A Wild and Crazy Bond Market!
Call your insurance agent. You might have whiplash. Both equity and bond markets were all over the board as stock investors tried to figure out what was happening in the bond pits today. The Nasdaq and the Dow saw triple digit trading ranges while the bond markets got crazy and stole the spotlight from the Nasdaq's third largest point gain ever.
Fortunately tonight's wrap is not going to be a lesson on everything you always wanted to know about bonds but didn't care to ask. Even so, bonds were the focus today and considering some of the rumors being floated about it was down right exciting (or terrifying) - if you were a bond trader. Let's do a quick recap. Yesterday the Fed raises interest rates by a 1/4 point. Both the Dow and Nasdaq yawn over the expected announcement but the yield on the 30-year bond falls from 6.42% to 6.308%. Asian markets breathe a sigh of relief over the FOMC decision and the Japanese Nikkei rallies 207 points to 19,786. Closer to home Amazon.com announces earnings after the bell, but more Amazon later. Adding fuel to the bond's fire was an announcement by the U.S. Treasury that they would issue fewer long term bonds on top of their newly announced plans to buy back $30 billion in debt.
Fast forward to this morning. Europe's Central Bank releases a surprise 1/4 point rate hike pushing interest rates up to 3.25%. Suddenly the rush from institutional investors to buy 30-year bonds (with the newly diminished supply) becomes a flood when crowded with a bevy of European investors looking to U.S. fixed securities after their Central Bank's new rate hike. The price on the 30-year bond spikes open pushing the yield to 6.148%. The buying spree continues and before 10:00 a.m. the yield almost breaks 6% with an intraday low of 6.054%. Some market watchers said they almost felt the panic as bond traders scrambled to buy the long-term notes after the Treasury's announcement last night.
Yield on the 30 year bond
The bond market had already been in the spotlight ever since we saw the bond yield inversion hit on January 18th. What is a yield inversion? It is when the shorter term notes yield more than the longer-term bonds which traditionally offer the greatest yield. Part of the fervor in the bond markets today was the severity of the yield inversion not only in the 30 yr and 10 yr notes but the 10 yr and 2 yr notes as well. The 30 yr yield closed the day at 6.14%, the 10 yr yield closed at 6.46% and the 2 yr yield ended at 6.54%.
The intraday moves on the 30 year bond hit a 3 point range today. This means nothing to those that only trade Internet stocks, but it is a bid deal to bond traders who normally trade in 32nd's. The T-bill actually closed up 2 full points. Okay, I can already tell that some of you option traders out there are yawning. That's okay, it gets better.
All of the bond action today was fanned by a red-hot rumor mill. On the top of the list were rumors of one or several large brokerage houses and hedge funds that were bleeding heavily from a short squeeze with this inverted yield curve and rush into the 30-year bond. The rumor was further embellished with word that the Federal Reserve was to hold an emergency meeting to discuss the volatility in the bond market and/or to save some of the larger hedge funds from the carnage. This of course was denied by a Fed spokesperson. Some of the more creative rumors circling the bond pits today were ideas that Friday's employment report had been leaked a day early and that traders were being fired for bad trades and steep losses in their company's portfolio. One rumor even had bond traders being escorted off the trading floor by armed security. You'd almost think they were a bunch of highschoolers passing notes when the teacher's back was turned.
Looking at a chart it is hard to imagine that only two weeks ago the 30 year bond was yielding 6.75% and the markets were concerned that we would see 7% soon. Unfortunately, some bond watchers feel that should still be a concern. Everyone knows that the Fed is very likely to raise rates again and quite possibly more than once over the rest of 2000. The economy needs to slow down and the Fed will do anything they can to make it happen. This, some say, has partly been the problem. With the host of new traders recent to the market, Greenspan has helped produce an attitude that the FOMC will save them from inflation.
What is a Fed chairman to do? You announce a 25-point rate hike with comments about your stern stance to quash inflation like a bug using your biggest weapon of repeated rate hikes in the future. What sort of response do you receive? The supposedly rate-sensitive tech heavy Nasdaq rallies to within points of a new all time closing high. Not only that, long term interest rates fall out from underneath you. Suddenly the debate turns from how much will the Fed raise next time to how soon should the Fed raise again? The FOMC's next scheduled meeting is set for March 21st. Productivity has still been the economy's savior from encroaching inflation but Alan knows that it can't outpace it forever.
In the mean time investors have renewed their hunger for tech stocks. No longer do we look at valuations and interest rate fears but rising revenues and earnings growth. Do tech stocks still have the momentum to outpace the Fed's plan for rising interest rates? Looking at the Nasdaq's chart, the answer is yes. Or is this just another bear trap rally?
The news may have focused on the bond market but the Dow saw plenty of volatility on its own. After a quick rally early this morning of +70 points, the ancient index quickly turned over and the selling began in earnest after 11:00 a.m. By 12:30 the Dow hit its low for the day of 10,842 before traders snapped up stocks (mostly tech) to push the average positive again by the close. Only 10 of the Dow 30 stocks actually closed positive today with GE leading the charge +5.18. Others Dow leaders included HWP +2.94, INTC +4.13, and MSFT +2.81. Traders suffered through a 237-point range only to close up +10.24 but still holding the 11,000 level.
On the other hand, the Nasdaq was the place to be if you were trading stocks - as usual. Gapping up 61 points, the index managed to stay in positive territory all day despite an 89- point drop intraday. Overall, the Nasdaq saw quite a range adding 137 points (3.36%) and breaking above the 4200 level again closing at 4210.98.
The good news today was the market breadth. On the NYSE advancers beat decliners 2071 to 1037 while new highs lost to new lows 53 to 76. The Nasdaq was stronger with new highs beating new lows 188 to 36 but advancers only beat declining issues 2554 to 1546. Volume was strong on both exchanges with 1.11 billion shares trading on the NYSE and 1.699 billion on the Nasdaq.
Part of the leadership on the Nasdaq has to be accredited with the likes of AMZN and YHOO along with a host of semiconductors. Amazon.com is truly an amazing story for the new stock market. They lose more money than analysts expect and the stock rockets 21.24% or $14.75 to $84.18 on the news. According to Bezos, AMZN's CEO, the "Earth's most customer-centric company" is doing quite well. Earnings came in last night with a loss of 55 cents a share or $185 million. Last year the company lost 7 cents a share or a scant $22 million. Expectations were low as AMZN recently announced layoffs in their workforce, which didn't bode well for the quarter's performance. Wall Street had expected AMZN to lose 48 cents a share but some analysts were expecting a much worse 58 cents. What powered the stock higher was Bezos' "drive towards profitability". The company offered investors a plan and a goal for AMZN to actually be profitable. Supporting those dreams was a 167% increase in 4Q sales topping estimates with a whopping $676 million from October to December. AMZN now claims they have almost 17 million customers with repeat business accounting for 73% of sales. With a flurry of upgrades and reiterations from brokers and the blessing of Internet analyst, Henry Blodget from Merrill Lynch, AMZN's shares soared.
Now that one of the old dogs of the Internet fold regained its "leadership" position, recently beleaguered YHOO caught investors' interest and garnered 9.83% or $32.25 for the day. YHOO looks like it has turned the corner after finding support at $300. Investor interest seemed to be growing towards the close as volume began to pick up. Traders are probably focusing on YHOO's 2:1 split payable on February 11th.
Other news today involved the retailers. January sales numbers came in and the results were strong. Retail sales numbers were strong enough to offset any slowdowns due to the harsh January storms. One thought making the rounds was that money withdrawn from consumers accounts in preparation for any Y2K emergencies never made it back to the bank but instead wound up in retailer's registers. Another industry analysts felt the strong January numbers were negative since January is more often thought of as a clearance month and margins were greatly reduced. Wall Street appeared indifferent and only rewarded those with the most stellar of gains. Same store sales were as follows: Wal-mart (WMT) +4.1%, the stock closed -1.13 to $57.25; Sears (S) +1.7%, the stock +0.13 to $31.19; Target (TGT) +5.7%, -1.94 to $66.06; K-mart (KM) +3.6%, +0.13 to $9.00; Federated Department Stores (FD) +4.2%, -1.50 to $41.31; May Department Stores (MAY) +2.3%, -0.44 to $30.31; The Limited (LTD) +9.0%, +1.56 to $34.81, Kohl's (KSS) +8.5%, +3.75 to $77.50, and the Gap (GPS) +11%, +6.06 to $52.88.
Retail wasn't the only sale going on. Vodaphone (VOD) finally got approval from Mannesmann AG for what will be the biggest merger in history. Mannesmann's senior officer, Klaus Esser, said he would recommend to his board that they accept VOD's offer of $180 billion. Together they would become the world's largest wireless communications company. VOD shareholders would control a 50.5% stake in the combined company. This had been a previous deal breaker as Mannesmann had demanded a 50% stake in the new company.
What can traders expect for tomorrow? There has been some concern that the next couple of weeks is a virtual blackhole for market moving events and news. Earnings are almost over and tomorrow's economic reports are the last major market moving events for the near future. Is the market going to roll over in a bout of post-earnings depression or merely be range bound awaiting the next catalyst to spur investors' fear or greed? The collective masses are still on Fed watch and will probably remain so for the undetermined future as the hawkish FOMC sits perched to act on any sign of rising inflation. Market watchers are already figuring in an 88% chance for another rate hike at the next Fed meeting in March. With nothing on the horizon equity traders may have to look to the bond market for direction. Unfortunately, everyone seems to agree that the volatility in bonds is not over.
This means that tomorrow's economic reports could set the tone for the next couple of weeks for both bonds and stocks. Current estimates for the non-farm payrolls tomorrow morning range from 255,000 to 270,000. The challenge is that even if the report comes in near expectations, this tightness in the job market will continue to fuel inflation concerns. What makes tomorrow's report wild card is January employment numbers can vary wildly with seasonal changes. It's common knowledge that the business world tends to beef up their holiday staff November through December and then lay off the extra help in January. Also on our plate for tomorrow is the average hourly earnings numbers. Current consensus puts the gain at 0.3%. To round out our triad of reports is the unemployment rate report. Forecasts are looking for 4.0%, which would be a 30-year low. All of these reports are due out at 8:30 a.m. ET and any of them, if they come in too high or too low, could really move the markets.
The good news is it looks like nothing can stop the Nasdaq. At least until it hits the top of its range. It does appear to be range trading. If you are optimistic the top of the range looks like 4340, if you are feeling pessimistic we are already at the top of its range and this is a bear trap about to snap shut.
The Dow is definitely stuck in a trading range but if you are bullish it looks like it's almost building an upside down head and shoulders pattern. Plus, it's still in an oversold position. Let's just hope the reports tomorrow are positive or we'll probably be looking at Dow 10,700 again.
Good luck and sell too soon.