Daily Market Reports | Jun 19 2008
By Greg Peel
The Dow fell 131 points to 12,029 last night, having breached the 12,000 level after lunch. The index attempted to bounce from 11,993 but that bounce waned at the close. The previous closing low in the Dow was 11,951 on Friday March 14. On Monday March 17 the Dow collapsed to 11,650 on the open before the Fed cut the cash rate by 75 points and opened the discount window to investment banks. Bear Stearns was saved, and a 11,972 close marked the beginning of the relief rally.
The Dow fell 1.1%, while the S&P fell 1% and the Nasdaq fell 1.1%.
The early source of weakness was a a quarterly profit report from the world’s largest cargo airline FedEx, which is considered a bellwether for economic conditions. But while high oil prices and a slowing economy had analysts braced for a loss, it was 2009 guidance that really provided the weakness. This was much lower than the Street had pencilled in.
Next came the second quarter profit report from investment bank Morgan Stanley, and once again the market was braced for gloom. However, a profit of $1.03bn – representing a 60% drop from Q207 – was actually better than expected. A fall in revenue of 38% was also less than anticipated. Morgan shares closed just slightly higher on the day.
Despite the well-received profit, Morgan Stanley also announced that a trader in its UK office had mis-priced a portfolio of credit swap products to the tune of US120m. The trader has been suspended and the UK authorities informed. Morgan Stanley’s CFO suggested he was “very angry”, blamed “stressed markets”, and suggested Morgan had the correct controls in place to catch such rogues.
Clearly not Mr CFO. You should be immediately sacked without severance, never to work in the industry again. Risk control and accurate revaluation is your responsibility. You have failed.
The financial sector was once again weaker, Morgan aside, as the focus continues to move into the regional banking market. Large regional Fifth Third Bancorp announced it was cutting its dividend by two-thirds, raising US$1bn in new capital, and another US$1bn through asset sales. Shares in Fifth Third fell 27% in what was a bad day for any regional bank.
Another quarterly result to put the cat among the pigeons was that of used car retailer CarMax. Its shares fell 13% after announcing a 55% fall in profit. The dealer noted that values of second-hand SUVs and trucks had fallen 25% in the quarter – the sort of depreciation expected over a full year. No prizes for guessing why. In response, shares in Dow component General Motors and rival Ford both fell 6%.
Outside of the specifics, it was another rally in the oil price which helped to send Wall Street tumbling. Oil rose US$2.67 to US$136.68/bbl, largely on the back of threats by Nigerian oil workers to go back on strike after talks with Chevron once again broke down. The weekly inventory data showed that crude supplies fell less than expected, but that gasoline also showed a surprise drop. Anecdotal evidence suggests gasoline demand is rapidly waning, but a Moody’s economist pointed out that demand is actually only down 1.6% from a year ago. In the oil shock of 1980, demand fell 12%.
As it becomes less likely that the Fed will raise rates next week, there is little to hold up the US dollar, particularly in light of the FedEx news. The US dollar fell once more sending gold up by US$11.00 to US$894.00/oz. The Aussie continued its steady rise to US$0.9476.
Base metals were all over the shop. The suggestion is that traders had set themselves short on expectations of Fed hawkishness and a stronger US dollar, but have now been caught out. Aluminium jumped nearly 2% and copper nearly 3%. Zinc – which has been decidedly weak of late, leapt 6%. Copper’s strength was aided by news that a strike at a mine in Peru which began on Tuesday will be indefinitely extended. Nickel bucked the trend however, as it continues to play out a game of uncertainty of supply. It fell over 3%.
The SPI Overnight fell 65 points.
