Daily Market Reports | Mar 05 2008
By Greg Peel
Last night the Dow closed at 12,213, down 45 points or 0.4%. At its low point it was down 226 points to 12,032. The post-subprime low close in the Dow is 11,971, posted on January 22. The intra-day low was 11,508, posted in the blink of an eye that morning when Wall Street came back from a long weekend to find Europe had collapsed (which later turned out to be due to SocGen’s rogue problem). The Fed made its historic 75bps emergency cut that morning and the Dow came back from oblivion.
Last night the S&P 500 closed at 1326, down 5 or 0.3%. At its low point it was down 24 points to 1307, which is below the January 22 low of 1310. As the S&P is the broad market index, its movement has more currency as a stock market indicator than the 30-stock Dow. Thus the January low was breached. The similar blink-of-an-eye intra-day low was 1270.
Last night the Nasdaq closed at 2260, up 2 points or 0.07%. The January 22 close in the Nasdaq was 2292, so that level has already been breached, and indeed was breached on February 29.
Wall Street began to turn around after 2pm when the New York State Regulator announced the rescue deal for monoline insurer Ambac was “progressing”. A consortium of banks has come together to restructure and recapitalise Ambac in order to save its AAA rating. Its first rescue package was rejected by the ratings agencies. There is no guarantee this second one won’t be either, but Wall Street wasn’t taking any chances. The turnaround gained extra encouragement, particularly in the Nasdaq, when the CEOs of Cisco and Amazon both independently came out with positive views on their businesses.
So why did Wall Street bounce? The answer lies in the speculative side of the market. Speculators are short, short, short. The open interest in index put options is currently off the dial. It has been a common theme that the stock market needed to retest the January lows. On the S&P move last night it did. What would it do next? Collapse or bounce?
As it was, it bounced on the above news. Technical levels are all well and good, but anyone with a coin has as much chance of finding them useful. The ASX 200 bounced several times off 5500 before gapping through. Support levels can be made of concrete one day and paper the next. The shorts responded specifically to the Ambac news, and staged a typical get-me-out rally as everyone else moved to the back of the room.
The reason the Dow was so weak earlier in the session was once again due to the financial sector. Firstly, Merrill Lynch analysts reduced their earnings forecast for Citigroup, suggesting the bank would write down yet another US$18bn of mortgage-related valuations in the first quarter. Citi is not finding this stuff under the rug. It is marking to market as required and the fact is the mortgage market is now worse than it was last year despite anything the Fed has thrown at it. The Fed cash rate is 3% and quickly heading to 2%. The 30-year mortgage rate for jumbo (specifically +US$417,000) loans is 6.82% and rising. Defaults are on the increase despite attempts by the government to promote mortgage relief.
In fact, so bad has the situation become that Fed chairman Ben Bernanke last night pleaded with banks to resolve the crisis by actually reducing the level of principal owed on mortgages. In other words, Ben wants the banks to effectively forgive part of a mortgage. Is he kidding? Not at all. With any equity in their houses totally blown away US home owners are simply walking away from their properties. The bank then has to sell that property at possibly 50% of its loan value. Were the loan value to be reduced, the home owner could continue to service the loan into the future and, eventually, the market would recover. Banks would ultimately stand to lose at lot less.
It was a daring appeal, and seemed like a panicked one. Back at Citigroup, management was busy denying a specific statement by its Dubai investors that the bank would need to raise yet more capital. Citigroup’s shares are now at a nine-year low. The S&P Financial Index has breached its January low.
While it was a rollercoaster ride on the stock market, the bond market did not take to the sidelines. The two-year traded as low as 1.5% when the Dow was at its nadir (money flowing out of stocks will usually first flow into bonds). The last time the two-year was at 1.5% was in 2004 when the Fed funds rate was 1%. Last night it bounced hard with the stocks, closing back at 1.64%. But this hasn’t stopped bond traders predicting the Fed will shortly make an emergency cut of 50bps ahead of the March 18 official meeting, at which it will make another 50bps cut. That would take the nominal cash rate to 2%, and the real rate well into the negative.
But now to commodities. It’s always hard to know who was leading whom, but last night but Dow weakness was exacerbated by a sudden turnaround in across the board commodity prices. Yes – the inevitable happened as the recent parabolic trajectories of commodity prices reached a peak. Profit-takers moved in, and moved in fast.
In the last few weeks observers have suggested commodity prices had completely disconnected with fundamental demand/supply influences and become nothing more than speculative. Fund managers were rushing into commodities as an alternative asset class, as talk of spiralling inflation inspired funds to get on board the train rather than be run over by it. This, of course, is self-fulfilling and can only last so long. The reality is a good, sharp pullback in commodities is very healthy, and if it continues it should ultimately allow investors to re-establish positions for the bigger picture advance expected over a longer time horizon.
Oil fell US$2.93 to US$99.52/bbl. Aluminium fell 1%, copper, lead, tin and nickel fell 2-3%, and zinc fell over 3%. Upcoming option expiries was another reason for base metal traders to square up. Grains and beans fell. Silver fell close to 3%. Even platinum fell.
Gold is called a commodity, but its’ not – it’s a currency. Nevertheless, with the US dollar relatively steady last night and oil dropping, gold traders decided they wouldn’t wait for US$1000 to start cashing in. Gold fell US$20.40 to US$963.70/oz.
The Aussie dollar was in a mind of its own however, having dropped like a stone on the RBA statement accompanying the rate rise yesterday. Economists agree RBA rhetoric now signals a pause at 7.25% when previously another 25bps hike was expected in May. Over 24 hours, the Aussie fell over US1c to US$0.9273.
The SPI Overnight fell another 46 points.
Last night’s various pieces of news just go to prove this is not over yet. However, there is a prevailing view of exactly that now on Wall Street. While the longer term players are still touting the value in so many stocks, and have been since about August, the short term players have been playing the short side, trying to push the market as well as ride the market to lower levels that really will offer good buying value. When the first speculators begin to feel enough is enough, this market will turn. But it won’t happen tomorrow, and may not happen this month. A large majority are signalling mid-year as a potential bottom, which means it is likely a bottom will be formed before then, if bottom is going to be formed.
Buy in May and go away?
