Daily Market Reports | Mar 27 2008
By Greg Peel
The Dow closed down 110 points, or 0.9% last night. The S&P lost 0.9% and the Nasdaq 0.7%. The Dow made some effort to rally from its lows an hour out from the close, but faded once more.
The renewed optimism on Wall Street seen these last few days took somewhat of a beating last night, as if a fusilade of bullets were hitting a game soldier trying to exit the trench. It started with economic data.
After a devastating 4.7% plunge in durable goods orders (everything from fridges to machinery, cars and computers) in January economists had pencilled in a 0.5% recovery rise for February. Yet again the economists were wrong, as the figure was a further 1.7% fall. Included in the number was a full 13.3% fall in machinery orders. The R-word is overwhelming economist predictions lately, with very little data failing to surprise to the downside. While Wall Street was happy to take the more intangible slump in consumer confidence in its stride on Tuesday, durable goods represents tangible, hard data.
Monday, however, had brought an upside surprise in housing data. Existing home sales increased in February and inventories fell. Was the housing market beginning to bottom? There was a big surge in buying of battered home builders. Now for the new homes data – hopefully a pattern is emerging.
Well it isn’t. New home sales fell 1.3% in February to a 13-year low, and inventories remained unchanged at close to 10 months, the highest level since 1981. The pace of sales has now fallen 30% below that of a year ago. Just when Wall Street was gaining in confidence these numbers are a reminder that there’s still a long way to go.
Data had come in earlier from Europe showing that business sentiment was still resilient in the EU’s two biggest economies of Germany and France. The ECB governor Jean-Claude Trichet also reiterated his inflation fears. Together this means even less likelihood of the ECB cutting its cash rate, despite the Fed being on track to keep cutting down to 1% as many expect (TD Securities is now predicting 0.75%). The result was that the recent rally in the US dollar also gave way, adding to disappointment in stock markets. The euro raced back to US$1.5841, and the dollar fell once more below 100 yen.
The pound had spent most of 2007 in lock-step with the euro, and thus strong against the US dollar. But as concerns have mounted in the UK over the state of both the financial sector and the housing market, the pound, too, is now under pressure, falling away noticeably against the euro. The combination of falling dollar but rising yen saw the Aussie treading water at US$0.9188.
But the most disappointing news emanated out of the financial sector – the sector that has led Wall Street down and which, since Bear Stearns, was hopefully going to lead it back up again. Respected bank analyst Meredith Whitney of Oppenheimer & Co has been among the most negative on bank earnings since the credit crunch began. Last night she shocked the market by substantially reducing her own estimates for the big four US commercial banks – by an average of 84%. Hardest hit was Citigroup, which Whitney decided would lose four times more in the first quarter than she had earlier predicted.
Citigroup shares fell 6%. Bank of America fell 3%, JP Morgan Chase 4%, and Wachovia 7%. The weak sentiment spread to the investment banks once more. Goldmans fell 2%, Morgan Stanley 3%, Merrills 7% and Lehman 6%.
Adding to financial sector woes was a speech by Treasury secretary Hank Paulson suggesting greater regulation of financial markets ahead. Every time there is some financial disaster the pollies zealously promise greater scrutiny, yet little much ever happens. If it does, the innovators simply move on to exploit the next loophole. Yet regulation remains anathema to investment banking, even if investment banks manage to blow themselves up once every decade. So Paulson’s diatribe was not gratefully accepted.
And then there’s Clear Channel. This US radio broadcasting giant has been in negotiation for months with private equity firms looking to implement a leveraged buyout. The deal began to wobble this week and last night Wall Street decided it was in danger of collapsing given an inability to settle on financing arrangements. Shares in Clear Channel fell 17% – their biggest one-day fall since 1989.
Software giant Oracle weighed in with its latest quarterly result just after the bell, and despite matching the Street’s EPS estimate it was shy on revenue and traders had been hoping for an upside surprise anyway. Tech has been another big hope, along with financials and home builders, this past week, given its high percentage of overseas earnings. Oracle shares are down 7% in the after-market.
Yet another hope-dashing move came from the oil market last night. Just when Wall Street was beginning to feel oil might fall back below US$100 – as one might expect given a US recession – and thus ease soaring costs for every business, the weekly inventory numbers showed no change when a rise was expected, and the dollar reversed. Oil leapt US$4.68 to US$105.90/bbl and had pushed well over US$106 in the after-market.
The US dollar fall was good news for gold. It rose another US$11.70 to US$950.70/oz. And silver continued its sterling reversal, rising another US47c to US$18.38/oz.
Base metal markets in London closed mixed to slightly higher, buoyed by a lower dollar but cautious on weak economic data in the US.
With all of the above amounting to a very negative day on Wall Street, and more particularly a kick in the guts for the brighter sentiment of earlier this week, a 100 point fall in the Dow is actually not too bad. What it does go to show, however, is that the recovery ahead will be a “process” and not an “event”, as many a wise head has been suggesting.
Yesterday on the local bourse saw some reversal in the buy financials-sell materials trade that has dominated this week. That reversal will likely feature again today. The SPI Overnight lost 38 points.
