be far less than their notional value. Trading in e-minis takes place entirely on the CME's
Globex exchange. Hedge funds and high-speed trading firms often use the
e-mini in an arbitrage strategy that seeks to capture the change in
prices between the futures contract and the S&P 500. The market for e-minis on May 6 fell more than 5
percent in a little more than 5 minutes starting at 2:40 p.m. -- the
height of the crash, the document said. The e-minis began to recover
before stock prices turned higher. An order the size of the Waddell contract would be a
big trade to execute on a normal day, said a trader whose firm is active
in the S&P 500 futures market. About 50,000 contracts are typically
traded in an hour, the trader said.
Economic Data Continues to Look Better and Better Retail sales rose, as did industrial production,
further evidence the economic recovery is strengthening and broadening
out. Consumers were also a bit more confident early this month, adding
to Friday's string of upbeat economic data that stood in sharp contrast
to financial markets which sold off as panicky investors worried about
Europe's debts. Though the debt crisis is expected to have a minimal
impact on U.S. economic activity, the falling share prices could dampen
consumer morale and crimp household spending. Retail sales were up 0.4 percent after rising 2.1
percent in March, the Commerce Department reported. April's increase was
double what markets had expected and marked the seventh straight monthly
gain. Meanwhile, the Federal Reserve said industrial
production rose 0.8 percent last month after a 0.2 percent increase in
March. The gain exceeded market expectations for a 0.6 percent increase
and highlighted the factory sector's lead role in the economy's recovery
from the worst recession since the 1930s. Capacity utilization, a closely watched measure of
how fully the economy is using its productive potential, rose to 73.7
percent, the highest since November 2008, from 73.1 percent in March. The Fed has listed resource use among factors it is
monitoring to determine when to begin raising benchmark interest rates,
which stand effectively at zero. Chicago Federal Reserve President
Charles Evans said uncertainty triggered by the Greek debt crisis
underscored the need to keep U.S. interest rates low for an extended
period. "I think that the risks, obviously, with the global
situation make things a little bit more uncertain than we were
expecting," he said. "So, if anything, I am even more comfortable with
my assessment that accommodation continues to be important. A rebuilding of inventories from record low levels
by businesses has largely driven the recovery, but consumers are now
taking part and growing more optimistic. The Thomson Reuters/University of Michigan's Surveys
of Consumers' sentiment index rose to 73.3 in May from 72.2 in April, a
touch below market expectations. The markets largely ignored the data, focusing on
worries that heavy government debt burdens in Europe could curb growth
in the region. Recent data have pointed to a fairly solid
foundation for the U.S. recovery, although an expected slowdown in
Europe may prove a headwind. A Philadelphia Federal Reserve Bank survey of
forecasters published on Friday forecast the economy growing at a 3.3
percent rate in both the second and third quarters, up from an earlier
poll. The economy grew 3.2 percent in the first quarter
and the Street is looking for a modest upward revision as export and retail sales
growth in March were stronger than previously estimated. However, businesses have some worries. J.C. Penny gave a
modest profit forecast for both the second quarter and the full year,
and the chief executive said spending remained tentative.
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MarketView for May 14
MarketView for Friday, May 14