Daily Market Reports | Nov 25 2008
By Greg Peel
The Dow closed up 396 points or 4.9% while the S&P gained 6.5% and the Nasdaq 6.3%.
Last night’s session was notable in that it marked the first time in November Wall Street has put two rallies together consecutively. It was also notable that for once the last hour featured a battle of ups and downs rather than just a sharp move one way or the other. The Dow was up about 350 points at 3pm which was as high as it had been all session. At 3.45pm it was up 550 following a typical post-three scramble, but suddenly the sellers moved in. Real sellers or profit-takers after Friday’s rally? A battle ensued at the death in about a 200 point range and the sellers ultimately won, resulting in a closing level 150 points below the high.
But it was a net rally nevertheless.
There were two significant pieces of news to absorb on Wall Street last night, both of which were known by the Australian market late in the session yesterday. Most significant was yet another government bail-out package, this time for Citigroup. Such a bail-out was a given, and I recall what I wrote on Saturday morning after the leaking of the Tim Geithner news:
“There will likely be little time for champagne at the Geithner household, as Wall Street is expecting Tim will be joining Hank, Ben and the usual suspects for yet another weekend emergency meeting. Strangely though, there is not the same sense of panic surrounding Citi as there had been as those other names were quietly imploding. The market has been weak, sure enough, but there is a sense of ennui about the whole thing and an expectation that some form of consolidation will be the result rather than a Lehman-style collapse.”
Well the consolidation is yet to come – a link with Goldman Sachs is a popular tip – but in the meantime the bail-out process has become quite slick. Practice makes perfect, so they say. Citi will get another US$20bn capital injection from the TARP, following on from the earlier US$25bn injection, and the government will also guarantee a further US$300bn of loans for which Citi will absorb only 10% of any losses. In return, Citi will cut its dividend from US16c to US1c and remuneration packages will be closely scrutinised.
While Citi is indeed a “whale” among financial institutions, there is a feeling on Wall Street that just about any bank will now be bailed out under the “whatever it takes” principle whether or not the government can afford it. As commodity inflation begins to rocket downward, the monetarist policy of economic stimulation through the unlimited printing of money (the helicopter policy) is now alive and well. And we are yet to learn the final outcome of the General Motors bail-out.
I was also moved to recall another article I wrote back in March, entitled “Could Citibank Go Under” (FYI; 17/03/08):
“Citibank nearly went under in 1991 (mirroring Westpac’s experience in Australia) following on from the ’87 crash, the junk bond/leveraged buyout boom, and the Savings and Loans crisis and a commercial real estate crash. It was then saved by Saudi Prince Al-Waleed bin Talal via an investment of US$590m. Total losses in the financial system back then were about US$100bn. The numbers touted this time around are in the range of US$500-600bn [much bigger now]. Around US$140bn has been written off to date [a lot more now]. As the London Daily Telegraph noted, following the US$200bn made available to investment banks by the Fed last Friday [the investment bank facility], in a long line of liquidity injections (or bail-outs by any other name), that ‘as the bail-outs are getting bigger, then clearly the problems causing them are getting bigger’.”
And I further noted the calculations of one Wall Street analyst:
“Citibank’s ratio of equity to tangible assets is 2.3%. Given the cloak of invisibility, it’s impossible to determine the quality of those assets, but we do know that their value need only fall 2.3% before Citi is technically insolvent, even if it is still liquid and trading.”
That article was written shortly after the Bear Stearns bail-out, invoking the possibility that Wall Street was wrong at the time to confidently believe Bear Stearns marked the nadir of the credit crisis. We subsequently had a rally through to May, and indeed it proved to be a bear market rally. In the meantime the US government has learnt a harsh lesson from letting Lehman Bros go under rather than providing another bail-out. It is not going to make that mistake again.
Speaking of stimulation, governments across the globe agreed at the G20 meeting (and again at APEC) that economic stimulation – both monetary and fiscal – is the answer to preventing an economic crisis. Wall Street’s positive session also included impetus from the announcement from Barack Obama over the weekend that his administration would orchestrate an “aggressive” fiscal stimulus plan. He didn’t say how much, but the message is clear.
Such stimulation and rescue intention is likely the catalyst to at least stop further falls in the stock market and maybe even encourage the long awaited recovery rally. As to whether such a rally will prove to be only another May-style bear market rally is yet to be seen. But one suspects there’s not much more governments can now do beyond what they’re doing, so a recovery rally may at least bring us back to a level from which we can then drift along tediously in typical recession fashion. At least that would be better than another 40% fall.
Apart from the stock market reacting positively last night, it was noted that the various credit markets also took heart from the Citi bail-out. Even spreads on commercial mortgage-backed securities eased, and that has to be at least a little comforting.
The US dollar took a hit, however, as well it should. Have the other major currencies now been sold down enough to bring them into line? If so, it could be time for the dollar rally to end, and “whatever it takes” bail-outs will do it provided the same doesn’t start happening in Europe or the UK.
As such, gold continued upwards with a US$23.90 rally to US$823.10/oz. The Aussie jumped a couple of cents to US$0.6516.
Oil – clearly oversold – jumped US$3.75 to US$54.50/bbl. Base metals also saw a short-covering scramble, forcing aluminium up 2%, lead and nickel up 3%, zinc up 5%, copper up 7% and tin up 9%.
The SPI Overnight added 132 points or 3.8%. We now have to see how much of yesterday’s hot-potch on the local market will assume a rally already, or will the futures be right this time?
Note: Given the explosion of interest in the Australian natural gas market, and constant reader interest in the VIX S&P 500 volatility index in the US, the FNArena home page will now display overnight price changes in both.
Like crude oil, the world benchmark price for natural gas is provided by the futures market on the New York Mercantile Exchange (NYMEX) and is traded in US dollars per million British thermal units (MMBtu).
The VIX volatility index measures the demand for options on the S&P 500 index contract traded in Chicago. A high price indicates strong demand for put option protection, and hence a high level of fear. A low price indicates a stable market and complacency. Peaks and troughs in the VIX usually indicate turning points in the stock market. A level towards 10 usually suggests the market is getting too complacent on the upside. Not long ago a level above 30 indicated capitulation selling may soon be over, but in the October panic the VIX blew away all records by trading into the 80’s.
We trust subscribers will find these new services useful.
