Daily Market Reports | Jun 27 2008
By Greg Peel
The Dow fell 358 points or 3%, while the S&P lost 3% and the Nasdaq 3.3%.
The Dow’s fall took the index to 11,453, the first close below the March intraday low of 11,650 and the lowest level since September 2006. The S&P 500 fell to 1283, which is still above the March closing low of 1276 and intraday low of 1256.
The weakness began on the close of the market on Wednesday, when two tech giants reported second quarter earnings. There was little wrong with the earnings per se, but both database specialist Oracle and Blackberry maker Research In Motion offered third quarter guidance that was decidedly weak. This was enough to ensure the Nasdaq was not going to open well.
As Wall Street did open, Goldman Sachs reported that it had moved both Citigroup and General Motors – both Dow stocks – on to its “Conviction List”. This is a list of recommendations in which the Goldman analysts have put added faith in being accurate. They have put a Sell on both companies.
General Motors, already battered by high oil and its own failure to see the writing on the wall for the SUV, fell another 11% to US$11.43. In nominal terms, GM has not traded at this level since 1955 when the company was in its heyday. An US$11 share price in 1955 would be worth US$93 in real dollars today, which about sums up the demise of what was once America’s greatest company.
As for Citigroup, well it was another 6% fall into ever lower territory. At US$17.67 Citi has now fallen 68% from its high at the beginning of 2007. The downgrade sparked another significant sell-off in the financial sector, aided by a round of further downgrading amongst the banks and brokers themselves. It might have now become tit-for-tat playground stuff – you downgrade me, I’ll downgrade you – but Morgan Stanley fell 3.5%, JP Morgan 4%, Merrill Lynch 7%, Bank of America 7%, and Lehman Bros 8.5%. Goldman Sachs itself fell 4%.
All of this downgrade mania was still coincident to the real sword in the side of Wall Street last night. That sword was wielded by one Chakib Khelil, Algerian oil minister and president of OPEC.
“It’s very difficult now to find a market. If you tell me there is someone to whom we haven’t sold oil and who needs it, I’d see, but right now I put my oil on the market and I don’t find buyers,” said Khelil, suggesting the current oil price has nothing to do with demand. (Reuters) “It’s not a question, but a certainty. The problem is the extent of that speculation on the market,” he said, adding that the effect of the subprime crisis in the United States had affected oil markets. Asked what the main factor behind the rise in prices had been, he replied: “I think it’s the devaluation of the dollar.”
Which supports the assertion oft put forward in this publication that the “speculators” are merely trying to preserve wealth by investing directly in the commodity that has become more representative of a global reserve currency than the shot-to-pieces, unsecured US dollar.
Khelil added that oil could rise as high as US$170/bbl in the coming months.
And that was a red rag to a bull. Oil shot up and traded at over US$140/bbl for the first time in early electronic trade. When the dust had settled on the Nymex in the day-session, oil closed up US$5.09 to US$139.64/bbl. It was nothing to do with demand – it was all about self-fulfilling words from OPEC.
And it didn’t help that Libya weighed in on the argument. Libya had made a vague threat at the Jeddah meeting on the weekend that it would actually reduce its oil production to offset the increased Saudi production, given its agreement with the Khelil thesis. But last night Libya stepped up the threat, this time adding in some leverage. Libya would reduce production, it said, unless the current terrorist charges outstanding in US courts were dropped. Not since the 70s have the enemies of the US used oil as so overt a bargaining chip.
The rise in oil was enough to send the stock market over the edge. However, what was missed in the rush to sell – a rush exacerbated by the fact there are only two more trading days before the end of the quarter – was the rest of what Khelil had to say.
Khelil suggested that oil would NOT go to US$200/bbl. Indeed he believes the price will ease before the end of the year. It will only be in the northern summer months that added demand will see oil move into the US$150-170 range.
What was also glossed over on what was a decidedly black day was the fact the US first quarter GDP was revised up to an annualised 1.0%, above the 0.9% expectation and initial estimates of 0.6%. This puts US economic growth for the twelve months to March at 2.5%. Preliminary second quarter growth estimates are currently sitting at 0.8% – sluggish, but positive.
Also ignored was a 2% increase in existing home sales in May, and a weekly jobless claims figure that was unchanged.
The rush out of stocks sparked a flight to quality that hasn’t been seen since the Bear Stearns lows. The US dollar clearly collapsed on Khelil’s statement, pushing the euro over US$1.57. Apart from the flight to the new “quality” – oil – traditional havens were also sought. The yield on the 2-year US Treasury fell 15 basis points to 2.66% as investors rushed out of stocks and into government bonds. Gold staged its biggest rally in some time, rising US$31.30 to US$916.80/oz.
While the Aussie dollar may be expected to shoot up on a falling greenback, it actually fell around US0.4c to US$0.9559. This is because the fear generated in the market sparked a reversal of risk positions, which includes the yen carry trade. The yen was bought against the US dollar, and the Aussie was subsequently sold.
Base metals were also in bullish mode on the weakness of the US dollar, but not alarmingly so. Beaten-down zinc was the major beneficiary, settling on a 4% rise having been up almost 7% in the session.
The SPI Overnight fell 123 points.
The significance of the approach of the end of the quarter should not be underestimated, and for Australia it also means the close of the financial year on Monday. With little hope of “dressing up” equity positions, the influence of recent weeks has been to sell losing positions to at least take the benefit of the tax loss. July should thus be a new dawn, but as to the brightness of that dawn, the jury is still out.
While Khelil might be held up as the cause of last night’s rout, the deeper implication is that the US, and the world, has lost faith in the Fed. At the SocGen low of January and at the Bear Stearns low of March, the Fed acted incisively with 75bps rate cuts. On Wednesday the world was looking for the Fed to act decisively again, but this time to lift the cash rate and kill the oil rally. Instead, as far as the markets are concerned, it vacillated. And last night’s GDP result showed there may be no justification for not acting.
If the ECB goes ahead with its own rate hike, the ramifications will be severe. We probably will see US$150 oil. But what one now has to consider is whether there is intervention on the cards – direct intervention in the US dollar, direct intervention in the speculative oil markets, or at least the sufficient threat of such. The US government also came under criticism last night for not making any response to Libya.
A fall of 123 points in the ASX 200 this morning would put the physical index below the 5200 mark, and below the 5265 level technicians are calling as significant long term support on a Fibonacci basis. While Mr Fibonacci would probably prefer to distance himself from such blame, the fact is the US market had broken significant levels with more under threat, and the Australian market could well break such levels today. The bank sector rally of yesterday will be reversed. It will be left to the energy and materials sectors to carry the can, but one wonders whether the market is still keen to keep buying those sectors at such elevated levels.
It might be a good time to take note that even OPEC believes the price of oil will fall.
