FYI | Oct 02 2007
By Greg Peel
The credit crisis is officially over. Or at least that’s what the stock market is suggesting. The Dow rose 192 points or 1.4% last night to close at 14,087 – a new record high. The S&P rose 1.3% to 1,547 – still shy of the 1,556 top – while the Nasdaq rose 1.5% but is still over 40% below the tech boom top.
There were several factors influencing last night’s rally. Firstly, the first day of the month and particularly the first day of the quarter are often up-days as investors begin anew. Secondly, the short covering that began with the rate cut two weeks ago has become more climactic as the shorts realise they are swimming against a tide of all news is good news. And it was definitely another all-news-is-good-news-day.
The ISM manufacturing index for September was released last night and it was down to 52.0 – below the 52.5 expectation. This represents another piece of weak economic data which is good news because it strengthens the case for another rate cut.
But the real news of the day came form Citigroup. The Dow component and bellwether banking stock issued a profit warning suggesting third quarter earnings will be down 60%. America’s largest bank said it would write down US$1.4 billion of its US$57 billion leveraged loan book, take a loss of US$1.3 billion on subprime securities and a further US$600 million on fixed income trading, and also provide for a further US$2.6 billion of consumer credit losses ahead.
The reason this was great news is because it was so very bad. While the stock market may have been pushing toward new highs ever since the Fed cut the discount rate in August, the financial sector has remained weak due to ongoing uncertainty over the potential losses still sitting on the books of banks and brokerages. The fear has been that asset-backed securities were still “marked to model” and not “marked to market” meaning the financial sector could still be kidding investors, and perhaps themselves, over the value of loan books.
The Citigroup announcement was seen as a full disclosure. The feeling on the Street was management has thrown everything out there, kitchen sink and all. Citi’s CEO added that he believed all was clear for a fourth quarter of normal, healthy business. While the sceptics are yet to be fully convinced, the market liked what it heard.
Swiss bank UBS also came to the party, writing down US$3.4 billion of subprime losses and anticipating a loss of US$690 million – its first loss in nine years. Between the two, the market took these disclosures as a signal the worst is now past and it’s time to pile back into financials once more. Citi rose 2.3% and UBS 3.2%.
The oil price fell again last night, down US$1.42 to US$80.24/bbl which can also be construed as good news.
The US dollar began the day trading down against major currencies once more, but as the euphoria spread elsewhere the dollar actually managed to pullback to be slightly up against the majors on the day. This turned the rally in gold around, but only as much as to crimp the day’s rise, not reverse it. Thus gold finished up another US$3.70 to US$746.80/oz despite rallying almost US$10 on Friday. As the yen continued to be sold down the Aussie maintained its extraordinary surge, clocking out at US$0.8943.
Base metals went largely nowhere last night with the exception of nickel which fell 4%.
The SPI Overnight was up 74 points.
