Daily Market Reports | Mar 07 2008
By Greg Peel
General housing market woes and some poor retail sales numbers helped to send Wall Street south once more last night. The Dow fell 215 points, or 1.8%, to 12,039, leaving it only 68 points above the January 52-week low close. While the Nasdaq, which fell 2.3% last night, had already made new lows last month, attention was focused on the broad market S&P 500 index. It fell 29 points, or 2.2%, to 1304 – crashing through the previous 52-week low of 1310 set in January.
Technical traders get edgy when new 52-week lows are established, and the next target down will be the S&P’s 52-week intraday low of 1270, set the morning following Europe’s SocGen rout.
The Mortgage Bankers’ Association was the harbinger of doom last night, reporting that a record 2.04% of American homeowners were in the process of foreclosure at the end of 2007, that a record 0.83% of homes entered into foreclosure in the fourth quarter, and that 5.82% of homeowners were behind on their payments – the highest level since 1983.
The Fed came in to kick the market when it was down as well, announcing that for the first time since the central bank began keeping records in 1945, average home equity value had fallen below 50% in the fourth quarter. Americans now only own an average 47.9% of their homes, meaning they have more debt than equity.
Large jumbo loan lender Thornburg Mortgage last night failed to meet its margin calls and its stock fell almost 50%. Thornburg has never issued a subprime loan. All of its mortgages are of a value that exceeds the government’s cap level of US$417,000 – a level below which Americans are eligible for a loan from the government sponsored lenders Fannie Mae and Freddie Mac. The difference is significant, as sponsored loans are a good 1% cheaper. What is also significant is that despite the Fed having cut the cash rate by 2.25% since the credit crunch began, and is expected to go to as low as 2%, 30-year mortgage prices have actually risen to around 6.8%. This reflects the blow-out of credit spreads driven by market fear and uncertainty. So far, nothing the Fed has done appears to have made any difference to anything.
The same story was being played out in Amsterdam last night, as a listed bond fund managed by private equity firm Carlyle Group also failed to meet margin calls. Its stock also fell 50%.
With the mortgage market in disarray, attention then turns to the American consumer. Last night saw a raft of February same-store sales releases from some of the country’s largest retailers. It was good news for the largest of them all – Wal-Mart – as its sales actually increased year-on-year in February. But given Wal-Mart is at the low end of the chain with its grocery and related businesses (think Coles and K-Mart in one), analysts suggest the strong sales figure shows a shift towards the discount end of the market. Higher quality names from JC Penney, to Victoria’s Secret all showed year-on-year sales declines.
So it was financials leading the charge down on Wall Street last night, with the retailers not far behind.
It was a mixed night on the commodity front. Both the European Central Bank and the Bank of England elected last night to keep their rates unchanged at 4% and 5.25% respectively. The ECB is under pressure from the European business community to cut its rate and let the valve off on the soaring euro, but with inflation sitting above the comfort zone and looking more and more entrenched, Trichet stood firm. The euro thus jumped to another new high at US$1.5373. The US dollar also fell heavily to 102.66 yen, with yen buying being reflected in a lower Aussie dollar, which fell over half a cent to US$0.9257. With the stock market threatening to break down into new low territory, and credit market risk looking as significant as ever, yen carry trade unwinding is on the move.
Gold also felt the pinch. As the stock market has been posting bad sessions of late what we hadn’t seen recently was a move to liquidate gold positions in order to pay margins elsewhere or to simply cash up. The US dollar influence has been just too strong. But last night gold fell US$10.00 to US$978.40/oz despite the falling greenback.
And despite the rising oil price, which added another US95c into blue sky at US$105.4/bbl. Aiding oil’s current strength is the tense situation in South America, where Ecuador has amassed troops on its border with Colombia after Colombian forces crossed unannounced into Ecuador on the weekend to attack rebels. Venezuela, to the other side of Colombia, has leapt to support Ecuador. Both are OPEC members. If this little stand-off can be resolved then maybe, just maybe, the oil price can fall.
There was nothing holding back the base metals, however, as apparently one large commodity index fund decided to do some selling last night. Having marked solid gains on the early London official close base metals then tumbled – copper by 3%, nickel by 6% and zinc by 7%. Again, this bucked the trend of chasing a falling US dollar when focus switched back to US housing woes.
The SPI Overnight was down 113 points. If the physical index opens lower by that amount this morning we’ll be at 5322 for the ASX 200. 5300 is the next significant level at which either buyers will emerge on a technical basis, or short hedge funds will try to crash it through. 5500 saw a week of such bouts. Take your seats.
Looking ahead on Wall Street, tonight brings the February jobs data which can have the power to move the market significantly as well. The Bank of Japan also makes its rate decision today.
