Daily Market Reports | Nov 13 2008
By Greg Peel
The Dow fell 411 points or 4.7% while the S&P fell 5.2% and the Nasdaq 5.2%.
The session opened to the downside, fuelled by more depressing news from US corporates. Iconic department store chain Macy’s announced a 7% fall in sales in the third quarter and a subsequent US$44m loss. Electrical retailer Best Buy dramatically cut its 2009 guidance. The bad news is rolling in, and last night’s announcements followed similar gloom a day earlier from Starbucks and builder Toll Brothers, and the bankruptcy filing from Circuit City earlier in the week.
All year the market has been predicting recession, and now the evidence is confirming the prediction. All year the stock market has been sold down, and on the evidence it is being sold down further. However, the massive waves of selling for cash have abated – volume remains very light in the stock market and also in commodities markets. The mood remains weak, but it is not selling pushing the market down as much as a lack of convicted buyers. Buyers with conviction are not interested in being heroic bottom pickers. They believe there will be plenty of time to get into this market once stability can be found and the outlook for stocks improves. It’s a stand-off.
The Dow spent the day mostly drifting in one direction, but it got another kick down mid-morning when Treasury secretary Hank Paulson emerged to announce that the government will no longer use the TARP to buy toxic mortgage assets from banks as was the original plan. He did, however, announce a plan to effectively open yet another “window” of access to Fed funds to support consumer loans, such as credit cards, auto and student loans. The TARP has gone retail.
When the TARP was hastily conceived one weekend back in September, its sole intention was to buy from banks the very assets that had fuelled the credit crisis in the first place – mortgage CDOs and other refuse. As house prices continued to fall the value of such assets continued to trend towards zero. This put bank balance sheets in perilous positions and ensured no one was game under the circumstances to lend to anyone else. It was believed by Paulson and Fed chairman Ben Bernanke at the time that the removal of toxic debt from bank balance sheets would free banks up to start lending to each other again, and thus end the credit freeze. It was, after all, a Troubled Assets Relief Program.
It was also one page long. It is now history that the US Congress sabotaged the TARP with self-interest, spending a week negotiating a new TARP document with all sorts of concessions. It was 300 pages long. In the meantime, the stock market tanked.
There is little doubt the TARP was put together in a panic by Paulson and Bernanke. The idea of buying toxic assets on a reverse auction was questioned in some quarters from the outset, and supported in others. Warren Buffet, for one, championed the idea. His belief was that the US taxpayer would eventually make a profit out of the deal.
But the TARP then began to morph into something more complex, following on from Congressional inputs. The most notable was the purchase of equity in troubled US banks. Various other lending facilities were established, including support for the commercial paper market. At last count the Treasury/Fed had established about 14-15 such emergency facilities over the course of 2008, although it’s probably more now. It had also stepped in to support AIG. It had forced Goldman Sachs and Morgan Stanley to become commercial banks. Their share prices have been falling ever since.
There has also been considerable pressure brought to bear by the auto industry to use the TARP to bail out, in particular, General Motors – employer of hundreds of thousands of Americans. Such a bail-out would be moving well away from original TARP intentions. But having shored up the banks with equity, the focus of the TARP has now moved more into the real economy. It has thus culminated with today’s announcement of a facility for consumer loans.
And as the TARP has continued to morph, it has become clear to the Treasury/Fed that the original toxic debt plan was no longer the top priority, not perhaps even necessary or helpful. So it was jettisoned. Many commentators welcomed its abandonment. When questioned on such apparent flip-flopping, Paulson suggested that the circumstances have changed since the original TARP was conceived and thus it would be foolish to fail to adapt to those circumstances and stick with original intentions. Fair enough. But at least in this session, Wall Street lost faith. Wags are now calling it the Try Anything Relief Program.
As the market weakened, shares in Citigroup broke below US$10. The bank has not traded in single digits since 1996. It had peaked over US$55. While only a number, the breach was significant on the trading floor. The market weakened further to the close.
The Nasdaq hit a new low today. The S&P 500 is getting perilously close. The Dow still has a 10% buffer. The bulls are looking for subsequent lows to be higher – a positive sign. The bears are looking for the lows to be tested – a worrisome sign. The uber-bears see more substantial falls. One thing is certain – as volume remains light volatility will remain high.
Oil dropped another US$3.17 to US$56.16/bbl and is now on its way to US$50 because that’s what traders expected a breach of US$60 would bring. US$50 in oil is the new US$150 in oil – the market will not be happy until the price is reached or at least close to reached before we can turn around.
The US dollar continued to rally, thus not helping commodity prices, but also sending gold down another US$21.10 to US$721.70/oz. The Aussie fell two cents to US$0.6372.
Base metal trading in London was nevertheless choppy as deleveraging sellers battled it out with technical buyers. Are metals forming a base? Copper fell only 1% but tin decided last night was its turn to tank, falling 7%, while zinc rallied 4%.
The SPI Overnight fell 185 points or 4.6%. A fall of that magnitude would take the ASX 200 to 3742. The intraday low to date is 3724.
