I was talking to my brother again this Easter weekend – the one who traded equity options on Wall Street for 20 years.
He’s consulting now, but still has some good opinions on the markets – especially the stock market over the past two or three bruising months – and the stock market going forward.
He tells me that the technology side of the market won’t go up until the U.S. housing market gets its act together. More specifically, tech companies won’t spend as much money or hire as many people, and will keep a tighter lid on costs, until they are convinced that U.S. consumers feel better about the value of their homes and start spending money again.
It’s a classic domino effect. When consumers start spending money, businesses start spending money. And when both consumers and businesses spend money, technology companies make money.
With that said, today’s run-up of 225 points on the Dow Jones Industrial Average (as of 1 PM trading on Monday) came after two economic signs that things may finally be calming down.
More on that from the Associated Press this afternoon:
“Wall Street extended its big advance Monday as investors applauded a new agreement that will give Bear Stearns Cos. shareholders five times the payout than was outlined in a JPMorgan Chase & Co. buyout deal a week ago. Investors were also pleased by a stronger-than-expected housing report and sent the Dow Jones industrial average up about 225 points.”
The Morgan deal is more of an “insiders ball game” effect. Wall Street types, many of who owned shares in Bears Stearns (the first company I worked for on Wall Street in the early 1980’s), were burnt by the bargain basement deal that the Federal reserve engineered for JPMorgan. At $2 a share, for a company that was trading at $60 a share the week before – well, there were a lot of angry traders roaming around southern Manhattan last week.
So Morgan bumps the offer up to $10 to placate shareholders and buys the Fed some time to get the rest of the financial sector back on track. Not as good a deal for Morgan as the original $2 per-share offer last week, but it’s a happier market today because of it. So let’s just say Morgan took one for the team here.
Even so, everybody wins for the short term, at least. Bear Stearns shares more than doubled, jumping $6.81 to $12.77, while JPMorgan rose $1.12, or 2.4 percent, to $47.09.
It’s the second piece of economic news that really interests me. This, again, from the AP.
“Beyond the troubles of the financials, Wall Street was examining the housing sector — the root of much of investors' current angst. A real estate trade group said sales of existing homes rose rather than declined in February, as had been expected.
The Fed's move and even the housing figures appeared to alleviate some of Wall Street's concerns about souring mortgage debt and lenders' resulting hesitance to grant loans of any sort. The latest Bear Stearns deal signals that investors' losses might not be as sizable as feared.”
Can you say Hallalujeh? I know I can. The news from the National Association of Realtors today that said sales of existing homes rose by 2.9 percent in February to a seasonally adjusted annual rate of 5.03 million units, was the biggest percentage-of-sales increase in a year and Wall Street had expected a slight decline. Evidently, with home prices so low, buyers are getting off the sidelines and back into the market.
That’s good news for technology companies. When buyers get back into the housing market, the floodgates open (okay, just a little bit for now) and consumers feel better about the equity value of their homes.
The upshot? Like a bud sprouting out of the turf, the Bear Stearns and home sales report may not look like much now, but they could foreshadow a much healthier investment climate for the second half of 2008.