Tags: Stock | Market | Woes | Really | Commodity | Woes?

Stock Market Woes or Really Commodity Woes?

Thursday, 17 March 2005 12:00 AM

The healthy Monday morning start to trading saw investors jump on shares in Morgan Stanley (MWD), Goldman Sachs (GS), Lehman Brothers (LEH) and Bear Stearns (BSC).

The healthy Monday morning start to trading saw investors jump on shares in Morgan Stanley (MWD), Goldman Sachs (GS), Lehman Brothers (LEH) and Bear Stearns (BSC).

One by one they announced stellar earnings growth, knocking the ball out of the park courtesy of ongoing strength in fixed-income trading, stock commissions and M&A advisory services.

It's Commodity Gains -- Not Earnings

While the quarterly earnings calendar is hardly in the banks' control, they couldn't have picked a worse time to announce their numbers.

Between Tuesday morning's peak and Thursday's low, when stocks finally stood up for themselves, the S&P 500 index lost 2.1%.

The NASDAQ composite fared even worse and shed 48 points or 2.4%.

By Thursday afternoon, trading investors had clearly recovered their nerve, and gains in these shares helped steady equity indices once again.

The culprit is not so much earnings-related disappointment as much as it is fears over rising commodity prices.

Many of the ensuing e-mails jamming my inbox over the last 48 hours relate to new all-time highs for crude, a 16-year high for the price of copper or a surge in lean hog prices.

Earlier in the week, China revealed fresh data, which spurred commodity buyers to stay on the bullish bandwagon. The Chinese economy is still on track for another year of 9% growth as imports of raw material continue to be churned out to the rest of the world as manufactured products.

Take a look at the growth in a handful of commodity imports to China since 1999.

In 1999, average monthly imports of refined oil were around 1.7 million tons. This January, that volume was almost double. Imports of copper have increased threefold since 1999, rising from 103,000 tons to 310,000. Imports of natural rubber, also up threefold, have increased from 35,000 tons to 110,000 as of January.

But take a look at imports of iron ore, which are up a whopping 452% from 4.6 million tons per month in 1999 to 20.9 million tons per month this year.

Despite a steady U.S. dollar on the foreign exchanges (where today a euro buys $1.3370 and a dollar buys 104.70 Japanese yen), commodity prices had risen at the time of this writing.

How Did GM Get It So Wrong?

Yesterday shares in U.S. automakers fell by 14%, accounting for 35 of the 112 Dow Index points in Wednesday's slide.

At the time of this writing today shares are already down a further 2.9%, holding a 24-point rally in the Dow back by a further six points.

The trouble came from a warning by the company that it wouldn't make the $4 to $5 per share this year as previously forecast. Ironically the albatross around GM's neck stems from when it ruled the North American auto market.

The accompanying chart shows that in the past 10 years GM has sold almost one in four vehicles bought in North America , but prior to that, they had sold one in three..

CEO Rick Wagoner decided to make GM leaner and more productive following the 9-11 tragedy. Helped by low financing costs, the strategy seemed to be winning.

But GM has fallen victim to the competitive directives of Toyota, whose own stretch goal is to surpass the sales of GM by the end of the decade.

Add on to GM's woes the rising cost at the pump -- which is fast becoming a really good excuse not to add an SUV to the family line-up -- and the outlook doesn't look so grand anymore.

Adding to worries for GM's future, credit-rating agencies Moody's and Standard and Poor's revised their outlook to "negative" for the company. GM now admits that instead of breaking even in the first quarter, it will more likely lose $1.50 per share. Instead of the $4 to $5 per share forecast in 2005, the company has lowered its forecast to $1 to $2 per share.

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The healthy Monday morning start to trading saw investors jump on shares in Morgan Stanley (MWD), Goldman Sachs (GS), Lehman Brothers (LEH) and Bear Stearns (BSC). The healthy Monday morning start to trading saw investors jump on shares in Morgan Stanley (MWD), Goldman...
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Thursday, 17 March 2005 12:00 AM
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