Daily Market Reports | Feb 05 2009
By Greg Peel
The Dow fell 121 points or 1.5% to again fall under 8000 (we seem to be snagged around that level at present) while the S&P fell 0.8% and the Nasdaq a mere 0.1%.
Bank of America fell 10% last night to its lowest price since 1985 as a lack of clarity on the new administration’s plans to shore up the financial sector continued to weigh heavily. BA was not alone, with Citigroup and others also feeling the pain. BA did announce that it plans to sell its fleet of corporate jets, including a helicopter it inherited from Merrill Lynch. Apparently some 60 people are employed to maintain and fly the fleet and an average hour’s flight costs US$10,000. A return ticket from BA’s Charlotte headquarters to New York on a commercial airline costs US$350.
Planes won’t save BA, nevertheless, and the market’s real concern is what Obama will ultimately decide to do with the TARP – being called TARP II – and what, if anything, comes of the Bad Bank proposal. The main concern is that further government direct investment in the banking sector will lead to further dilution of the ordinary shares. There’s been a lot of discussion, and enquiries continue in Washington. In the meantime, Wall Street watches and waits.
The financial sector’s worries overcame some good early news. The ISM services index rose to 42.9 in January from 40.1 in December. While anything under 50 means contraction, Wall Street had expected much worse. The services industry represents about three quarters of the US economy. The ADP jobs numbers showed 522,000 jobs were lost in the private sector in January. The ADP number is an unofficial one and is notoriously a very bad predictor of the official number (which comes out on Friday). Still, it was bad but not quite as bad as expected so Wall Street responded anyway.
Early strength was short-lived, however, and the Dow only managed to rally 84 points before the rot began to set in mid-morning. Outside of bank concerns there were poor quarterly earnings results from both Disney and Kraft to contend with – both Dow components. (The big banks are also Dow components, which is why the Dow fell a lot more than the S&P).
The build up of financial uncertainty brought the gold buyers back last night. Gold recovered US$9.10 to US$906.60/oz. The Aussie dollar gave back a cent to $0.6427 after all the short-coverers had been cleared out post the RBA decision to cut by 1% and not 1.25%, as currency traders had talked themselves into.
No doubt having an influence on gold was the announcement from the US Treasury that it will reintroduce the seven-year note – not seen since 1993 – and double the amount of 30-year bond auctions. Next week’s quarterly budget refunding will also see a record US$67bn auctioned across the yield curve. Why so much debt issuance? Because the US government needs the money. The budget is blowing out beyond US$1 trillion with all the rescuing going on.
How long can the world keep absorbing US debt? Already this week there have been the first signs of movement out of the one-month T-bill. So panicked were the financial markets late last year that everyone sold everything and just stuck their money in T-bills. The one-month yield fell to zero. That’s nominal – the real rate would have been negative 3% or so. But this week has seen the one-month rate tick back to 0.25%. Hardly a rush to escape, but a positive sign for risk appetite nevertheless.
Oil fell US47c to US40.31/bbl following the weekly inventory report which showed a continued build-up. It’s a game of push and pull in the oil market at the moment. Gasoline demand is weak so oil is weak, and crude supplies are building up so oil is weak. But refiners, loaded with excess crude, are cutting back refining capacity thereby producing less gasoline. Thus the gasoline price rises. When gasoline prices rise a lot, oil tends to follow. Somewhere in the equation must be some point of equilibrium, at least in the near term.
Base metals might as well have taken the day off but aluminium rose 2%.
The SPI Overnight ignored Wall Street and rose 15 points. The Australian market has shown very little correlation to Wall Street this last week or so, dealing, as it has, with plenty of its own home-grown influences. Recently these have included shock profit warnings (eg Incitec), shock profit upside warnings (CommBank), the RBA rate cut and BHP’s poor result. As long as Wall Street remains in a general trading range – which seems the case at the moment – Australia will pay little attention. And the local reporting season is only just beginning to gain steam.
