FYI | Nov 03 2007
By Greg Peel
The Dow finished 27 points higher on the close following a late surge back from the depths. This was no quiet Friday. The index opened around 60 points higher at 9.30, and then fell to -120 by 10.00. At 10.30 it was only down 20 but by 11.30 it was down 120 again. Then came a rally which saw +30 before that failed and at 3.00 we were down 80. A late charge got us to +27 by 4.00. Who’d be a trader?
It was once again a Dickensian tale. While the Dow played most of the day in the red, the Nasdaq rocked and rolled in the green. The Dow finished up 0.2% while the S&P only managed 0.08%. The Nasdaq, however, put on 0.6%. Nearly all of the grief was centred in the embattled financial sector, while the export-heavy Nasdaq watched on. It was a day of rumours, press articles, and a battle between those who see more pain to come in financials and those who see value at these low levels.
It was not a rumour that kicked the market off strongly nevertheless. The much anticipated jobs data came out before the bell and the market was ready for a figure of +80,000. Anything above might have provided a boost following Thursday’s big falls. Anything below could be devastating. The focus would be on the financial sector where many jobs were assumed to have been lost in October.
The number was posted as +166,000. The finance sector actually put on jobs. While concern was raised over a -22,000 number in the retail sector ahead of Christmas trading, there was no denying this was a red letter day for the economic bulls.
But the positive response was fleeting. For one thing, jobs data are considered by many to be Disneyland stuff. They can be significantly revised up to two months later, and indeed last night the August and September numbers were revised down a net 10,000. Some analysts simply did not believe the figure. But it didn’t matter much because financial sector rumours were about to fly anyway.
The Wall Street Journal made some pretty damning accusations about Merrill Lynch. Two weeks ago Merrills wrote down US$8.4bn in third quarter CDO losses, and analysts anticipated another US$4bn would be written down in the fourth quarter. That forecast has now been blown out to as much as US$7bn following accusations from the WSJ that Merrills has organised swap deals with certain hedge funds that see CDO positions removed from the books for one year in order to hide the immediate pain. If this is the case, thought the market, is Merrills alone?
Financial stocks were hit and hit hard. Speculation resurfaced that Citigroup’s capital was in trouble. Its shares fell another 5%. Even Goldman Sachs was hit with rumours of big write-downs to come. Its shares fell 4%. Merrills shares fell another 8%. Shares in US bond insurer Ambac fell 20%. Over in the UK leading investment bank Barclays was hit with rumours of its own as traders anticipated more big write-downs. Its shares were down 8%.
As rumours and denials flew about, the Dow, which contains leading banks Citigroup and JP Morgan Chase, credit card issuer American Express and bond insurer AIG, and the S&P 500, which is 20% financials, rocked and rolled. Just before the death another rumour sprang up – that the Citigroup board was set to hold an emergency meeting over the weekend. The suggestion is that CEO Chuck Prince would watch the lever being pulled just before the trapdoor opened under his chair. This was the impetus for the late market turnaround. Wall Street puts a lot of positive value on CEO changeovers in times of crisis. (But then the Merrill CEO left this week.)
Up at Times Square, a bemused Nasdaq was concentrating on that wonderful jobs number. It was also the focus of attention on the Nymex, for if the US economy is not as bad as assumed then that means higher oil demand. Oil jumped US$2.44 to US$95.93/bbl.
Can oil producers make windfalls at that price? Not so Chevron. The Dow component followed its colleague Exxon’s lead last night and announced third quarter losses. While Exxon’s quarter was down 10%, Chevron’s was down 23% on the same refinery margin problems. Chevron’s shares fell 1%.
But the real action was on Comex. Something happened right on midday, just after the Dow had turned around from its initial lows. To that point gold had simply been pulling back the losses of yesterday as the US dollar slid yet again to new historical lows. But at midday the metal took off from US$796 to reach US$806.00/oz in a heartbeat, at which it closed. That was up US$17.10 from Thursday. Silver followed suit, putting on US47c to US$14.53/oz.
The Aussie, which lost US2c on Thursday as carry trades reversed, bounced back US1c as life returned to normal and hit US$0.9239.
Base metal prices in London featured aluminium up 1%, zinc up 2% and lead up 4%.
The SPI Overnight rose 25 points.
