Daily Market Reports | Jul 12 2008
By Greg Peel
The Dow closed down 128 points or 1.1% while the S&P lost 1.1% and the Nasdaq 0.8%.
As suggested on Friday, order is descending into chaos. The rollercoaster that was Thursday’s trade on Wall Street was simply a curtain raiser for Friday. On Friday the Dow opened lower and traded down by as much as 252 by lunch. At 3pm the index was back to square. In the last hour it fell another 128 points. All of the movements were precipitated by reaction to comments made at the ongoing House Committee testimony with regard to financial market regulation, and rumours regarding Israeli jet fighters carrying out exercises.
Friday’s action can be divided into two distinct and separate developments, although movement in the US dollar does link the two. The first involves the government-sponsored mortgage lenders Fannie Mae and Freddie Mac, and the second, and simultaneous, development regards the oil price.
Fannie and Freddie between them control over half of American mortgages, to a value of over US$5 trillion. While none of these are subprime toxic waste, that point no longer matters in the US housing and credit markets. Lending has been conducted on such fine margins on even the primest of prime loans that it doesn’t take much in the way of write-downs to put the capital of these two lending behemoths under threat. This is has been Wall Street’s concern this week.
The share prices of Fannie and Freddie have been flying about, collapsing one minute and soaring the next. Friday was another night for the former, at least early on. There has been a growing belief on the Street that given Treasury secretary Hank Paulson’s oft stated words of “support” for F’n’F that the obvious implication is that if it had to, the government would step in. Nobody wants to contemplate the ramifications of either F or F or both going under with half of the country’s mortgages.
But early on Friday in front of the House Committee Paulson reiterated that the government supported F’n’F “in their current form”. As far as the market was concerned, this meant “no bail-out”, and panic ensued. At their nadir, both had lost 50% of value in the session, putting Fannie down 90% from its high and Freddie down 94%.
At this point the chairman of the House Banking Committee, Senator Dodd, reported that he had been in talks with both Paulson and Fed chairman Ben Bernanke to discuss “various options” for assisting the two lenders. One option Dodd suggested was another “discount window” emergency lending facility to be offered by the Fed, in a similar vein to that which has followed the Bear Stearns collapse.
On this news, the Dow turned and raced back to square.
Dodd’s comments may have been premature, however, for the Fed came out later in the day and said “we are not currently in talks with Fannie and Freddie”. A dazed market then sold once more. On the death, Freddie Mac was only down 3% but Fannie Mae remained down 22%.
And while all this was going on, little attention was being paid to Lehman Bros, which fell another 17%.
There is little more to say about the Fs other than no one knows what will happen next.
Meanwhile on the other side of the world, a report came out from the Jerusalem Times suggesting Israeli fighter jets were flying training runs over Iraq. As Fannie and Freddie were tanking, the oil price jumped over US$5 to US$147.27/bbl. Assisting oil’s jump – if it needed any – was a collapsing greenback.
Later in the session the Pentagon issued a statement suggesting they knew nothing of any military exercises and this rumour was clearly untrue. Oil thus fell back, and at the close was up US$3.43 to US$145.08/bbl.
There is little more to say about oil other than no one knows what will happen next.
It was a similarly wild ride for the US dollar last night amidst the rumours flying about. The euro pushed over US$1.59 and the Aussie traded close to US$0.97. Gold jumped US$18.10 to US$964.60/oz.
Base metal prices surged initially on a combination of the dollar and ongoing Chinese power concerns, but profit-taking crimped gains by the end of the session. Aluminium and lead were up 2%, copper 1% and zinc 4% while nickel had the night off.
The SPI Overnight was down 74 points, once again quashing any late-Friday thoughts of a push back to 5000 in the ASX 200.
