FYI | Aug 02 2007
By Greg Peel
Late in each trading session, the New York Stock Exchange announces the volume of orders in the market and whether they are buy or sell. A weighting either way can have a lot to do with how a session ends, and explains why often the biggest move in US markets occurs within the final hour. With only twenty minutes to go before the bell, the NYSE announced that sells roughly matched buys in a day of significant volume. This was exactly the green light the bargain hunters had been looking for – a balanced platform.
The Dow rallied about 180 points in that twenty minutes to finish up 150 points on the day. At it’s lowest point mid-morning, the Dow was down 79 points. But during the day, the fluctuations from up to down and up again were numerous and wild. The VIX volatility index surged.
There was plenty to absorb last night as far as news was concerned. But did any of it matter? Are there really any bombshells left to explode?
For starters, all of Asia was down 3-4% yesterday including Australia (3.3%) and even China (3.8%) which finally seems to have aligned with the global malaise (although see below re protectionism). After sharp bounces yesterday, the FTSE closed down 1.7% and the Dax 1.4%.
On the US second quarter earnings front, results were mixed again but the S&P 500 average profit growth remains at 14.6% with 71% of companies having reported.
The news of a 10% fall in Macquarie Bank due to fund losses unrelated to subprime exposure also resonated in the US, but was eclipsed by word from the original culprit Bear Stearns that another of its funds – worth US$800m – was staring at massive losses as well. This fund has no subprime exposure either. This fund is exposed to alt-A (let’s call those mezzo-prime) and prime loans. And then a rumour ran through the floor that US home builder Beazer Home was going under. Its stock almost fell off the board before a sharp rebuttal from management suggesting “scandalous” misinformation brought shares back to be only down 20% on the day.
In Germany, the government announced it had pulled together a rescue team of leading banks in order to save Dusseldorf-based lender IKB, which did have significant exposure to subprime loans.
On the economic data front, the closely-watched ISM manufacturing index for July fell to 53.8 from 56.0 in June. Consensus expectation was for 55.0. This indicates a slowing. But surprise-surprise, the National Association of Realtors announced that pending new home sales (contracts already signed) rose 5% in June – the highest monthly jump in more than three years. This shows there were bargain-hunting property buyers around in June, but are they going to be around in July?
On the all important jobs front, an unofficial measure of June jobs growth (often indicative of the official figure) showed 75,000 jobs were added. The consensus figure for the Friday non-farm payrolls release is about 130,000, so there is a chance the real number may be much lower than expected. This is seen as wobbly from the consumption point of view, as it is full employment that shores up consumer spending against mortgage problems and oil prices.
In political news, a bill was raised in Congress which seeks to impose significant protectionist measures in a clear anti-China attack. The bill is said to be supported by not just Democrats but Republicans as well. This prompted a bipartisan group of over 1,000 economists to petition Congress and presidential hopefuls and plead against destructive protectionist measures. The last time such a group made a similar petition was to Herbert Hoover. Hoover ignored the entreaty and introduced his protectionist policies. Therein followed the Great Depression.
All of the above were factors in determining Wall Street’s wild intra-day ride. But it was the bargain hunters who moved in on the close, clearly indicating that while there may yet be more significant fallout from the “subprime crisis” (a label that is becoming increasingly over-specific) there is not much more than can actually surprise. The damage has already been done.
Are they right?
Movements in other markets now seem reasonably correlated to equities. Investors continue to buy US ten-year bonds (4.75%). The US dollar staged a rally against the euro and the yen, indicating a breather in yen carry trade unwinding. This breather allowed the Aussie to rally back to US$0.8559 and despite a fall in the oil price (down US$1.68 to US$76.53/bbl) and the dollar gold rallied US$3.70 to US$666.70/oz.
After yesterday’s carnage on Bridge Street – a Macquarie Bank-led mass divestment – the SPI Overnight has run back 1.8% or 107 points indicating the bargain hunters may be out on the local bourse as well this morning. Base metals (which have largely now taken a back seat) were mixed.
Only those desperately trying to be optimistic would declare that yesterday’s massive local fall – the worst since 9/11 – must signal the bottom of the correction. It may yet prove to be so, but volatility in the US suggests there is likely more bad news to come, and that bad news can still cause panic even if more bad news is just about a given now. Beware the second wave – those investors who were either oblivious to, or frozen into inaction by, the shock down day. There are always Johnny-come-latelies who look to sell on any decent bounce given they missed out the first time. If not today, then soon.
