FYI | Nov 08 2007
By Greg Peel
Picture Wile E. Coyote standing on a thin rock ledge, the shadow of a cartoon anvil ever darkening before it strikes and snaps the rock ledge from under him. That will be how the bottom pickers of the last few days will be feeling this evening on Wall Street as once again the US market has proven there is more mortgage fallout that must be worked through before value in the financial sector can be confidently declared.
The Dow fell 361 points last night, or 2.6% – almost at the low of the day but smack on 13,300. For most of the day the index hovered around the -200 mark but as is usually the case the big move came in the last half hour. The S&P faired worse, falling 2.9% or 45 points to crash through the support level at 1500 and end at 1475. The Nasdaq gave back 2.7% as traders rushed to take profits in the large cap techs that have performed so spectacularly in recent weeks.
The litany of bad news began over cornflakes on Wall Street as traders learnt of the news that hit the market late in Asia’s trading day yesterday. The vice chairman of China’s National People’s Congress told a conference in Beijing that China planned to diversify out of the US dollar as the greenback loses its status as a world currency. This news, along with the RBA rate rise, sent the Aussie close to US94c late yesterday as an already timid US dollar began to find further acceleration on the downside.
It’s really all a bit ridiculous.
China has been making such sabre-rattling claims all year, coming out every couple of months and warning the US of its intentions to shift its US$1.4 trillion of foreign reserves elsewhere. Such claims have often come as a retaliation for upsetting China over, for example, poisonous toys that caused a big step-up in US protectionist calls. In every case the individual who has made the “you upset us, we sell your currency” claims have been party officials with absolutely no connection to monetary policy. The simple fact is that China can diversify all of its new reserves away (which build at alarming rates daily) and even reduce its holding of US Treasuries (it has supposedly done so by 5% to date) but it cannot afford to dump the dollar. That would be a purely internecine move. It will not “dump” the dollar.
Nevertheless, tell that to a nervous trader. China or no China, the greenback is heading south in a big way. The dollar fell sharply last night against all currencies, hitting all time lows against the euro (15 years if you pre-extrapolate the ’99 introduced currency), the pound (26 years), the Canadian dollar (57 years) and, for a while, the Aussie (23 years). But it also fell heavily against the yen in the first big down move for a while, and a stronger yen means carry trade unwinding. The Aussie thus gave up all of its gains to be back around US$0.9290 where it finished on Tuesday night. The US dollar index fell as low as 75.21, which continues to be “blue sky” on the downside.
The collapsing dollar naturally sent gold flying once more. The precious metal hit about US$845/oz before the dollar corrected somewhat. It ultimately closed up US$6.50 to US$831.10/oz, while silver gave back some of yesterday’s spectacular gains. Apart from the dollar correction, oil actually had a stumble on the road to US$100/bbl last night when the weekly inventory figures proved not quite as bad as had been expected. While still a net drawdown on reserves, the figure was less negative than the market had geared itself up for. Oil managed to fall over US$1.70 at one point, but you can’t keep a good commodity down and it ended the day down only US33c at US$96.37/bbl.
The rising oil price and, more importantly, the rising gasoline price in the US have begun to really weigh on Wall Street perceptions. Retailers were hit heavily in last night’s session. Also hit hard was automaker General Motors which has voiced recession fears. But that was not the extent of GM’s problems.
General Motors last night announced a US$39 billion loss for the third quarter – the biggest loss in the company’s history, and probably the biggest loss in any company’s history that is still standing to tell the tale. This number simply boggles the mind. However, it is is not a straight up cash loss, because that would put the General out of business about twice. It mostly represents an acknowledgement that deferred tax assets sitting on the balance sheet – assets that assume profits will be made herein – will not be realised. The rest of the actual loss (and this is notwithstanding GM has lost its number one status to Toyota) are losses from the GMAC finance division from – you guessed it – mortgage security write-downs. GM’s shares fell 4%.
But the news that really spooked the financial sector was an announcement by the New York Attorney General intends to initiate a probe of the country’s biggest S&L, Washington Mutual, for collusion in mortgage lending with the likes of Freddie Mae and Fannie Mac. Shares in Washington Mutual fell 17%. Shares in the big mortgage insurers such as Dow-component AIG were also trashed. Morgan Stanley is the latest brokerage to suggest it may be set to announce big write-downs, and it helped all the brokerages and banks to be trashed, including Citigroup which lost yet another 4%.
The fat lady has not yet sung on mortgage securities. She has not warmed up. Indeed, she hasn’t even ordered the cab for the Opera House.
Despite the falling US dollar, there was little joy for base metal markets in London, which closed as oil hit its intraday lows. Nickel and zinc were up marginally, but everything else was down marginally.
The SPI Overnight lost 138 points.
