A favorable
employment report on Friday led the stock market to its fourth consecutive
weekly gain and a three-month high on Friday. U.S. payrolls added 163,000 jobs
in July, above the 95,000 expected, giving investors some hope that the economy
will manage to shuffle along, instead of falling into a recession.
The Dow
gained 217.29 points Friday to hit 13,096.17, reversing losses from earlier
sessions. The index rose 20 points, or 0.16%, on the week. Likewise, the
Standard & Poor’s 500 rose 25.99 points Friday, bringing its weekly haul to
five points, and leaving the index at 1390.99—10.6% higher than it started
2012. The Nasdaq Composite wasn’t left behind. It gained 58.13 points on
Friday, ending 9.81 points higher on the week at 2,967.90.
The July
jobs numbers offset some of the disappointment investors had after both the
Federal Reserve and the European Central Bank failed to act on recent rhetoric
that they would move to help the economy. Milton Ezrati, senior economist and
market strategist at Lord Abbett, believes the ECB may announce a plan to
provide liquidity within the next two weeks and he’d expect the markets will
continue to rally on the news.
“We
think the market over the next six to 12 months will return more than
10%,” he says. That’s in addition to the gains the market has already
enjoyed this year. If the economy can grow 2%, and inflation runs about 3%, he
believes companies can grow revenue 6% to 7%, especially if they have
international exposure. So even if there is no margin expansion, corporate
earnings should improve moderately. Not bad for a sluggish economy.
THE BIG
SURPRISE of the week was the $440 million loss racked up by Knight Capital
Group (ticker KCG) in just 40 minutes. Thanks to a software glitch, the company
accidentally bought almost 150 stocks on Wednesday. It sold those stocks to
Goldman Sachs at a loss.
Knight
stock collapsed from $10.31 at the week’s start to a low of $2.27 on Thursday,
then bounced more than 50% to $4.05 on Friday on reports that the company
secured a line of credit.
Knight
might not be well known on Main Street, but it is a vital part of the equity
markets. The firm is the largest secondary trader of U.S. equities, trading 15%
of the stocks listed on the New York Stock Exchange in the first half of this
year and 16% of those listed on Nasdaq. You may not think you’re trading with
Knight but the trade that you send to your broker may find its way to Knight to
be executed.
Knight is
reportedly working to raise equity, which isn’t surprising given it only had
$336 million of cash on its balance sheet as of June 30. But even if it manages
to raise the capital it will have to repair its reputation and convince the
Street it’s safe to trade with them again. By the close on Friday, TD
Ameritrade and Scottrade had resumed trading with Knight, while Vanguard Group
and Fidelity Investments reportedly continued to trade elsewhere.
“Knight
has a very strong reputation and was known for staffing up with smart
people,” says one equity trader. Adds Larry Tabb, founder of the research
firm TABB Group: “They have a great business and it’s amazing that in 40
minutes you can do that much damage to a company like Knight.”
Knight’s
software nightmare is just the latest in a spate of market malfunctions. Think
JPMorgan’s big trading losses, the flubbed Facebook and Batts IPOs, MF Global,
and the infamous Flash Crash of 2010. One potential solution: Increase the
difference between where investors can offer to buy and sell stocks,
particularly on mid- and small-cap stocks. The spread is now a penny and Tabb
thinks it should be wider to improve liquidity and slow down the market.
“My
viewpoint over the last year and a half has really changed,” says Tabb,
who previously thought narrow spreads and more technology would improve
liquidity across the markets. “This market is not robust.” (Source: Barrons Online).