FYI | Jan 24 2008
By Greg Peel
The Dow posted a 632 point trading range last night as, once again, Wall Street came back from the brink. This time it appeared the bargain hunters were out in force. The Dow closed up 299 points or 2.5% while the S&P finished up 2.1% and the Nasdaq up 1%. It was a day marked by yet more extraordinary volatility.
As was the case on Tuesday, the Dow opened very weak, falling around 300 points. The weakness was attributed firstly to Apple’s result, reported in late trade on Tuesday. There was little problem with Apple’s 58% increase in profit, but the Street was spooked by lower than expected March quarter guidance, which sent the shares spiralling down 17% on the open. This set off another day of weakness in tech stocks. Each time Wall Street attempts to bounce, “late cycle” stocks such as techs and commodity stocks are sold in favour of “early cycle” financials and retail. This is a simple shifting of funds from the winners to date into the losers to date in the hope to pick up bargains.
Another source of weakness was attributed to the ECB. Last night Jean-Claude Trichet once again railed against the evils of inflation, suggesting that in these times of market turbulence an inflation watch was even more important. In other words: “I will not cut rates”. Despite a total of 1.75% of rates cuts from the Fed since the beginning of the credit crisis, the ECB has not budged. Yet many commentators fear Europe could suffer a worse recession than the US might ever see. To top things off, it was revealed that at the last Bank of England committee meeting, the vote fell 8-1 in favour of not cutting. It seems Britain has a similar view. Last night London closed down 2%, France 4% and Germany 5%.
The early weakness in the Dow did not last long, and after an hour the short-coverers had pushed the index back towards the unchanged line. The momentum then stalled however, and the Dow drifted back to be at its lows again by lunch time. This seemed to be similar to Tuesday’s session, where sharp short-covering volume soon evaporated to find no genuine buyers. What the market needed was some sort of catalyst.
It got its catalyst when it was learnt the big banks and brokers had met with the New York state insurance regulator to discuss a means of stabilising and rescuing the US$2.3 trillion bond market, in light of US bond insurers’ perilous exposure to toxic securities. Nothing has yet been decided, but just the meeting was enough. The scene is set for yet another bail-out of foolhardy businesses.
The buyers then began to put their toes in the water, and pretty soon the race was on. There was a stumble at 3pm, but then Wall Street put on one of its famous last hour surges as if someone had just opened the doors for the New Year sales. Financials led the charge, with some big names posting ultimate gains of over 10%. Retailers were also popular. The two big mortgage insurers – Ambac and MBIA – were the real stars. After gains of around 30% on Tuesday, MBIA put on another 30% and Ambac an incredible 80%. God bless free market capitalism.
So the buyers are in. We may well see this rally extend for days, yet there is still a pervading scepticism that it will only prove a classic bear market correction. There is little doubt, however, that there are bargain prices out there for the long term player. In the shorter term, traders are still wary of new lows to be set in the next month or so.
The Dow has now surpassed its closing price from Friday – the last close before the rest of the world decided to tank by itself. Asia bounced back furiously yesterday, with Japan up 2%, Shanghai 3%, India 8% and Hong Kong a remarkable 10%. Australia also added 4%, although this result was down from the initial highs. Last night the SPI Overnight added a muted 91 points on the back of Wall Streets rally, suggesting there may be a bit of enthusiasm tempered by caution today.
The US dollar lost last night against the euro following Trichet’s comments. It did, however, regain some ground against the yen for a mixed day all up. The result was a small rise in the Aussie to US$0.8739 and a small fall in gold – US$1.20 to US$888.60/oz.
Base metals in London gave back their gains of Tuesday as the excitement of the Fed’s 75 point cut began to wane. Most metals fell around 3% but missed the late surge on Wall Street. Oil staged a decent fall – US$1.46 to US$88.45/bbl (for the new March contract) – as traders focus more on recessions than rescues.
A good rally for Australia today? Let’s see if some buyers crawl out of their caves.
