Daily Market Reports | Jun 05 2008
By Greg Peel
The Dow fell 12 points or 0.1% while the S&P fell negligibly. The Nasdaq, however, rose 0.9%.
The obvious question is what was going on on the Nasdaq? The short answer is that the major tech names are continuing to perform well, and given their global exposure they are regarded a haven in a time when a weak economy is forcing a weaker US dollar. This past week the heat has come out of the materials sector as the oil price has slipped, and at the same time renewed fears of instability in the financial sector have prompted another retreat from those names as well. Apart from a bit of money finding its way back into bonds, having previously exited to pick up supposedly cheap stocks, there is a simple equity switch out of the popular sectors post-March back into tech once more.
This is January all over again.
And just to complete the January deja vue, last night an attempted rally in the Dow was completely extinguished when ratings agency Moody’s once again threatened to downgrade the AAA credit ratings of the two big bond insurers Ambac and MBIA. Both have been frantically attempting to shore up their balance sheets since the initial downgrade scare of early 2008, and some success in that venture meant both had slipped off the radar somewhat. But Moody’s has decided that increasing foreclosures in the housing market are continuing to apply pressure to mortgage securities, which means the insurers are once again back in the frame. The talk on Wall Street is that these names are now no longer long for this world.
Shares in both fell 15% on Moody’s warning, which came out around lunch time. At that point the Dow was up 94 points, but it turned around to be down 64 points towards the close. The commercial banking sector suffered the biggest collateral damage from the news on the insurers. If Ambac and MBIA are downgraded, by default so is every security they insure, including the massive weight of municipal bonds. In typical fashion, very late skirmishing sent the Dow wibbling and wobbling into its down 12 close.
While the commercial banks fell heavily, the investment banks actually managed to rally. The rally was led by Lehman Bros, which bounced 2.5% after the big falls of the last couple of days. The impetus was a recommendation upgrade to Outperform by Merrill Lynch on the basis the stock has become too cheap and the bank is not about to go under. In the meantime rumours surrounding Lehman intensified, with the latest conjecture being that executives are offshore trying to sell off some of the firm to private equity.
The initial rally in the Dow was due firstly to the April ISM non-manufacturing (services) index, which fell to 51.7 from 52.0 in March. The reason this is positive is because any number above 50 implies continuing growth, and consensus expectation had the number falling to that 50 mark in April. The ADP jobs data were also released, showing an increase of 40,000 jobs in the private sector in May. This implies a total non-farm increase of 60,000 when you add in the public sector. The official jobs data are released on Friday, and consensus is for a fall of 50,000 jobs. The two measures are always wildly different.
Ben Bernanke again made news by speaking at his old alma mater of Harvard University, where he shocked young students by explaining that when he started his studies there oil was US$3/bbl. The Arab oil embargo of 1973 then sent crude to US$14/bbl – a fourfold increase similar to the fourfold increase which has occurred in the naughties. But despite having warned that entrenched inflation is a major concern – another factor which took the wind out of Wall Street’s sails – he did not see a return to the double digit inflation that defined the 70s, nor the petrol rationing he experienced as a student, nor another destructive wage-price spiral. This time, said Bernanke, it’s different.
In the meantime oil managed to fall another US$2.01 to US$122.30/bbl as it was announced that an increase in refinery capacity last week had led to an increase in inventories of gasoline and diesel. At the same time, demand for these products in the US has fallen, and so despite an actual reduction in crude inventories in the week the oil price was happy to continue its recent pullback.
The US dollar, which made a big jump yesterday, barely troubled the scorer last night. Tonight sees rate decisions in the UK and Europe, although no changes are predicted. The Aussie did, however, jump half a cent to US$0.9579 over the 24 hours, but most of this move was made in response to the higher than expected GDP result released locally yesterday. Gold slipped a mere US60c to US$879.00/oz.
Base metals were mostly lower as London continued to be concerned about the Fed’s new tack of championing the US dollar. Aluminium slipped 1.5%, lead 2% and copper 0.5% but nickel was steady and zinc managed a 2% rally.
The SPI Overnight lost 25 points.
This particular SPIO move seems in contrast to Tuesday night’s move, which seemed tame at minus 15 when both the Dow and oil had fallen heavily. But sure enough, the local market showed remarkable resilience yesterday when nearly every fool (such as this one) expected some more carnage. Apart from the obvious drop in pure oil stocks, the likes of BHP held up and banks were also well bid. There is anticipation in the air over the Chinese iron ore result, but also it looks like anything under 5600 in the ASX 200 is considered to be reasonable buying following the recent pullback from the relief rally. This is exactly the sort of market behaviour that implies a base is trying to be formed. Investors are getting in ahead of what is very strong support at 5500.
But the SPIO was down 25 and there may need to be more pain yet before the ultimate launching pad can be called. Indeed, it could take months.
