Daily Market Reports | Sep 06 2008
By Greg Peel
The Dow closed up 32 points or 0.3% while the S&P gained 0.4% and the Nasdaq lost 0.1%.
Thursday’s rout proved pre-emptive last night as Wall Street’s expectation of a weak August jobs number was not only met but exceeded. The Street was looking for 75,000 jobs to be lost in the month but the actual (before several revisions) figure was 84,000. The unemployment rate jumped once more from 5.7% to 6.1%. The August number proved a big jump on the 51,000 jobs lost in July, and the total number of Americans joining the ranks of the officially unemployed this year now stands at 550,000.
The bulls are attempting to put a spin on the number suggesting that monthly figures are always volatile anyway, and that the August number is always more so due to the comings and goings of the employed in the summer break (students etc). However anyone sensible will tell you that the unemployment number is vastly understated when one considers the number of illegal aliens who made up a good deal of the labourers in the residential construction industry, now defunct. These immigrants may not collect benefits but they do spend money.
It was also notable in August’s figure that a solid proportion of jobs lost was from the retail sector, marking a shift from the earlier significant losses from construction, manufacturing and, of course, the financial sector. This is clear evidence, if any more were needed, that America’s problems have moved out from the confines of housing, auto and banking and into the broad economy. Once again we are reminded that more than 70% of the US economy is driven by the retail consumer.
More bad news was to come from the Mortgage Bankers Association, which revealed that 4 million home owners with a mortgage – a record 9% – were either in foreclosure or behind on their payments by the end of June. That’s more than two months ago, and the situation has only weakened since. If employment has left its early sectoral confines then the mortgage market has also clearly moved beyond those foreclosing on subprime and adjustable rate loans and into the wide spectrum of straight up prime mortgages.
Herein lies the problem.
The more foreclosures increase the more house prices fall and the less money the consumer has to spend or is prepared to spend. The contraction in spending leads to job losses which in turn force more mortgage holders into delinquency when they can’t meet payments. This means more foreclosures and so house prices fall and…
Blindly optimistic commentators have been trying to talk up emerging signs of stability in the weak housing market. In particular they point to the house price falls decelerating each month and certain states showing increases which belie problems in the concentration of basket-case states such as Florida and California. But the real signs now are that the US has headed into a spiral – one that sees the housing slump feeding into unemployment which feeds into the housing slump and down and down we go.
What might halt this slide?
Well for one thing there is a common expectation that the average house price fall of around 20% we have seen so far must reach at least 35%, if not 50%, before the bottom. In other words, there will be an end and its levels are already being factored in. Having written last week about a quarter of all houses on the market at present in Detroit being on sale for the price of a car or less, I have since been inundated with emails from readers and market colleagues noting houses on offer elsewhere for much less. For peppercorns, effectively. If the US government had any sense it would start bulldozing these abandoned properties – some of which are collected together in whole suburbs – and create green spaces, at least temporarily. Owners could be paid a peppercorn for the land. This would go some way to putting a dent in the eleven month overhang of housing inventory and stabilise the prices of houses elsewhere.
Another factor which may go some way to easing the situation is the nationalisation of Fannie and Freddie and the subsequent offer of government funded “cheap” mortgages. Not subprime mortgages, just prime mortgages on a lower interest rate. Here in Australia we’re bitching about a benchmark mortgage rate some 235 basis points over cash whereas in the US the benchmark is around 440 points over cash. (Australia variable 20-year, US fixed 30-year, but the difference is still significant).
Well on that latter point the Wall Street Journal revealed after the bell on Friday that a meeting between the CEOs of Fannie and Freddie, the Treasury secretary and the Fed chairman has led to a resolution and an announcement will be made sometime before Monday on the Treasury’s plan to “backstop” the two sponsored lenders. After weeks of pathetic vacillation since Hank Paulson first flagged the government’s willingness to act to save US$5trn of mortgages – weeks in which the stock market has been kept in the dark and left to make what might prove very wrong decisions – the WSJ is convinced some package is to be announced and that the heads of F’n’F will also do the honourable thing.
The farewell parties will begin after they have left their buildings.
The immediate reaction in the after-market share prices of both the F’s was jumps in the order of 15%, but prices have settled back a bit since. These are only penny-moves anyway, and the reality is there is no early clarification on whether the common stock shareholders will be screwed. If they are screwed, well tough. This move, whatever it might be, has been coming for a while.
Back to the day session.
The rallies in Fannie and Freddie after the bell were only kick-alongs from what was a general financial sector rally from about mid-morning Friday. The Dow fell to be 150 points down on the employment news but then the bargain hunters stepped in. Financial stocks were well sought, led by Lehman Bros. Every day there is new speculation as to who might be lining up to buy all or part of the terminally ill investment bank. Everyone from Korean banks to local private equity have been touted, although any announcement is yet to be forthcoming. Do they have a look at the books and then change their minds?
Commodity stocks were also on the shopping list in the session, following a week where some commodity names have fallen up to 25% and following the 350 point rout on Thursday.
But the talk on the NYSE at present, and for some time now, is that this is how one trades a bear market. Buy on the oversold days, and sell out on the relief rallies. It’s all one-step-forward-two-steps back. There is a growing belief the stock markets must retest their July lows before any return to strength can be considered. The July low in the broad market S&P was 1214. The big figure of 1200 is a psychological level and the strong technical support level is considered to be 1172. On Friday the S&P closed at 1242; 5.6% above that technical support.
The old adage in the market is that when everyone gets bearish it’s time to be bullish, but that only works in times of sheer, widespread panic. In orderly markets it’s a case of don’t fight the trend. We saw the oil price almost touch US$150 because the market basically talked it up there. It now looks like we must test at least the July lows, if not lower support levels, because the market is talking it down there.
Those commodity bargain hunters may have been working on the panic factor on Friday however, for in London base metals markets were absolutely trashed. With each step down another wave of commodity fund selling hits, and with the end of September marking the opening of a lot of quarterly redemption windows there’s not a lot of relief in sight.
Aluminium fell 1%, lead 6%, nickel 3% and zinc 4%. But the really dramatic move was in the bellwether metal, copper. It was slammed down nearly 5%, which is a very big move for the most highly traded of all the metals.
Oil fell another US$1.66 to US$106.23/bbl despite Hurricane Ike now tracking a path into the Gulf. On the above theory, oil wants to see US$100, and it is strength in the US dollar (which is really weakness in the euro) that is driving it there and helping to shaft base metals. The Little Aussie Battler is currently on the cliffs of Gallipoli. It fell yet another cent on Friday to reach US$0.8117, but the US dollar was actually slightly weaker against the euro on the jobs report. The Aussie is suffering from carry trade unwinding and commodity price pressure.
Gold actually finished the day higher for once, up US$7.40 to US$803/oz. However on the release of the jobs number, when the US dollar initially tanked, gold traded close to US$820. The buying then evaporated on the dollar’s general recovery. For the gold market, the battle is on between dollar strength and physical demand below US$800.
The SPI Overnight was up 36 points following Friday’s drubbing. BHP and Rio shares traded down 3% in London, but London missed most of the Wall Street recovery, which featured bargain hunting in commodity stocks. In New York, BHP closed flat.
