The Overnight Report: All Hail The Car Czar

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By Greg Peel

The Dow closed up 70 points or 0.6% while the S&P gained 0.8% and the Nasdaq 0.7%.

The tumbleweeds rolled through the NYSE once more as traders continue to show indifference ahead of the holiday season. For those still happy to play, it was a market dominated by auto industry discussion. The Democrats intend to put up a bill next Wednesday that will see a US$15bn bridging loan to the Big Three. Wall Street was encouraged by the news, and by the fact a bail-out of the auto industry is positive for beaten-down commodities. Throw in the infrastructure plan, which continues to influence trading and there was enough to push the Dow up 188 points by lunchtime.

The auto industry loan is intended as a stop-gap to allow the automakers more time to come back with meaningful restructuring plans. Along with the money comes the appointment of a so-called “car czar” who will oversee proceedings and who has the right to pull the pin in funds at any juncture if he is not happy with progress. The deal also insists on the scrapping of shareholder dividends and of executive golden parachutes.

The bill has nevertheless met opposition from Republicans, and it was that opposition which caused Wall Street to lose faith and the Dow to slip back under the flatline by mid-afternoon. It was only some half-hearted buying on the death that affected a positive close. Republicans see the US$15bn as a case of just throwing more good money after bad and allowing the automakers to write more cheques, burn more cash, and achieve nothing. There is a strong push to allow the Big Three to go bankrupt, which would precipitate more urgent and effective restructuring under Chapter 11 conditions. The lifeline is all about saving auto industry jobs – which number in the millions from factory floor to showroom – but simply keeping a terminal patient alive artificially is not the solution as far as many Republicans are concerned.

This will thus go on for another week, and failing any further exogenous shocks it thus likely will be another week of disinterested market participation. Not that there’s anything wrong with a few quiet days, but the fact that the VIX remains in the high 50s indicates a willingness by the market to continue buying put option protection in fear of another big drop. Only when the VIX really starts to retreat could we begin to believe confidence is truly returning.

The same can be said of short-end Treasury securities which continue to offer around zero yield. The long end is also being heavily sought given the Fed’s indication it would attempt to reduce mortgage rates by purchasing bonds. It is the nature of markets that all you need do is announce something and let the market do the rest. Mortgage rates have indeed fallen sharply – down to around 5.25% – as a result of pre-emptive buying in long bonds.

Despite interest in Treasuries, the US dollar continues to slip against the euro. It is still rising against the yen as the carry trade continues to be gradually unwound (another indication risk appetite has not yet returned) but last night the euro broke back through US$1.30 which has been a long time technical target. The moved sparked a sharp reaction in the gold market, which clearly thought maybe, just maybe, this time the US dollar is really beginning to slide as most expect it must. Gold jumped US$33.70 to US$809.10/oz.

Oil also reacted to the US dollar’s fall, as well as shrugging off increased inventory numbers in favour of a belief OPEC will shortly announce its big production cut. Oil rose 68c to US$42.75/bbl.

Base metals matched the mood, with copper jumping 3% and nickel triggering technical levels to leap 11% out of the blue.

The Aussie remained steady at US$0.6571.

The SPI Overnight was up 41 points or 1.1%.

The big news from yesterday was Rio Tinto’s ((RIO)) announcement that it would shed 14,000 jobs worldwide in a cost cutting binge. Rio shares jumped about 12% in Australia, but in London overnight soared 20% and in New York 25%.

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