FYI | Aug 14 2007
By Greg Peel
With the cavalry now in control in the form of global central bank intervention, perhaps Monday was a day when Wall Street traders decided it was safe to actually go and enjoy some of that summer break they’ve so far missed out on. Volume on the NYSE was relatively low, and the wild gyrations of last week were missing.
Still, the market was not unidirectional. The Dow was up 99 points at its height – almost a small move in the current context – and there were still fluctuations before the market turned tail at the death and slipped under the line to be down 3 points. Quite possibly, traders looking for a follow-through were not confident enough and decided to square up again at the close.
The good news of the day was the release of the July retail sales figure, which at +0.3% slightly exceeded expectations. The consumer market represents two thirds of the US GDP, and the great fear is that the mortgage crisis will stymie spending. But as a counterpoint to the retail sales figure, retail store giant Sears Holding (owners of Sears department stores and K-mart) reported disappointing same store sales in the second quarter. The company cited the housing slowdown as a drag on sales of whitegoods and other home-related lines.
Further worrying news came in the form of announcement by Goldman Sachs that the investment bank and some of its larger investors injected US$3 billion into Goldman’s Global Equity Opportunity Fund which is rumoured to have lost 30% in value despite being a straightforward quantitative fund and not a high-yield fund. The news followed last week’s announcement that Goldman’s US$400m “market-neutral” fund had been closed.
The market is still very concerned about the losses that may yet emerge from the likes of Goldman Sachs and the many other banks, brokerages and financial institutions that have not been as forthcoming as GS. While the bulls are screaming that financial stocks “are being given away” at these prices, the more cautious are waiting to see just what may yet come out. The same is very true for Europe, where massive ECB injections have led to disquiet that there may be some bad news yet to emerge.
The ECB injected yet another US$65 billion last night, bringing its total injections since Thursday to more than US$200 billion. By contrast, the Fed only injected US$2 billion last night, which is actually a low amount under any normal open market operational standards. That the Fed did not need to make another ECB-magnitude injection also helped to calm markets.
While the first central bank injections sent the world into a panic on Thursday, Europe had yet to catch up with the dip-and-late-rally on Wall Street on Friday. Just as the Australian market put back 1%, so did Europe respond, with Germany up 1.8%, France 2.2% and the heavily hit UK a soaring 3.0%.
News on the US private equity front returned to the fore last night. From the “well blow me down” department came the news that a private equity consortium led by the Lone Star Fund had decided to withdraw its bid for subprime lender Accredited Home Lenders due to changed conditions. From the “only in America” department came the news that AHK now wants to sue.
But more importantly, doubt still surrounds bond issues for the long standing takeover offer for energy retailer TXU Corp by a Texas Pacific/KKR-led consortium. If the bid fails, says TXU, it intends to split into three companies instead.
In other markets there was little excitement. The US dollar was mixed to slightly stronger while gold slipped a bit, bonds were relatively steady, oil posted a small rise and base metals were quiet, with the exception of aluminium. Aluminium exhibits the lowest volatility of all the metals, but it fell 3% in New York last night.
The Aussie dollar remained weak on only a slightly stronger yen/US dollar, indicating carry trade unwinding still rules.
Despite what was essentially a non-event Dow, the SPI Overnight rallied a further 40 points, suggesting there may still be some catch-up to achieve after Friday’s carnage. At least until the next big bit of news.
