Daily Market Reports | Sep 17 2008
By Greg Peel
The Dow closed up 141 points or 1.3% while the S&P gained 1.8% and the Nasdaq 1.3%. At 11,059 the Dow retraced back above its July low of 10,962. The S&P reached one point shy at 1213 and the Nasdaq five points shy at 2207.
It was a rock and roll ride on the NYSE last night, and the point to remember is that while the floor closed at 4pm NY (6am Sydney) the stories are still unfolding as we speak. Most importantly that of the fate of AIG.
The Dow opened down 175 points as AIG appeared to move closer towards bankruptcy, but therein began a rally. The rally was assisted by the third quarter profit result from Goldman Sachs – an EPS of US$1.81 beat Wall Street’s estimation of US$1.71.
Goldman Sachs and Morgan Stanley are the number 1 and number 2 investment banks on Wall Street, and amongst the Top Five of early 2008 remain the only two not to be voted out of the house. While the Goldman news was a positive for the market, the result itself was 71% down on the third quarter 07 and represents the firm’s biggest loss since listing in 1999. Goldman famously did not get involved in subprime CDOs – even going short – so it just goes to show how destructive this credit crunch has been to any financial institution.
It was also announced during the session that the vultures have moved in on Lehman Bros – now under chapter 11 – with Barclays announcing the purchase of a chunk of Lehman operations for US$2bn. It has bought a business division representing 9000 Lehman employees, but is not at all interested in any real estate. Barclays was one bank who had a look at possibly buying all of Lehman last weekend, but pulled out. Clearly the “bad” parts” were just too bad to overcome the “good” part that the bank has now acquired.
The Dow rallied into the green by lunch time, and then a deathly quiet descended. At 2.15pm the Fed announced that the cash rate would be left unchanged at 2%, and the traders on the floor of the NYSE literally booed the news. The Dow immediately fell 150 points once more.
Stock and bond markets across the globe had convinced themselves that the Fed would have to cut the rate to 1.75%, maybe even 1.5%, in the wake of Lehman and AIG and the possible ramifications thereof. However, while recognising that “strains in financial markets have increased significantly” the Fed also warned that “the inflation outlook remains highly uncertain”. Thus despite sub-100 oil, the Fed still sees inflation risk as offsetting current financial turmoil and its threat to the US economy. The Fed maintains, as it has done for months now, that the easing from 5.25% to 2% will be enough to stabilise the market, and the economy, over time, while inflation will also moderate eventually.
While the knee-jerk reaction was negative, one can also view the Fed’s lack of rate cut as a positive. If the Fed didn’t see the need to cut, the argument goes, it means things can’t be quite as bad as everyone assumes. In the meantime however, the Fed and its central bank counterparts across the globe have been furiously pumping liquidity into the system this week.
The Dow turned around once more, but then the real impetus was provided by news on AIG. The Fed, the government, insurance regulators, banks, and which ever other parties have a stake in the argument all gathered to see if they could bang out a solution that would prevent AIG’s bankruptcy and “save” the financial markets. This represented a back-flip from the Fed, who yesterday stayed at arm’s length from the insurer and asked the banks to put together a package instead. One can only assume that apart from other regulatory bodies pleading with the Fed – as we know is the case – the banks likely told the Fed they just didn’t have that sort of money.
The other point to note is that AIG does not have a solvency problem, only a liquidity problem. It just needs a bridging loan to get it through. The prospect of an AIG rescue was enough to send the Dow soaring again in late trade, to finish up 141 on a 300 plus rally from the low.
The news from after the bell is – as yet not confirmed – that the US government will put AIG into “conservatorship” just as it did with Fannie and Freddie. This means the policyholders are protected but the shareholders are not. On that news, AIG shares fell another 50% in the after-market. Trading in AIG shares reached an extraordinary volume of over billion last night, representing more than half of all shares traded on the NYSE in the session. They closed down 20% at 4pm, but may now be worth zero.
In further after-market action, number 2 investment bank Morgan Stanley decided to bring forward its own third quarter profit result, otherwise due tonight. The move was intended to stem the continuing run on investment bank shares on the one hand, but more specifically the panicked and damaging blow-out in credit spreads that it and also Goldman were experiencing. The assumption from the market was that it must be a good result if it was going to be pre-announced, and it was.
Morgan Stanley reported a loss only 7% down on the previous period and an EPS of US$1.43. The Street was expecting US78c. Morgan shares had fallen 11% in the day session but stabilised after hours.
Outside of the investment banking fraternity, things were a lot more positive in the broader financial sector by the bell. The sector index rose 7.5% and included an 11% jump in Bank of America shares. Shares in Merrill Lynch thus rose 30% as they are now mathematically connected to the BA price. The perception in the sector is that we have now begun the necessary process of shifting responsibility “from weak hands to strong”, mostly evident in the non-rescue of Lehman. One might compare such process to that of ripping off a plaster with an accompanying scream and short term pain, rather than peeling it off very slowly and extending that pain over a much longer time frame.
That’s the latest from the financial sector.
On the commodities front it was another night of falling oil in the wake of the financial turmoil. The connection is that such turmoil should result in global recession, thus reducing demand. OPEC backed this up by suggesting North American demand had fallen markedly. Oil fell US$4.56 to US$91.15/bbl, although as the oil session closes ahead of stocks, later trading was a couple of dollars higher.
The gold price turned around and lost US$6.70 to US$778.90/oz last night as the US dollar staged a turnaround rally in the face of no rate cut from the Fed. The Aussie Battler is feeling particularly battered and bruised at present, being caned when the US dollar rallies and caned again when the US dollar falls against the yen. It finished the 24-hour period down more than a cent again to US$0.7929.
Base metals remained under pressure in London for the same reason oil was weak, although they too managed to pull off their lows on the late Wall Street rally. Copper was down 1.5%, aluminium, lead and zinc down 2%, tin down 4% and nickel down 5%.
The SPI Overnight limped to a close up 16 points.
Last night on the NYSE was one of large volume, although half of that was AIG. Monday’s volume was also very large, representing a big turnaround from earlier pathetic volumes both during and after the summer holiday period. For a market to see an absolute bottom, it requires three things – a big fall, large volume, and a belief that the end of the world is nigh. More recently, the market also realised that a bottom cannot be formed unless the VIX volatility index trades over 30 points. On Monday, all four boxes were ticked.
You could also throw in that a “whale” must die. The market incorrectly thought this whale was Bear Stearns, but in reality that whale was saved. Then there was Fannie and Freddie, but that collective whale was nationalised. AIG might also be nationalised after a fashion, but Lehman was allowed to go down. That’s five boxes.
It is looking increasingly like we may have moved from the end of the beginning to the beginning of the end
