Relatively solid gains for major averages at midday misrepresented what was a pretty wild morning, particularly for a mid-August Wednesday. As of 1:24 p.m. EDT, the Dow Jones Industrial Average was up 0.5%, to 8,917.84, vs. its earlier high of 8968.40 and low of 8798.89. Similarly, the S&P 500 was higher by 0.7%, to 944.07, after having traded as high as 947.39 and as low as 931.80. The Nasdaq Composite was up 1.5%, to 1397.16, vs. its earlier high of 1401.21 and low of 1378.09. Stock proxies bolted higher from the opening bell amid a downtick in oil prices, strength in the dollar and the first guilty plea in the Enron saga. Strength in both AOL Time Warner ( AOL) and AT&T ( T) also aided stock proxies; AT&T agreed to sell its minority stake in Time Warner Entertainment for $3.6 billion in cash and stock, plus minority ownership in cable-television systems that AOL plans to take public next year. Comcast ( CMCSK), which is buying AT&T's cable business, will inherit the 21%-stake in Time Warner Cable. As Byzantine as the deal was and is, it was seen as a victory for AOL CEO Richard Parsons. It extricates the company from a long-running partnership with AT&T, gives AOL the ability to market its broadband service to AT&T and Comcast cable subscribers, and should simplify AOL's financial structure.
Into the Red
Two hours into the trading day, major averages fell into negative territory, albeit briefly. A warning by Radio Shack ( RSH) and Salomon Smith Barney's downgrade of fellow brokerages Merrill Lynch ( MER), Lehman Brothers ( LEH), Morgan Stanley ( MWD), Bear Stearns ( BSC) and Goldman Sachs ( GS) weighed on sentiment. The Amex Broker/Dealer Index was recently down 0.8%, to 417.61, after trading as low as 408.41 earlier. Also weighing on shares were reports the international terminal of the Miami airport was evacuated and comments from Philadelphia Fed president Anthony Santomero, indicating rate cuts may not be forthcoming anytime soon. "The Fed's current monetary policy stance is appropriately supportive of the recovery process," Santomero said in a speech in Berks County, Pa. "At some point, prudence will dictate that we begin moving monetary policy back toward a more neutral stance." Santomero, one of several Fed governors speaking this week, did express confidence that "the tools we have available will be effective in continuing this recovery and leading us to potential growth," and that the Fed has room to lower rates even though they are close to zero.
Perfect Storm Gathers Strength
In recent days I've written about the possibility that bond prices peaked last week, meaning the low in yields has occurred. Of late, the price of the benchmark 10-year Treasury note was down 11/32, to 101 16/32, its yield rising to 4.19%. Many people deduce that what's bad for bonds is automatically good for stocks, and equities have benefited in recent weeks from some asset allocation movements out of fixed-income. So it seemed again Wednesday. But hardcore bears foresee a scenario where both stocks and Treasuries fall in tandem, triggered by another steep drop in the dollar. Such a scenario is predicated upon foreigners selling dollar-denominated assets in large quantities. So, understandably, the bears were enthused this morning by reports in the British press that Saudi Arabian investors are withdrawing billions from the U.S. in protest of our policies toward the Israeli-Palestinian crises, as well as Iraq. Additionally, the BBC quoted a Saudi financial consultant as saying many of his countrymen were offended by the lawsuits filed against Saudi institutions by families of victims of the Sept. 11 attacks. (There's no comment I can offer about that which is printable in a family-friendly Web site.) The BBC put the level of potential withdrawals at $200 billion, while the Financial Times offered a range of between $100 billion and $200 billion. Such developments certainly merit close watching and bears believe this is just the tip of a massive repatriation iceberg. However, Jim Bianco, president of Bianco Research, suggested the amounts cited above seem "wildly inflated." All OPEC nations (there is no country-specific breakdown) held $45.7 billion of U.S. Treasuries as of May 2002, Bianco noted, citing the most recent data from the U.S. Treasury. That's down only slightly from $46.8 billion at the end of 2001 and $47.7 billion at the end of 2000, he noted. Thus, "if the Saudis 'dumped' $100 billion-$200 billion of U.S. assets, it cannot be solely in Treasuries," Bianco observed. Furthermore, total banking liabilities owed to Middle Eastern countries was $24.7 billion as of May 2002, according to the Treasury Department. Again, this was not materially different than levels at year-end 2001 or 2000, Bianco observed, noting Saudi Arabia accounted for "only a fraction" of that total. The numbers suggest Saudi investors have not (as yet) dumped all their U.S. Treasury holdings and redeemed every bank deposit, Bianco concluded. Furthermore, even if they had (do), "we come up way short of the numbers cited" in the British press.