WASHINGTON, May 23, 2013 – The mood is grim on Wall Street this morning after yesterday’s double whammy. Markets had actually begun trading in a positive mood yesterday morning, boosted by fairly benign remarks from Fed Chair Ben Bernanke. But then, two bombshells hit Wall Street in the afternoon.
The Fed’s minutes put the sincerity of Bernanke’s soothing comments in doubt, indicating some movement in the FOMC (Federal Reserve Open Market Committee) toward a sooner monetary “tapering” of QE than anyone had anticipated. Capping this off, almost simultaneously, was word from London of a bizarre, brazen, and bloody terrorist murder on the public streets in broad daylight.
The result was a dramatic and thorough reversal in stocks and bonds, as markets plummeted almost straight down for the rest of the day with few stocks escaping damage—most notably Bristol-Myers Squibb, which discussed positive Phase III trial results for an innovative cancer treatment.
Several reasons have been blamed for the 7.3 percent fall in the Nikkei index to 14,483.98, including a spike in Japanese government bond yields and unexpectedly weak Chinese manufacturing figures.
Much of the recovery in global stock markets over the past few years has had its roots on the extra liquidity that’s flown through financial markets as a number of central banks, particularly the Fed, have pursued stimulus programs. The withdrawal of this new liquidity has, for some time, been viewed as the greatest threat to stocks in particular.
“The mood has switched from greedy to fearful,” said Chris Beauchamp, market analyst at IG.
In Europe, the FTSE 100 index of leading British shares, which was only around 75 points off its highest-ever close on Wednesday, was down 1.9 percent at 6,710. Germany’s DAX, which has hit a series of all-time highs recently, tumbled 2.6 percent to 8,306 while the CAC-40 in France was 2.3 percent lower at 3,956.
Those declines though are dwarfed by the scale of the reverse in Japan’s Nikkei, the biggest since March 2011. Some sort of decline in global indexes, especially in the Nikkei, had been anticipated following a run that’s seen many post historic highs.
Markets elsewhere in Asia sank sharply after a survey showed China’s manufacturing contracted in May. HSBC said its preliminary Purchasing Managers Index fell to a seven-month low of 49.6 in May from April’s 50.4. Numbers below 50 indicate that activity is contracting. Analysts had expected a more modest decline to 50.3.
The Shanghai Composite Index lost 1.2 percent to 2275.67, its biggest fall in a month while the smaller Shenzhen Composite Index shed 0.7 percent to close at 1014.47.
Elsewhere, Hong Kong’s Hang Seng slumped 2.5 percent to 22,669.68. South Korea’s Kospi lost 1.2 percent to 1,969.19. Australia’s S&P/ASX 200 dropped 2 percent to 5,062.40.
“The fact that the equity markets fell so hard on these headlines overnight indicates that perhaps investors have been guilty of too much exuberance in recent months,” said Jane Foley, an analyst at Rabobank International. It also indicates that the “sell in May” syndrome may still be alive and well, even though it appears to be arriving late, assuming there’s pre-holiday follow through to the downside today and Friday.
Oil prices were another major casualty yesterday amid concerns over the global growth environment — the benchmark New York rate was down $1.19 at $93.09 a barrel and is treading water just above $92 this morning. Gold, however, was in demand as it benefited from its status as a haven at a time of uncertainty. It was up 1.3 percent at $1,385 an ounce. However, it, too, was considerably down from an earlier plunge in the day.
“A solid performance here will simply add to the hawkish sounds that are going to resonate from the Fed and in turn could end up weighing further on the major indices,” said Fawad Razaqzada, market strategist at GFT Markets.
UPDATE: Wall Street has just opened with the Dow plunging an initial 100 points.
Today’s trading action:
The main debate now in the markets is whether Thursday’s developments mark the end of the euphoria that has gripped many investors this year. Judging from this morning’s futures, the initial answer may appear to be that the fun is over, at least for now. Action will be thumpingly negative on the open, and may not be robust for the rest of this trading week at the very least.
Reaction to upcoming U.S. data and comments from officials at the Fed will likely provide insights into whether the bull run has come to an end. Later, traders will have U.S. new home sales figures to digest — the recent improvement in housing indicators has been largely behind the speculation of a change of course by the Fed.
We continue to advise caution here. We ourselves had a bit less in cash yesterday than we’d planned and we’re sorry for that as our accounts took a fairly good initial hit. Selling right into what’s likely to be a panic downward move this morning may not be optimal strategy, but don’t let the HFTs take all your profitable positions down if it comes to that.
Of the four IPOs we mentioned previously in this column yesterday, we dropped our request for shares in two of them—Blackstone Mortgage Trust (BXMT) and Global Brass and Copper (BRSS)—due to an uncertain portfolio and a big pricing drop in the former and to absurd levels of leverage in the latter.
BXMT, a REIT that’s still in the midst of restructuring and has yet to purchase key assets, cut their proposed secondary offering price by approximately $3 and increased the number of shares offered, indicating a poor reception for the offer. Since REITs, which we normally love, tend not to do to well during their frequent secondary offerings anyway, we decided to take a pass. We may look at BXMT later, though, as its mother ship, Blackstone (BX) is generally a reliable moneymaker and will likely impart that aura to this evolving REIT.
The case with BRSS was simpler. Prior to the offering, its vulture capitalist owners had stripped the firm of as much money as possible, leveraging it to the hilt in order to pay themselves “special dividends,” while likely choosing to cash out of some shares now in order to catch the building boomlet wave. It’s a cynical ploy. The shares were priced at the low side of the proposed range, again indicating some skepticism, which we share.
We kept orders in for the remaining two IPOs we discussed, ChannelAdvisor Corp (ECOM) and Ply-Gem Holdings (PGEM), the former an e-commerce offering, the latter a housing play. Of the two, ECOM had been adjudged the most likely to pop this morning. But intriguingly, PGEM, which is also a little too over-leveraged like BRSS, priced surprisingly above its tentative range, indicating more interest than we had imagined in the shares.
As of this writing, we’ve received half of our requested allocations in each, but will have to wait for everything else to smooth out in the markets before we see this pair open for trading, likely around 10-11 a.m. EDT this morning. Intrinsically, both look good for the open. Except for the fact that they’ll commence trading amidst what’s likely to be an initial stop-loss triggered blood bath. Fingers crossed. Good bets that are ending up coming public at the worst time in this particular May.
We’ll update on these two when they’re priced, just to keep you informed, so check back here late morning. We may also have a comment or two on what is about to happen in the markets.
UPDATING: Both ECOM and PGEM had fantastic opening trades this morning, circa 10 a.m. EDT, even as the down has plunged more than 100 points. PGEM currently trades at $23.20 per share, up over 10 per cent, and ECOM is trading at $18.52, up a whopping 33 per cent from its IPO pricing. This comforts the Maven greatly, as the rest of the portfolio is tanking this morning, pretty much like everything else.
It will be interesting to see if these two IPOs can retain their strength into what’s likely to be a very bad market environment going into the Memorial Day holiday weekend. Fingers crossed. We have to keep this pair in the portfolio for 30 days.
–AP contributed to this report
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.
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