Daily Market Reports | Oct 08 2008
By Greg Peel
The Dow fell 508 points or 5.1% to 9,447. The S&P fell 5.7% to 996. The Nasdaq fell 5.8%. The Dow fell below its low point of Monday, when it was down 800 points. The S&P traded at triple digits for the first time in five years.
Unlike Monday, last night’s trade was all in one direction and the close marked the low. It’s extraordinary that when I look at that number of 508 I’m taken straight back to the Crash of ’87 – a very one-off event of the time. I know that the percentages are different but at the moment it feels like every day is a Crash. Brokers are reporting heightened emotion from their clients as they ring to just sell and get out. There are redemptions flowing in from small investors who have received their September quarter statements and despaired. There is currently a redemption window open for hedge fund investors who have had to wait for the end of the quarter.
The emotion is a good sign. Only when sellers are choked with fear and despair can we find a bottom. But as to when that will be it is still just not clear.
The trigger for last night’s slide, coming as central banks across the globe step up their various activities to try and free up credit markets, was a speech from Ben Bernanke.
Bernanke admitted the combination of recent economic data and the financial market turmoil “suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased.” He added that “The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth.”
No more tempered language, no more silk purse. This is not what frightened investors wanted to hear. One can argue that the significant fall in the market to date takes account of a lot of what is only now being admitted, and that the market will turn well before the economy does, but at the moment emotion is the driver. The market also ignored Bernanke’s hint:
“In light of developments, the Fed will need to consider whether the current stance of policy remains appropriate.”
This would seem to indicate the Fed is prepared to cut the cash rate. On any other day this would be good news, but it was of no help. The next FOMC meeting is not until October 29. The market has been hoping the Fed would cut, and assuming it would make an emergency cut outside the regular FOMC schedule. It has further been hoping such a cut would be in coordination with central banks across the globe, particularly with the ECB which stood fast only two weeks ago on 4.25%. It is the disparities and disorganisation of global action that is knocking this market down in a tit for tat across the Atlantic at present.
Speculation is that maybe the ECB won’t be in on a coordinated cut. It now puts the RBA shock cut of yesterday into some perspective. It does seem as though Stevens acted alone. There are still those within the Fed who fear cutting the cash rate when inflation risks remain, although Bernanke did last night suggest that the inflation outlook had “improved”. There are those within the market who argue a cash rate cut is exactly what is needed right now, and others who argue that a cut will make no difference. And with the rate already at 2%, there’s not a lot of room for a “shock and awe” cut such as Australia scored.
There was more good news that otherwise did not inspire the market either. The Fed announced it would step in and buy commercial paper directly from corporations, albeit for a limited amount and at a penalty rate of interest. This move cuts out the middleman – the banks that have been taking Fed funds and not passing it on to either each other or to corporations who desperately need the rollover funding to keep their businesses operating. They are the innocent victims. But the plan will simply prevent business closures, it won’t prevent a recession. This is what the market focussed on last night.
There is at least one coordinated effort from central banks, and that is to one after the other hold “dollar auctions” regularly through to the end of the year to keep the world’s banks liquid. Why coordinate this but not a rate cut? The market is asking. The Fed has pledged US$900bn in funding, on top of the government’s US700bn taxpayer-funded TARP package.
We still don’t know how TARP is going to work – the details of the mechanism – and that is not helping either.
Banks were slaughtered on Wall Street once again last night. There was a rumour Mitsubishi Bank was pulling out of its offer to buy a significant stake in Morgan Stanley. The rumour was denied, but Morgan stock was sold down 25% anyway. Bank of America announced a worse than expected loss on Monday night, a slashed dividend, and a US$10bn stock issue. As of last night’s close the take-up of that issue was “slow”. BA stock fell 25% to just under US$24. So far the book-build value of the issue is looking at a US$23 price. Merrill Lynch, who BA is acquiring, also saw its shares fall 25%.
Shares of British banks were sold down as much as 40% in New York last night.
The BA/Merrill Lynch 25% falls bring up an interesting point. Tomorrow night brings the supposed end of the short-selling ban on Wall Street. Will the SEC extend? If it doesn’t, investors might be forgiven for believing the end of the world is nigh. If we’re all the way down here without short-selling, where might we be with it?
But old-hand traders are frustrated that under normal circumstances hedge funds would have moved in to play short Bank of America and long Merrill Lynch on the acquisition announcement. But they can’t. So not only does BA collapse, ML collapses too. Possibly the most popular hedge fund use of short-selling is the long-short trade – a net zero dollar position. In this market there are no shorts in action, but thus no longs either.
The US dollar slipped back slightly last night as the euro recovered somewhat from its precipitous fall of Monday. This allowed commodity prices to take a breather and recover some of their losses as well. Oil rose US$2.16 to US$90.06/bbl. Base metals in London all added 1-2%. The Aussie dollar, however, was hit further yesterday in local trade and has not recovered, battered by carry traders buying yen. It is nearly one and a half cents lower again over 24 hours to US$0.7062.
The safe haven of gold is largely ignoring paper currency movements at present as it gains in popularity once more. Gold rose US$27.30 to US$884.20/oz.
The SPI Overnight fell 266 points or 5.7%.
Where are we left in Australia? Shattered once more, no doubt. The rate cut and subsequent rally gave hope, and one can be forgiven for believing similar action was about to be taken by central banks around the globe. Not so, not yet. We battle on.
