FYI | Aug 21 2007
By Greg Peel
A lot of the rally on Wall Street on Friday, sparked as the Fed cut the discount rate, was put down to short covering. As to just how much conviction was apparent in the buying that occurred on heavy volume as the day progressed is something traders are still to be convinced about. As the Dow closed higher last night and the S&P down, it is clear we are now entering a limbo period that will likely last until at least the next FOMC meeting on September 18 – unless something dramatic happens in the meantime.
And whatever that dramatic event may be, it’s likely to be bad news rather than good, forcing, perhaps, the Fed to cut the discount rate further or to cut the cash rate as many expect. Without anything dramatic, the Fed will do neither and the market will have no further specific impetus, other than a lack of bad news. The US result season is over. This week brings virtually no US economic data. It is now very much a waiting game.
Volume on the NYSE dropped last night from the heights of Friday’s 5 billion shares to a more August-like 3.3 billion. It has to be remembered that through all of the August turmoil, Wall Street is meant to have been on vacation. The Dow fell by nearly 100 points by lunch time but recovered to close up 45 points, or 0.3%, on the day. The Nasdaq managed to gain 0.1% but the S&P 500 slipped by 0.03%.
Early weakness was once again led by financials. Two of the big non-bank mortgage lenders that have been in the frame of late were back in the frame again. In an attempt to prevent further margin calls on short term borrowings, Thornburg – a jumbo loan specialist – sold US$21 billion of mortgage backed securities, booking a loss of US$930m against the US$700m it had put into provision. Countrywide’s CEO did the company’s share price no favours when he said the current mortgage market was “the worst environment” he’d ever seen as the company began to lay off an undisclosed number of employees.
Lay-offs are becoming the next theme in the marketplace. Job losses had already been accelerating in the housing market (twice as many in the industry have lost their jobs in 2007 as compared to 2006) but now it is the turn of the mortgage lending market to face the inevitable. The next step is the hedge funds and other Wall Street mortgage security trading units. While in the case of the latter two their may be little sympathy, these people are still American consumers.
The market recovered somewhat in later trading, helped by news that the chairman of the Senate Banking Committee (a Democrat) would be meeting with Ben Bernanke and hopefully Henry Paulson tomorrow. Even he however, speaking on CNBC, played down the idea that his meeting was anything more than a Senate Banking Committee chairman is supposed to do on a regular basis.
But it was enough for now, and while financials pulled back some ground it was the big industrials that pushed the market higher as traders sought out quality. But the move to quality was still a negative on the other side of the market, as US T-bills and T-bonds continue to be heavily sought as well. Money flooding into bonds is not going into stocks. The ten-year bond yield continued to fall, last night hitting 4.63%.
The US dollar was quiet and mixed last night. Yen carry trade unwinding continues to take a breather, allowing the Aussie to shoot back above US$0.80. Gold closed slightly higher, and base metals held their ground after Friday’s recovery. The oil price fell, however, closing at US$71.12/bbl, as Hurricane Dean wreaks havoc in Jamaica and probably Yucatan, but does not appear to want to head north into Gulf oil rig territory.
After the biggest rally in nearly a decade on the local bourse yesterday, the SPI Overnight was down 39 points. A move of 4.6% was quite extraordinary, although it has to be remembered that down-move percentages are measured from above, and up-move percentages are measured from below. Hence a market that has fallen 15% has to move back 17.6% to return to where it started.
For the weeks ahead there will be an intensity of focus on the American consumer. Can spending levels, which represent 70% of GDP, be maintained in the face of the housing/mortgage/credit crisis? Over the period August 13-16 Gallop conducted one of its regular polls and found 72% of Americans believe the US economy is getting worse. That’s as high a number as Gallop has ever seen.
In after-market news on Wall Street, Capital One Financial announced it would shut its wholesale mortgage business and lay off 1900 staff.
