FYI | Sep 14 2007
By Greg Peel
The Dow rose 133 points or 1% in light volume last night having been as much as 178 points up on the day. Components McDonald’s and General Motors led the charge. The S&P managed a 0.8% rise fuelled by a stronger financial sector, while recent star the Nasdaq managed only 0.3%.
Following its surprising result of an 8% increase in same store sales yesterday, McDonald’s (known as Mickey D’s due to its MCD code) announced it would increase its dividend by 50%. The stock jumped another 6% to an all time high.
General Motors has been battling the unions of late, trying to resolve the issue of the oppressive cost of healthcare cover for one of America’s largest employers. The General announced last night a possible agreement between the two parties which would see a union-controlled healthcare fund established, thus relieving the automaker of the cost. GM has been down in the dumps recently, struggling against the Toyotas and Hondas of the world who surprisingly seem to have picked up market share by not focussing on V8 Sherman tanks. But last night’s news saw its shares leap10%.
These two stock movements would realistically have approximated about half of last night’s Dow move.
But the news was also good in the broader market, particularly in the much maligned financials. For starters, the LIBOR rate finally pulled back slightly in the UK, as the Bank of England followed the world trend and expanded its acceptable range of collateral. (Look for perhaps a similar response in the Australian bank bill market today, although the RBA has already made such a move). Furthermore, the US commercial paper market showed the first slowing of its weekly declines. This either indicates liquidity may be eking back, or it’s just a blip, but traders liked it.
They also liked the news that borrowing at the Fed discount window is finally, finally, beginning to happen. The Fed sparked the equity fight-back earlier in the month when it cut the discount rate by 50bps, but aside from some symbolic borrowing from the big banks the average loans were only running at US$1.3bn. Last week that figure jumped to a US$3.1bn average, with Wednesday scoring US$7.1bn – the highest single day since 9/11. Again, traders took this as a sign that liquidity problems may ease (perhaps ignoring the reasons as to why those borrowings were necessary).
But the big news of the day involved our old friend Countrywide. Speculation had been rife that despite the Bank of America equity acquisition earlier in the month, Countrywide was again canvassing bail-out partners among the big investment banks. But last night the news came in that in fact Countrywide had secured US$12bn in financing from said banks in order to prop up its diminishing loan book. So while the shares had sunk on the earlier speculation, they jumped 14% last night as the big lender managed to sell debt in a frozen credit market, instead of equity.
Great news, but it doesn’t detract from the fact that Countrywide’s new mortgage count is now 17% lower year-on-year. Nor from the news that Countrywide’s UK equivalent – Northern Rock – last night went cap in hand to the Bank of England and applied for emergency financial support.
Nevertheless, all the good news conspired to send share prices of the big investment banks and brokerages up between 3-5% last night. Given next week brings the lottery of this sector’s third quarter results for the financials, observers suggested the rally was as much about short covering than anything else.
And in a market looking for good news, another supposedly positive sign was that the weekly jobless claims figure indicated only 4,000 more people went on the dole last week, as opposed to the 10,000 the market expected. This provided some contrast to last week’s shocking negative jobs growth number. (How quickly do white collar workers hit the dole queue? Last resort?)
So that’s why the market was up last night. The accentuation of the positive flowed into the US dollar, which regained some ground against the yen and the euro, sending gold off from its highs (down US$3.40/oz). The Aussie has this morning slipped back under US$0.84. Base metals in London were particularly quiet.
The topic du jour has, however, become oil. The Nymex contract closed above US$80/bbl for the first time ever last night, finishing at US$80.09/bbl. Suddenly the market has woken up to fact that a high oil price poses somewhat of an inflationary threat, and thus may swing sentiment back to only a 25bps cut from the Fed next week, rather than 50bps. Strong oil means strong oil stocks, and this was another driver on Wall Street’s positive day.
Last night the Swiss National Bank (central bank) hiked its interest rate. Never one to associate with the rest of the world, Switzerland remains, however, the “other” carry trade, and an important global currency given the extent of its anonymous deposits. It seems Bern is more concerned with the sinking franc and inflation than credit woes, and has done what Japan would like to do if only its economy wasn’t so weak.
The SPI Overnight was up 66 points.
