Daily Market Reports | Oct 02 2008
By Greg Peel
The Dow was down only 19 points or 0.2% while the S&P fell 0.4% and the Nasdaq 1%.
As we speak the US Senate is discussing a modified form of The Plan and Senate leaders have indicated their confidence that by sometime this evening (sometime this morning AEST) a bill will be passed and sent back to the House of Representatives for another attempt at final passage through Congress. There is no guarantee that the House will pass this modified bill, but after the events of this week, a lot of passioned pleas, a lot of Economics 101, and a lot of phone calls among representatives, there is quiet confidence that The Plan will be endorsed by the end of this week.
Successful passage through the Senate will be positive for Wall Street, such that tonight might see another reasonable but tentative rally. Passage through the House might occur on Thursday, or we might have another stand-by night before passage on Friday. If the bill is passed, then there should be a further relief rally before we come back to face the reality that the market is still broken, if not terminally so. There will be some “sell-the-fact” as well however. If the bill is rejected, then down 1000 in the Dow would merely be a starting point.
If dissenting House representatives needed any preview into the economic reality of their actions on Monday, it came in the form of last night’s US auto sales figures.
September saw sales for Ford fall 34%, Chrysler 33% and GM 16% – the latter indicating we’re not just talking a simple reluctance to buy gas-guzzlers anymore. This is backed up by Japanese US sales, with Honda’s falling 24%, Toyota 34% and Nissan 37%. Dealers indicated that consumer confidence collapsed in late September as credit became largely unavailable to prospective buyers, and dealers also found difficulty in funding their own wholesale purchases. When credit markets freeze, the economy ceases to operate. This is what the House, and Main Street, must appreciate.
From a credit market perspective, another glimpse into a dark future was provided by the London Interbank Offered Rate (Libor) on Tuesday, which hit a record 6.88%. It had leapt up from around 4% on Monday prior to the no-vote. This is the basis rate at which global banks lend to each other, and upon which most mortgage, credit card and other lending rates are based. How would you go with another 2% on top of your current mortgage rate? Fortunately, with more confidence last night of a bill being passed, Libor is back to under 4%.
But a successful passage of The Plan will not prevent the US from heading into recession, if it’s not already there now. It might only prevent a depression (10% negative GDP growth, the Great one was negative 33%). Last night’s ISM manufacturing index for September came as a shock when Wall Street opened. A figure under 50 indicates contraction, and in August the figure was 49.9. Economists were expecting 49.6 in September, but got 43.5.
The Dow’s response was to initially fall 200 points on this news, but bill-confident buyers moved in to push the index back to its starting point. Bear in mind that this was also the first day of the new quarter, and few funds who squared for September can actually sell to begin, given the shorting ban.
That ban expires on Thursday night, but at this stage expectation is it will be extended but modified to include holders of convertible debt/equity securities. A popular proprietary trade is to buy convertibles and sell a stock hedge (a hedge – not an open short position). The market was concerned that withdrawal from the convertible market by proprietary traders would thus dry up this important source of corporate funding at a time when banks have the shutters down.
The US dollar was also stronger again last night, with the euro falling towards US$1.40 once more. This sent gold down a modest US$2.30 to US$868.90/oz, and the Aussie drifted back to US$0.7883.
The ISM number and stronger dollar sent oil down US$2.11 to US$98.53/bbl, while all the above saw more weakness in base metals. Lead fell 5% but the standout was yet another 3% fall in the benchmark, copper. For base metals there is a new problem that buyers for longer dated delivery have withdrawn or are forced to sell, unable to secure the longer term credit they require.
Just another look into a bill-rejection future.
The SPI Overnight was up 28 points.
Now we wait.
