Daily Market Reports | Feb 19 2009
By Greg Peel
The Dow closed up 3 points while the S&P added 0.1% and the Nasdaq 0.2%.
On Tuesday morning the Dow opened down around 300 points in order to catch up with Europe and Asia after the holiday. Thereafter, Wall Street effectively went home. It doesn’t much look like Wall Street bothered to come back last night either. We have basically had two sessions of low volume, directionless trade. Positive incentives seem allusive. Negative incentives just keep rolling in. One feels that if something doesn’t happen shortly, we’re going to tip over in another leg down to fresh lows. That the Dow could not post a typical small recovery after a 300 point down-day is not a good sign.
It is possible that long-awaited news on greater detail for the TARP, in relation to the purchasing of toxic assets from banks, may be a positive incentive. But as each day goes by without a result, the chances of any market bounce diminish. Last night, however, brought welcomed detail on Obama’s plan to ease the mortgage burden on struggling US homeowners. JP Morgan CEO Jamie Dimon described the plan as “elegant”.
In short, the administration will commit US$75bn of taxpayer funds to assist some seven to nine-odd million homeowners who are facing foreclosure due to mortgage strain. The assistance will extend to Fannie and Freddie mortgages (about 60% of all US mortgages) and beyond to approved lenders. It will involve the reduction of mortgage rates to the point where no more than 31% of a homeowner’s income is needed to maintain payments. The rate reduction will be held for five years. If necessary, principal value will also be reduced.
The government will assist both sides of the equation, offering subsidies to both borrower and lender. To implement the plan, the government will increase its investment in Fannie and Freddie preferred stock from US$100bn to US$200bn and its commitment to buy F’n’F mortgage securities from US$850bn to US$900bn. Note that in the case of US$75bn of what are effectively hand-outs, the taxpayer is on the hook. The US$200bn of preferred stock and US$900bn of security investment come from “printed” money, for which Treasury bonds are issued on the other side.
Everyone agreed that this is a nice little plan. But three points need to be noted: (1) Last week the Dow rallied back to flat from 250 points down on the initial announcement of at least some mortgage plan, so the positive move is already on record; (2) Without clarification on what happens to the mortgage securities held by banks and how much they are worth, Wall Street can’t feel confident yet; and (3) Some horrible housing data were released last night.
In the case of (3), last night it was revealed housing starts plunged by 17% to a record low in January. Housing starts have now fallen 79% since their peak three years ago to mark the worst readings since figures were kept post-War. Now – we can look at these numbers in two ways. The bad news is falling housing starts implies less demand for houses. The good news is that less housing starts means less supply of houses. One assumes that the faster supply dries up the faster the housing market will turn around when demand finds a bottom.
The only problem is, housing inventory has only fallen by 38% in those same three years. So if you consider that demand is down 79% and supply down only 38% then we have a long way to go before a bottom can be found. This news helped put a dampener on any positive response to Obama’s mortgage plan.
In the case of (2), I suspect that Obama has deliberately concentrated on first rolling out his mortgage assistance scheme – his Main Street plan – before rolling out his plan for Bad Bank and toxic securities – his Wall Street plan. Cheer up the electorate first with a politically popular move before hitting it with the politically unpopular move of “rescuing” those greedy banks. I suspect we will be learning the details on Bad Bank fairly soon.
Real commodities were relatively motionless last night. Oil slipped another US31c to US$34.62/bbl ahead of tomorrow night’s expiry. (Unfortunately the spread is coming in fast, with April closing only about US$3 above March, down from US$8 last week). Base metals were steady, with the exception of a 3% fall in lead.
The star, nevertheless, was once again gold. Despite another night of strength in the US dollar, gold added yet another US$11.20 to US$981.40/oz. The world is still moving into the two “safe havens” coincidently.
One is reminded of about eleven months ago, when gold was performing similarly. The world had US$1000 in its sights and had been talking about this magic number for a long time. As US$1000 began to appear on the horizon, the rush was on. But just as mountain-climbers intend only to reach the peak, have a look around, and then descend again, so did gold hit US$1030 and then drop back toward US$900 very quickly. Be warned that this may well happen again. In order for gold to seriously breach US$1000 it must approach the figure a little more slowly and then do a lot of “work” before establishing a meaningful breakout. At the moment the rally is carrying a lot of rubber-neckers.
The Aussie remained steady at US$0.6390 and the SPI Overnight fell 19 points.
