Daily Market Reports | Feb 23 2008
By Greg Peel
The Dow closed up 96 points or 0.8% on Friday. The S&P was up 0.8% and the Nasdaq 0.2%. At 3.15pm, the Dow was at it’s lows for the session of -129. Then the news broke on CNBC that a rescue package for distressed monoline insurer Ambac would be announced early this week.
That’s a 225 point rally in 45 minutes, lead by Ambac’s 18% jump and a similar move for its cohort MBIA. Short covering? Absolutely.
Ambac is the lead celebrity in the great monoline insurance debacle which has seen ratings agencies threaten to downgrade companies in the sector due to their insurance exposure to CDOs and other toxic waste. Were Ambac, the biggest player, to be downgraded so too would all the bonds it insures be downgraded, triggering a massive debt sell-off. The same is true for MBIA and other insurers. Some of the smaller names have already lost their AAAs.
The bail-out deal involves a consortium of banks, which includes Citigroup and Wachovia among others, injecting capital and providing lines of credit to Ambac such that its AAA rating can be maintained. Where on earth these banks are going to get that money is anyone’s guess, given Citi, for example, has itself recently been “bailed out” by the Arabs when it was at risk of falling below its capital adequacy requirement. Word on the Street is that Citi is technically insolvent, but then there’s lots of words on the Street these days. Either way, the commercial consequences of an across the board bond de-rating and subsequent sell-off are enough to ensure banks have little choice but to “save Ambac” given such an investment can only pay off on an opportunity cost basis.
Is this shock news? No. The New York regulator has been working on a deal ever since it became apparent monoline insurers were staring down the abyss. The fate of Ambac et al has been hanging over Wall Street for weeks now but there was no way in God’s green earth the government was ever going to let a crash of every bond on issue, including trillions in municipal bonds, occur. There was a strong possibility Ambac might be split up, allowing the muni business to individually retain an AAA while the toxic waste was left to perish, which would still have been problematic for the banks. So this news is certainly good news, if not actually gobsmacking.
The market had been drifting off in the general doldrums up to the announcement, led down by the financial sector. Merrill Lynch analysts had downgraded the two government sponsored mortgage houses – Fannie Mae and Freddie Mac – to Sell and this set the tone for another weak session, one in which reverberations of Thursday’s Philly Fed number were still noticeable. The bounce was a real blink-and-you’ll-miss-it affair, and thus rather meaningless. However, the bail-out does represent at least one tick in the box of things that have to happen if this market is ever going to regain some upward bias.
Elsewhere the markets it was feeling rather TGIF. The US dollar drifted lower, assisting the Aussie to continue its interest rate driven rally up another half a cent to US$0.9237. Gold, on the other hand, was “unch”. Silver, however, pushed to a new high at US$18.00/oz while platinum, for once, was steady.
Base metals saw profit taking after a very strong week and closed slightly lower.
Oil pushed higher, rising US58c to US$98.81/bbl. Apart from a cold snap hitting the US north east, Turkey has again invaded northern Iraq to deal with the troublesome Kurds. Oh good – another geopolitical crisis is boiling over again just to help oil maintain its lofty heights.
The SPI Overnight was up 42 points. This should help the local market pull a bit further away from the concrete slab at 5500 (ASX 200). It had two goes at penetrating in Friday’s session, before abandoning the assault and moving higher again.
