Daily Market Reports | Aug 13 2008
By Greg Peel
The Dow fell 139 points or 1.2% while the S&P fell 1.2% and the Nasdaq 0.4%.
The Dow slipped 50+ points from the open, but largely held a tight range all the way through to 3pm. By that point reports coming out of the financial sector tipped the market over, and suddenly the financials were back in familiar bearish mode. The XLF financial sector index has rallied over 30% from its July 15 “Fannie & Freddie low”, as once again Wall Street tried to convince itself it had seen the worst, and thus the bottom. However, as this report has tried to assert on many occasions, the Fat Lady has not even been spotted at the stage door yet.
The primary source of weakness came from commercial/investment bank JP Morgan. The bank announced it had so far lost US$1.5bn in the third quarter on mortgage-backed securities and loans. Now when you compare that to some of the double-digit billions in write-downs put in by the likes of Merrill Lynch and co, this number doesn’t seem too bad, but there are several points to consider.
(1) JP Morgan only lost an equivalent US$1.1bn in the second quarter, so things are getting worse, not better; (2) JP Morgan is now the most highly capitalised US bank, is a Dow component, and has been seen as almost a safe haven by comparison to its Dow rivals Citigroup and Bank of America; (3) JP Morgan was the bank that “saved” Bear Stearns. The implication is that if JPM is in trouble, everyone must be in trouble.
The stock’s weakness was exacerbated when a respected bank analyst downgraded earnings forecasts and attacked various past and more recent management decisions. This included taking on Bear Stearns, which the analyst suggested is dragging down JPM’s capital market division. JPM shares closed down 9%, which is a big move for this particular financial stock.
If JPM has been the Golden Child in banking, Goldman Sachs has been the Golden Child among the investment banks and brokerages, having shorted subprime securities in early 2007. But that gloss was fading last night as a number of analysts, including the famed Meredith Whitney from Oppenheimer, downgraded earnings, targets, and in some cases ratings on the stock. Goldman fell 6%.
Fourth largest US commercial bank, Wachovia, which has put in quite an extraordinary bounce since posting a shocking second quarter result, saw its shares fall 12%. The bank announced it would need to cut yet another 600 jobs to counter losses on mortgage securities, and that it had had to provision US$500m in legal reserves in order to deal with Wall Street’s latest debacle – the SEC directive to pay back investors in auction rate securities.
Leading Swiss investment bank, UBS, announced second quarter write-downs of US$5.1bn and flagged plans to split its operation into separate divisions. Its shares fell 6%.
It was all a bit of a wake-up call for those investors who believed they’d bought the greatest bargains of all time. There was damage across the sector, with sympathetic falls in Citigroup (6%) and Lehman (12%) among others. The XLF index fell 5%, and although it’s a way to go to hit a new low, reality is beginning to bite once more. And we haven’t yet moved into write-down mode on credit cards and auto loans.
The focus might be back on financials, but it hasn’t yet moved away from oil either. The oil price fell another US$1.44 to US$113.01/bbl last night to provide at least some counter influence.
The fall in oil came in light of news Russia had supposedly called a halt to its military offensive in Georgia, although such news seamed spurious. The real driver was reports from both the International Energy Agency and the US Energy Information Administration, who noted respectively that global supply/demand tightness was easing and that US oil demand had collapsed. The fall in US demand in the first half of 2008 has been the fastest since 1982.
The US dollar finally had a slight down-day last night, but clearly oil doesn’t care and nor does gold. Gold fell another US$10.20 to US$813.30/oz. The precious metal has now fallen over US$160/oz since the Fannie & Freddie high, in pretty much a straight line. As US$800 looms, the chances of a sudden snap-back strengthen.
The same could be said of the Aussie, which was down almost another cent over the last 24 hours to US$0.8747. The Aussie has fallen over US10c from its high on weak commodity prices and the merest hint the RBA might soon cut. Forget commodity prices – they only drive perception. Exchange rates are mathematical and driven by interest rate differentials. If the RBA doesn’t cut in September, watch for a violent snap-back.
And speaking of commodities, some may wish to avert their eyes at this point.
The savaging of base metal prices continues a-pace as the commodity fund divestment snowball gathers momentum. Lead was down another 10% last night, while aluminium lost 2% and copper and zinc 3%.
Base metal prices have now fallen below what is roughly regarded as production cost price in most cases. This should suggest an oversold position, and probably does, however (1) commodity funds are unwinding in a panic – never stand in front of a freight train; and (2) those production costs, in theory, will also come down as energy and other input costs come down. BHP and Rio were hit again by about another 2% offshore last night, and at some point a little bird will go “cheep”. But don’t try to be a hero.
The SPI Overnight lost 33 points.
