Daily Market Reports | Jul 09 2008
By Greg Peel
The Dow rose 152 points or 1.4% while the S&P rose 1.7% and the Nasdaq 2.3%. The S&P thus pulled back from the brink of break-down.
To find a reason for last night’s stock market rally – which was mostly towards the close after a couple of early stumbles – one need only look at the oil price. Oil fell US$5.33 to US$136.04/bbl last night, sparking an across the board surge. Oil has now fallen over US$9 in two sessions.
The reasons for the fall in the oil price are many. Firstly, oil is in an overbought bubble that needs to pop. Has it popped now? More on that later. Secondly, the heightening of Middle East tensions of previous weeks has turned to an easing as Iran has indicated it is willing to talk. Thirdly, one reason the oil bubble would always pop is simple demand destruction at high prices, and last night the US Energy Information Administration projected that US petroleum consumption would shrink by 400,000 barrels per day in 2008. That’s a 40% greater shrinkage estimation than the EIA was projecting only one month ago.
The reason the EIA has increased its projection of demand destruction, apart from the fact petrol sales in the US have been way down in the summer driving season, is because of the higher price. And in a classic case of nothing kills high prices like high prices, oil has responded. If oil continues to fall, of course, one presumes demand will pick up again, until we find some sort of tolerance equilibrium. To that end, the EIA is predicting an average oil price of US$127 in 2008 and US$133 in 2009.
While the EIA report was an important catalyst for oil’s fall last night, it was really only a curtain-raiser to the main game. The real impetus came from a rise in the US dollar.
The US dollar shot up last night later in the session following a coordinated set of three speeches made by Fed chairman Ben Bernanke, Treasury secretary Hank Paulson, and JP Morgan CEO (and Bear rescuer) Jamie Dimon. As far as the greenback was concerned, it was Bernanke’s words that were most influential.
Bernanke suggested that the Fed would probably keep its extraordinary lending facility – put in place in March as an adjunct to the Bear rescue – beyond the end of the year. Bernanke also argued that in return for such largess the Fed should be given greater powers to prevent and limit financial market turmoil. In short, the Fed should be a regulator and not just a hander-out of money, Bernanke implied.
Paulson concurred, in a separate speech. Paulson also, and importantly, reinforced the vital role of the government sponsored mortgage lenders – Fannie and Freddie – and suggested that moves would be taken to stem the ongoing flood of mortgage foreclosures for those good folk who have inadvertently been swept away in said flood. For those who simply entered into overly risky deals of their own making – unlucky, you’re on your own.
A combination of Bernanke’s and Paulson’s dissertations acted as a salve for the beaten down financial sector. Fannie and Freddie, which had been sold down 16-18% on Monday, each rebounded around 10%. The whole financial sector took solace in the knowledge that Mum and Dad were there to pick up the pieces after the teenagers had gotten themselves into a spot of bother. It’s all a bit motherhood of course, and any attempts at manipulating the regulatory framework has to pass not only a Democrat-led House committee but also a potential Democrat-led administration in 2009, but the US dollar loves stability and the relief that the financial system will not be left to go to hell in a handcart.
The irony is that extending lending facilities or saving mortgages ultimately means conjuring up more US dollars out of thin air, but we’ll let that go for now.
The third member of the reassurance triumvirate was JP Morgan CEO Jamie Dimon, who in another separate but unconvincingly coincidental speech suggested, “I think the government is taking proper, in my opinion, monetary and fiscal policy at this point”. Given JP Morgan is one bank that has not suffered as much as others, was able to buy Bear Stearns, and is rumoured to be about to but a regional bank as well, Dimon is a man who attracts respect. Dimon also gave the thumbs-up to the concept of regulatory reform and the Fed’s greater involvement. He did, however, add that while he thought there was an end in sight to the current credit crisis, things would probably still get worse before they get better.
Never mind. With the support of Mum, Dad and wise old Uncle Jamie the US financial system is clearly in safe hands. Result – dollar rallies, oil falls, financial sector takes off, broad market follows.
While the fall in oil might put a smile on most faces, the ramifications were not good for the rest of the commodity space. Gold fell US$6.90 to US$9.19/oz. Natural gas fell 5%. Corn was “limit down”. Aluminium reversed its rise from Monday and fell 5%. Copper, nickel and zinc all fell 2-3%. The CRB commodity index fell 2.5%.
It looks like the overbought commodity environment may be shifting finally, at least for the time being. Is this really the beginning of a solid pullback for oil? To US$130, 120, 100? Well, never count your chickens. Oil didn’t hit US$150, but US$146 wasn’t bad. We have been here before – oil fell swiftly to US$122 last month before Israel opened its big mouth and we ran up to new highs again. We can’t rely on Israel not opening its big mouth again, and nor can we feel comfortable with the unstable weather in the Gulf of Mexico. However, just for the moment, Economics 101 is playing out as it should.
The SPI Overnight rose 38 points. The bottom-pickers rather lost the Battle for Hill 5000 yesterday in the ASX 200, but maybe they will win the skirmish today. It should be noted that the US stock market is oversold, as is the local market, so short-covering is very much a feature of any snap-back rallies. We’ve had one decent “sucker’s rally” so far, and bottoming processes usually require more than one.
In late news, Alcoa “beat the Street” with a slightly better than expected result after the bell. The stock had been sold down 3.5% last night ahead of what was assumed might be a poor result but it has since recovered that loss in the aftermarket, boding well, at this stage, for more market strength tonight.
