The significance, or lack thereof, of yesterday's gains can only be known in the fullness of time. The early returns didn't look good for those hoping yesterday's session marked the beginning of a sustainable rally, although the
began to lead indices higher after midday.
The major averages took a serious dip after the 10 a.m. EDT release of two disappointing economic reports. Of late, though, the Dow Jones Industrial Average was up 0.9% after dipping 1.1%, the
was up 0.5%, after dropping 1%, and the
was off 0.7%.
The Institute for Supply Management's index of business activity fell to 53.9 in April from 55.6 in March. Yesterday's weaker-than-expected Chicago purchasing managers' index was an indicator that today's ISM report would prove slightly weaker than expectations.
But the Chicago report did not prepare traders for some troubling aspects of today's ISM survey. Namely, the new-orders index fell to 59 from 65.3 in March, and the employment index fell to 46.7 from 47.5. Meanwhile, the prices-paid index jumped to 60.3 from 51.9, its highest level since January 2001 and its second-straight big monthly increase.
The components of the ISM report provide another hint of potential
stagflationary pressures lurking in the economy.
Separately, the Commerce Department said construction spending fell 0.9% in March, the first decline since September and vs. expectations for a flat reading. February's construction spending was revised down to a gain of 0.7% vs. 1.1% previously, although January's level was revised upward to plus 1.4% vs. 0.8%.
Other issues weighing on stocks at midday included
, down 15% on news of the retirement of COO Ed Zander;
, down 10.7% after Lehman Brothers cut estimates; and
, down 3.2% after a
court cleared the way for its merger with
was down 36.6% after
AOL Time Warner
ended its relationship with the firm.
Don't Stop Thinking About Yesterday
The action thus far indicates yesterday's gains were more a function of
technical factors vs. excitement about the slightly stronger-than-expected consumer confidence report. It also suggests month-end "window dressing" by institutions played a bigger role than any fundamental developments.
"There's no question that there is window dressing that goes on," said Brett Gallagher, who oversees about $4 billion as head of U.S. equities at Julius Baer Asset Management. "I dread the last day of a month because some hedge fund out there is trying to achieve certain prices and I've seen shares move 5% to 10% in the last half-hour of trading, and it's clearly not a fundamental move."
Naturally, Gallagher denied participating in the practice -- and he doesn't fit the profile of a window dresser, which is illegal but has become an established part of the market's firmament. (Longtime readers will recall Jim Cramer's detailing of these nefarious practices in his old
Buzz and Batch series.)
Gallagher didn't name names, but another source pointed out the action yesterday in
as an example, doubtless one of many.
Nyfix shares were remarkably flat all day yesterday before enjoying a remarkable spike on higher volume in the final 30 minutes of trading.
As is often the case with names pumped up to make month- or quarter- or year-end statements look better, the gains proved fleeting. Nyfix shares were lately down 5.6%, serving as an admittedly dramatic example of the broader market's experience.
Don't Stop Thinking About Yesterday, Part 2
Another issue discussed here
yesterday was the news that
J.P. Morgan Chase
is going to reduce its practice of providing backup lines of credit to corporations seeking to borrow in the commercial paper market.
"You haven't seen the typical signs of stress of a recession in terms of higher write-offs" by banks, aside from unavoidable issues like
, Gallagher said. "This is a sign there are issues."
Gallagher, who recommended in
mid-December that investors avoid J.P. Morgan because of concerns about its lending practices, said the key going forward is if other banks follow suit. If they do "it's definitely a problem because it forces companies to restructure the maturity profile of the debt going out longer, typically at higher interest rates, which has an earnings impact," he said.
Brad Ruderman, managing partner at RCM Partners, a Los Angeles-based hedge fund, agreed.
J.P. Morgan pulling back from providing lines of credit is "bulletin board material" for
Chairman Alan Greenspan, Ruderman said. "This is how a credit crunch starts."
On the other hand, the hedge fund manager recalled that while J.P. Morgan was forced to take a $220 million fourth-quarter writedown for Enron loans deemed unrecoverable,
took steps to hedge its exposure to the ill-fated energy firm.
That hedging is a source of controversy, but Ruderman's point was that J.P. Morgan didn't do it while Enron's other big lender did. "J.P. Morgan has obviously not done its homework with risk and risk assessment," he said. "J.P. Morgan was lending money like it was ice."
The optimistic spin on the firm's decision to retrench from providing lines of credit is it could possibly signal a bottom, he said, such as those following Long Term Capital's implosion in 1998, Orange County's (Calif.) bankruptcy in 1994 and Citigroup's lending problems in 1991.
Ruderman agreed it's too early to assess the impact, but given J.P. Morgan arranged almost half the lines of credit supporting the $1.4 trillion commercial paper market, you'd think this development would be getting more attention.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.