Daily Market Reports | Mar 04 2008
By Greg Peel
It was a rollercoaster day on heavy volume on Wall Street as the Dow started lower then bounced around all day – rising to be up 15, falling again to be down 105, and finally recovering to be as good as unchanged. It was the same for the S&P but the Nasdaq copped a 0.6% loss as big names such as Google and Apple continued recent weakness.
The Dow played out its to-ing and fro-ing amidst more weak economic data, more distress in the bond insurance market, and the relentless surge in commodity prices.
The Institute of Supply Management’s index of manufacturing activity for February was expected to fall to 48.1 from 50.3 in January but came in at 48.3. No great relief, however, as a figure below 50 indicates contraction and this number was the lowest since April 2003. January construction spending was tipped to fall by 0.8% but fell 1.7% – the steepest decline in 14 years.
There was action aplenty in the financial sector. Shares in “jumbo” mortgage (+US$500,000) provider Thornburg fell 50% to US$4.38 as the company announced it was struggling to meet margin calls. This was a US$28 stock in July. Bond insurer Security Capital fell over 50% to US71c when it announced US$1.5bn in credit costs in the fourth quarter. This was a US$30 stock in July.
Shares in the big two bond insurers also suffered once more, with MBIA falling 5% and Ambac falling 13%. A deal on Ambac is expected shortly, after the ratings agencies rejected plans to split the company in two – CDO and muni – because it would require more capital than one entity. In the meantime, Ambac, MBIA and FGIC (call them the big three) rejected an earlier offer from Warren Buffet to buy US$800m of muni bonds. Buffet has since withdrawn the offer, but is continuing his efforts the capitalise on the muni market meltdown, including setting up his own muni insurance vehicle.
While bond insurer shares may have fallen, the good news is there are vultures (not wishing to be unkind to the Oracle of Omaha) circling, and that’s exactly what the financial sector needs before it can find a bottom. It has to remembered also that there are CDOs out there marked down to 40-50c in the dollar which are yet to suffer a single default in their portfolios. The mark-downs are a result of lack of willing buyers, not actual losses. Some percentage of these instruments will ultimately mature successfully in 2-3 years time. There is value to be had and the vultures are awaiting the right time. It won’t happen until the Fed and government stop interfering, however.
And then there are the commodity markets.
Oil rose to almost US$104/bbl last night before the profit-takers moved in. The final score was up US61c to US$102.45. OPEC made the suggestion that oil has now disconnected with any concept of fundamental supply and demand, as such OPEC would not commit on whether it would raise production quotas, or even reduce them. In the meantime, the killing of a Colombian rebel leader has sparked tension in Latin America. Colombia is a right-wing enclave and US ally now surrounded by the left-wing nationalist governments of Ecuador, Bolivia and Venezuela. Ecuador and Venezuela have deployed troops to their borders.
But the rise in oil is also related to the fall in the US dollar, which hit a new low against the euro last night before pulling back. The Aussie turned swiftly and added 79bps to US$0.9391. Gold rallied US$10.50 to US$984.10/oz and appears determined to hit the $1000 mark. Silver reached a 27-year high at US$20.30/oz while platinum hit yet another all-time high and palladium is now on the move. Palladium can be used as a substitute for platinum in catalytic converters.
Soybeans and corn hit new all-time highs.
Tin hit another all-time high, while nickel surged more than 5%, taking its one-week move to 20%. Zinc put on 4%, while 2% in copper and 1.5% in aluminium put both closer to May 2006 records. As with oil, the fundamentals of supply and demand seem but distant concepts in the base metals market. Inventories continue to grow, but so does fund interest as the US dollar weakens. But the US dollar is weakening on poor economic data. Warren Buffet said last night on CNBC the US economy is already in a recession “by any common sense measure”. Yet commodity prices are soaring. In nickel’s case, a significant chart break last week has created excitement among the tea leaf readers.
The SPI Overnight closed absolutely unchanged, but not before in went on its own rollercoaster. It’s interest rate day today, but there will be little surprise (unless it’s a 50 point hike).
