The nonsense trade returned to the markets on Wednesday as bonds rallied and stocks struggled amid a largely favorable economic backdrop for equities, not fixed-income securities.
The dollar weakened, aiding exporters and improving pricing power for domestic producers. Merger and IPO activity continued apace, with
( FON) and
( NXTL) finalizing their deal and
Las Vegas Sands
gaining 61% on its first day of trading.
which rose 11%, retailer
, up 5%, and broker
( LEH), up 3%, all reported blowout earnings. Finally, the economic data were good as the New York Fed's manufacturing survey came in stronger than expected and confidence among home builders remained at elevated levels.
Virtually the only macro negative for stocks was higher oil, which should be a negative for bonds as well because it fosters inflation and prompts more -- not less -- tightening by the Fed. Crude futures gained more than $2 a barrel, or almost 6%, to $44.19 after the Energy Department reported that inventories were lower than expected last week.
In the end, oil trumped all the happy news as the market struggled to end the day on a positive note. The
Dow Jones Industrial Average
gained 15 points, or 0.1%, to close at 10,691.45 while the
added 0.2% to 1205.71. The
gained 0.1% to 2162.55.
Dragging down major averages were
, which lost 0.4%,
, down 1.4%, and
, which dropped 0.7%.
Despite all the bad news from a fixed-income perspective, bonds rallied and the yield on the Treasury's 10-year note fell to 4.08%, the lowest in more than a month. The dollar dropped to 104.24 yen while the euro climbed to $1.3408.
If the dollar goes into a further tailspin, economists may pinpoint October as a key turning point. On Wednesday, the Treasury Department reported that foreigners bought a net $48.1 billion of U.S. securities in October, the lowest figure in a year and down from $67.5 billion in September. Foreign securities purchases have been the most important factor holding up the U.S. economy despite its huge trade deficit and savings shortfall. The October capital flow data were notable in that they no longer exceeded the trade deficit, which came in Tuesday at a record $55.5 billion.
The dollar didn't fall off a cliff in October -- it was down only about 1.8% vs. a trade-weighted basket of other currencies -- reflecting that the capital flows tracked by the Treasury Department don't account for all sources of investment.
In fact, the report showed evidence that it was U.S. investors going abroad who made the biggest difference, according to Pierre Ellis at Decision Economics. Total net foreign buying was $63.3 billion, down slightly from $64.7 billion the month before. But U.S. net purchases of foreign securities subtracted $15.2 billion from the overall flow in October vs. adding $2.7 billion the prior month. In other words, Americans scared by the dollar's decline upped purchases of nondollar assets rather than foreigners dumping U.S. assets.
"The orderly October decline in the dollar indicates that no catastrophic choking occurred," Ellis wrote on Wednesday.
By sector, the decline in foreign buying came in corporate bonds, as non-U.S. buyers added $19.1 billion of securities, down from $43.9 billion the previous month. Treasuries got $18.3 billion, up from $15.7 billion, and equities saw $3.7 billion of net purchasing activity after $3 billion of net sales in September.
Japan sold $5.1 billion of Treasuries, following sales of $1.9 billion the previous month. It could be the start of a troubling trend as Japan hadn't previously been a net liquidator for any month in two years.
In other economic news, the New York Fed's regional survey of manufacturing activity came in stronger than expected for December, and the National Association of Homebuilders said its confidence index was virtually unchanged in December from the prior six months.
Living in a Telecom World
The Federal Communications Commission approved revamped telecom competition rules on Wednesday, and as mentioned
Monday, the revisions favor the Baby Bells,
( BLS) and
The changes come at the expense of upstarts like
and long-distance carriers
( MCIP) that have tried to compete for local business since the 1996 Telecommunications Act was passed.
Under the FCC's plan, approved on a party-line, 3-2 vote, big discounts used by competitors to provide residential service will be phased out over 12 months for existing customers and closed out for new customers. Winners in this transition might not be the Bells, according to Legg Mason analyst Blair Levin, but cable telephony providers like
Time Warner Telecom
The situation for service to businesses is, as many predicted, much murkier, with current government-mandated discounts for competitors being eliminated in many but not all cases. The agency appears to have adopted a test that forgoes the building-by-building type of analysis so feared by the Bells and commentators like
contributor John Rutledge.
The market reaction was just the opposite, however, because the Bells didn't win a slam dunk. Verizon lost 0.8%, SBC dropped 1% and BellSouth fell 0.9%. The competitors, known collectively as competitive local access carriers, or CLECs, rose. AT&T gained 1.3%, MCI rose 1.1% and Talk America added 0.3%. Time Warner Telecom gained 0.2%.
Nevertheless, "the absence of a bipartisan compromise points to a more pro-Bell order at the expense of CLEC competitors," writes Levin, who served as chief of staff to Democrat Reed Hundt when he ran the agency in the mid-1990s. "Net, we view it as slightly more favorable to the Bells than we have modeled, but largely baked into the stocks."
The deregulatory train that has already freed the incumbents from having to share new fiber to the home lines is not slowing or losing momentum. Rather, Wednesday's decision emerged from the thorniest and arguably most pro-competition, pro-regulation section of 1996 Telecom Act. The FCC had a much freer hand when it came to rules for cable Internet service or fiber to the home.
The trend here is still less regulation and less help for competitive carriers.
In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send