Tech Wreck

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By Greg Peel

If you want to make money as a Wall Street day-trader it’s probably best to turn up at 3.30pm and then just go with the trend in the last half hour. The Dow was down 249 points around 11am on Friday before rallying back to be down about 70 points before 3.30pm and then collapsing once more. The index closed down 223 points or 1.7%. The S&P fell 1.4%.

The greatest pain in the Dow was felt in the tech stocks, which is evident from the fall in the Nasdaq of 2.5%. This followed Thursday’s Nasdaq fall of 1.9%. Had it not been for a late short covering rally on Thursday, ignited by a turnaround in financial sector stocks, the Nasdaq would have been down over 3% in that session for its biggest single fall since 2002. Friday simply put things back in order.

The tech sector bubble burst on Thursday, sparked by a warning from Cisco that corporate America was winding back on its IT spend. Never mind how many iPhones Apple might sell, the tech sector has undergone a spectacular run in 2007 and a major acceleration since the depths of the credit crunch. With every other sector hit by US recession fears and credit problems, tech offers significant offshore earnings. But the R-word is gaining substantial currency in the US and the tech sector was so far out on a limb by itself that something had to give.

In terms of specific news however, Friday was another black day for the financial sector. One by one US and global investment banks and brokers are lining up to pre-announce expected subprime write-downs. The previously silent names of Bank of America and JP Morgan Chase prepared the market for losses on Friday without mentioning numbers. Wachovia suggested a write-down of US$1.1bn for October alone. Rumours from the UK suggested Barclays were looking at US$10bn. Barclays denied these rumours, but is yet to reveal a loss of any magnitude.

Apart from wanting to get the bad news out of the way, US houses are disclosing ahead of accounting rule changes effective as of next week. See “The Perils of FASB 157” (FYI; Friday).

But if the news was black, financial sector shares were nevertheless mixed on Friday. There is a growing belief the worst of the news is now being revealed, suggesting the sector could be finding a bottom. Citigroup, having already wiped off over 40% of its value, fell no more in the session.

If the financial sector is slowing its demise, we may not yet have seen the worst for retail despite that sector having also taken some big losses to date. All eyes will be on the US October retail sales figure on Wednesday night. The November consumer confidence measure from the University of Michigan was announced on Friday, showing a drop to 75.0 from 80.9 in October. This is its lowest level in 13 months, and consensus expectation was for 79.5. It is not a good sign for retailers if confidence is collapsing going into Christmas.

There was some good news in that the US current account deficit was reduced in September, again confounding expectations. However, the fact that US exports grew substantially is no surprise given the state of the US dollar. The bad news is that import prices have equivalently soared. Ben Bernanke has suggested the average American is unaffected by the falling US dollar if buying domestically. The problem is, America doesn’t actually make much outside of tech products and cars. If the R-word is one problem, the I-word is another.

The US dollar was steady last night against most major currencies – except the yen. The yen leapt on Friday to 110.66 to the dollar as unwinding of the carry trade picked up pace. This is the global risk appetite measure, and as financial storm clouds gather once more risk appetite is beginning to fall back to August levels. The Aussie dollar responded accordingly, falling over US1.5c to US$0.9121.

Gold was steady as oil pushed up once more, rising US96c to US$96.32/bbl. Base metals trading in London featured another 3% fall in copper as inventory levels increase, while nickel enjoyed the opposite.

The SPI Overnight was down 78 points, eroding the 79 points up on Thursday night supported by Rio Tinto ((RIO)).

G7 finance ministers gather in Brussels this week. There is little doubt the one topic of conversation will be the US dollar. If currency intervention is on the cards, watch for a bounce in the greenback and subsequent falls in commodities. If nothing can be resolved, then the US dollar will still be history.

Following an after the bell warning, shares in E*trade fell 13%. E*trade announced the value of its US$3bn mortgage security portfolio has continued to decline, as if that was a scoop. The SEC has begun an investigation into E*trade’s reporting. Who’s next?

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