Daily Market Reports | Jul 15 2008
By Greg Peel
The Dow Jones index, which contains only two banks – both large commercials – fell only 45 points or 0.4%. The real action was in the S&P, which fell 0.9%. The Nasdaq fell 1.2%.
Wall Street opened strongly from the bell, spurred on by the government bail-out package announced for the two major mortgage lenders Fannie Mae and Freddie Mac. The Dow was up 139 points at the open, a reflection of the 30% bounce in Fannie shares, to chose one. However, by the end of the session Fannie was to close down 5% on the day.
It was another volatile session (for VIX watchers the magic number is now 28), which included the Dow down 97 at lunch, slightly positive at 3.30pm, and down 45 on the closing bell. While the broader market fought it out, the focus was on the banking sector. Apart from the F/F bail-out, traders were responding to Friday’s second largest ever bank collapse – that of IndyMac.
In the case of Fannie and Freddie, the smart traders were immediate sellers on the opening surge. Consider firstly that Bear Stearns was “bailed out” through a package contrived by the Fed and JP Morgan, yet Bear shareholders only received US$10 for their shares, representing a massive loss. Consider also that while the US government may have stated that it would inject equity into F/F if it had to, the purpose of that injection would not be anything to do about saving shareholder investment – it would simply be about saving mortgages. A bail-out of this nature would amount to an effective nationalisation. If you nationalise a company, it’s all over for private shareholders.
Hence the initial euphoria about the cavalry quickly evaporated. Fannie shares were down 5% on the day, and Freddie 8%.
Turning to the other problem, the collapse of IndyMac has highlighted the role and limitations of the Federal Deposit Insurance Corp. The FDIC will guarantee to return every penny to depositors in a failed institution, but only up to a limit of US$100,000. Thereafter, the FDIC will do its best, but perhaps only fifty cents in the dollar might be returned, if anything. The FDIC does not shut a failed bank, it takes it over, so returns of deposits are dependent upon being able to keep the bank going, and hopefully finding a buyer or buyers. It’s a difficult job because small depositors are queuing up to withdraw whatever money they have as quickly as possible.
The average American would have been blissfully unaware of this US$100,000 limit before the weekend. The US media have done their bit in informing average Americans all day Monday. If you have more than US$100k deposited in one bank, get it out now! As one can imagine, regional banks have had a busy day. There is some US$7 trillion deposited in US banks, and some 8500 deposit-taking institutions. Of the US$7tr, about two-thirds is made up of deposits of US$100,000 or less.
So if you had US$200,000 in one bank, what do you do? For one, you could take out US$100,000 and put it in a different bank. If you did that, the banking system would be fine on a net basis and would even generate a lot of fees all of a sudden. But what if you decided banks had become just too risky a proposition, and so you bought gold, or T-bonds, or stuck the cash under your mattress?
Regional banks listed on Wall Street were absolutely trashed last night in an indiscriminate rout. The largest of the regionals – Washington Mutual – saw its shares fall 30%. Another biggie under pressure – National City – saw its shares fall 15%. By the end of the day WaMu was forced to come out and say it had more than enough capital, while National City suggested it had not seen any unusual depositor withdrawals. But the rout was everywhere, affecting the worst day in the small bank index since 1994.
And the big financials were not spared. The commercials were hammered – Citi down 6% – and the investment banks were hammered – Lehman down 14%.
Moving to the only other sector of any note – energy – oil refinery workers in Brazil went on strike last night. But at the same time, president Bush announced a lifting of the executive ban, put in place by Daddy Bush in 1990, on drilling for oil on the US outer continental shelf. There is meant to be bucket-loads of the stuff somewhere well into the eastern Gulf.
By the end of the session, oil was up only US10c to US$145.18/bbl. The US dollar was slightly stronger after falling in previous sessions, and Brazil was something to consider, but if anyone was looking for blessed relief following the president’s announcement consider that it would take at least ten years for the first drop to be extracted from the outer shelf, even if the first moves were made tomorrow.
Nevertheless, it was a good night for the energy sector in general, and the energy services sector (drillers etc) in particular. Hence the financial carnage was not reflected in a disastrous day for the indices.
Financial carnage is a good spur for gold, however, and it pushed up another US$7.70 to US$972.30/oz. The US government cannot bail out every bank in America, and gold has US$1000 in its sights once more. The Aussie has been enjoying general US dollar weakness, and is up US0.4c to US$0.9720.
By contrast, base metals had a quiet day of little movement, except for nickel which fell 3%.
The SPI Overnight fell 37 points.
As the US financial system crumbles, attention will also be drawn to results season, which is building up steam. Results to come include all of those of regional banks.
