Daily Market Reports | Mar 28 2008
By Greg Peel
The Dow closed down 120 points, or 1%. The S&P lost 1.1%, while the Nasdaq copped a 1.9% beating.
To get last night’s economic data out of the way, the US fourth quarter GDP was confirmed at an annualised growth of only 0.6%, but that’s old news. Domestic personal consumption fell by 0.4% in the quarter, which was more worrying given the first quarter is hardly likely to be better. The inflation numbers as measured by personal consumption were revised lower however, with headline revised down from 4.1% to 3.9% and core from 2.7% to 2.5%. This put the annual rates at 3.4% and 2.1% respectively, the latter giving the Fed an excuse to cut cash rates and the former encouraging critics to suggest the Fed is being conveniently selective in its inflation measure. And it’s been in the first quarter (which ends on Monday) that commodity prices have really taken off.
Jobless claims fell by 9,000 last week, bucking the recent trend, but cynics point to Easter as the explanation.
On the stock front, it was tech weakness that cast a pall over the market from the opening bell. Every time the broad market tries to bounce tech has a run, and it has had a big run since Bear Stearns turned sentiment around. That’s why yesterday’s Oracle result announced after the bell was such a disappointment. It met EPS forecasts but fell short on revenue, and the Street was setting for upside in both. Oracle lost 7%. Google lost 3.5% when it suggested internet advertising revenues would be lower than expected. Just when the market is trying to put its faith in the global tech stocks, it is nipped in the bud once more.
Financials were another problem last night, despite what was essentially some pretty good news.
Last night marked the beginning of the Fed auctions to the investment banks. This is the extraordinary measure the Fed has undertaken, not used since the Depression, to allow investment banks to directly swap certain mortgage-backed securities for Treasuries on an auction basis. In this round the Fed put up US$75bn of an ultimate US$200bn promised.
Given the current situation, one would have been forgiven for believing the Fed would be swamped. Capital-constrained banks should have been elbowing each other out of the way to get their hands on as much of the US$75bn as they could, and shore up their balance sheets. But it wasn’t to be. The market was greatly surprised when only US$85bn was bid for in total, and all at a price well below the current rates of the Treasuries on offer. This thus begs the question as to how much of the remaining US$125bn will be needed.
This appears on the surface to be wonderful news. The situation is not nearly as grave as some might have expected. When the Bank of England recently put up 20bn pounds, 100bn pounds were bid for. Some experts have been looking to these auctions as an indicator as to whether we’ve now seen the worst. The Dow immediately rallied back from being down around 100, and pushed towards unchanged.
But that’s where it ended. The Dow stalled, turned, and in the last half hour accelerated to close on its lows. While the auction result may have been curious, Oppenheimer’s respected banking analyst announced another round of earnings downgrades – this time for Merrill Lynch and UBS. Meredith Whitney yesterday downgraded all the commercial banks , including a suggestion Citigroup would lose four times more than first thought. The Street has pencilled in an EPS loss for Merrills in the second quarter of US3c. Whitney is now at US$3, and expects her peers to catch up next week.
This added to the latest round of financial sector fear that began yesterday. The rumour mill also began to step up, with Lehman Bros once again in the frame. This prompted the Lehman CEO to come out and deny any truth to the rumours, and suggest there is no problem with the firm’s balance sheet. Oh no.
This is exactly what the Bear Stearns CEO said on a Wednesday. By the Friday Bear Stearns was gone. Lehman Bros shares lost 9% last night. Goldmans lost 4%, Morgan Stanley 4%, Merrills 6%, JP Morgan 3% and Citigroup 1%.
The US dollar leapt on the auction news but its rally fizzled toward the end as well, closing only modestly higher. The Aussie barely moved. Gold fell US$4.20 to US$946.50/oz.
And it was back to the old chestnut of geopolitical risk in the oil market last night, after a brief hiatus to allow everyone to have a sit down and enjoy half an orange. An oil pipeline was explosively sabotaged in Iraq, being the first case of oil-related terrorist activity in the war zone since 2004. Oil jumped up as high as US$108, before settling on the dollar drift to be up US$1.68 to US$107.58/oz.
All more ammunition for the fusillade hitting our brave soldier trying to exit the trench. (Thank you to readers who pointed out the spelling mistake in yesterday’s report – the sub has been taken out and shot).
It was nevertheless a big night on the base metal front. Having divested of commodity positions in a panic earlier in the week, last night funds began to re-establish long positions ahead of the end of the quarter. When the copper inventories numbers came out showing a fall, the rush was on. When the dust settled nickel was up 6% and everything else 3%.
The SPI Overnight lost 41 points.
