Daily Market Reports | Sep 30 2008
By Greg Peel
The Dow fell 777 points or 7% to 10,365. The S&P 500 fell 8.8% to 1106. The Nasdaq fell 9.1% to 1983.
The fall in the Dow Jones Index was the biggest in its history in points terms. In percentage terms it was the biggest since the 684 point fall as the market reopened after 9/11. The VIX volatility index closed at 46.72.
On a vote of 228 to 205, Congress voted against Plan B of the so-called “bail-out” package. Republican and Democrat alike rejected the bill which would see Main Street bailing out Wall Street, at least in their own eyes. Republicans turned on George Bush, unable to condone government interference in capital markets to the extent the Democrats were proposing. Democrats turned on their own leadership, unable to countenance a public rescue of the Wall Street “fat cats”.
God forgive them, for they know not what they do.
This is not the outcome that anyone was expecting. As of Sunday night Washington time it appeared that several days of negotiation had resulted in a package that both sides of the House, and all ideologies, could stomach. The capitalists wanted to prevent the system from collapsing. The socialists wanted concessions for the taxpayer. Plan B was a package of concessions that seemed to be a middle ground, at least as far as party leaders were concerned. It was not to be.
To understand why the Democrats were uncomfortable with the concept of what they call a “bail-out”, one only need look at images of hoards of protesters gathered outside the NYSE, viscerally voicing their disgust for any concept of “saving” Wall Street. They would have no doubt cheered as the ticker showed a plunging stock market. But the stock market is merely a passenger. The stock market fell because credit markets finally shut down completely. If they do not open, banks will fail, credit lines will freeze, factories will close, jobs will be lost, foreclosures will skyrocket and there will be widespread public despair. Main Street is erecting its own noose.
The Republicans voting against the plan were turned when there was more talk of potential further concessions ahead, including a tax on future Wall Street profits. At the end of the day, the Republicans could not face their voters in a month having destroyed the free market they so believe in. The most frustrating aspect of the rejection is that it is all well meant, but misguided.
It is difficult to know what will happen from here – we are in new territory. Talk on the floor is that this is another “blood on the streets” capitulation, offering yet another opportunity to buy quality, collaterally-damaged stocks at low prices. There will be a solution one way or another, observers believe.
Time remains very much an issue. As banks collapse in Europe, last night the financial sector took a big hit on Wall Street. But while the large commercial banks saw falls of over 10% in some cases, it was the smaller regional banks which took the hit. Falls of 50-70% were not unusual. These are the banks holding Main Street deposits and loans. If there is no safety net put in place soon, gravity will win.
With a Depression now a greater risk, the materials and energy sectors were also hit hard. Oil fell US$10.52 to US$96.37/bbl. Base metals in London fell between 1-7%, with benchmark copper falling 5.5%.
The extent of these falls belied the fact the US dollar was as good as steady. Commodity prices had risen over the past few days because the US dollar had fallen as the world weighed up the sheer extent of money the US government was intending to invest in unfreezing credit markets. But last night the US dollar index was steady to slightly higher. This is a world economic problem, and thus exchange rates are remaining static. The dollar rose against the euro, given the European situation is seen to be even more dire. The dollar fell against the yen, given another rush to unwind carry trade risk. The Aussie dollar dropped heavily on carry trade unwinding and commodity price falls, losing two and a half cents to US$0.8019.
Gold is not a commodity anymore. Last night it continued its role as safe-haven currency, jumping US$27.50 to US$906.60/oz even as the dollar index remained steady. Investors also rushed once again into US Treasuries, seeing the US government itself as the only other safe haven from a closed down private credit market. Short end yields again pushed towards 0%.
The SPI Overnight fell 339 points, or 7%. If the SPI movement proves accurate, the ASX 200 will fall to around 4470. Major support on a technical basis lies above 4300.
One can only now wonder how many capitulations there must be before we hit the last one. Last night eclipsed the market falls last week when the world was in danger of going under, only to be rescued by the announcement of a Plan. The failure of any sort of Plan in Congress was not an option Wall Street considered at all likely. As noted, calmer heads on Wall Street are seeing another buying opportunity. For the longer term investor, one can only have faith that a resolution will be reached.
