Daily Market Reports | Feb 24 2009
By Greg Peel
The Dow fell 250 points or 3.4% while the S&P fell 3.5% to 743 and the Nasdaq lost 3.7%.
Last night the US broad market index – and more favoured equity indicator – fell below 752 to 743. This drop officially puts the market back at 1997 levels and represents a breach of the November low, thus sending technical analysts back into bear trend mode. The Dow had already breached such levels.
Early strength proved fleeting as the downtrend resumed over the morning, before some supposed good news threatened a reversal. There has been a great fear on Wall Street that the government has within its TARP plans, the details of which are being drip-fed, an intention to nationalize banks. Last night the authorities attempted to assuage such fears by suggesting that any bank which passed the “stress test” (can actually survive into 2010) will be provided with a “temporary capital buffer” only. No “systematically important” bank will be allowed to fail.
The assurance came as the Wall Street Journal revealed that Citigroup – one of the stressed, systematically important banks in question – was in talks with the government to request an increase in capital from the TARP. Last year the government acquired preferred stock in a range of large banks. Citi received US$45bn, representing 7.8% of its capital. Citi went on to post a fourth quarter loss of US$8.3bn.
Now it wants the government to take its stake to 40%. This would be good news for Citi in two ways, as it provides more support but is still a minority stake. The great fear is that Citi would be nationalized, but 40% is not quite there.
The cause of the fear is firstly that existing shareholders are wiped out, but more fundamentally that you end up with a bank run by a self-interested Congress. If you can’t see any problem with this, just imagine the NSW government in charge of Westpac.
Citi shares closed up 12% on the day, and big moves were also posted by Bank of America, JP Morgan and other large commercials. Even GM shares rose as it is also considered by the market to be “too big to fail”. Unfortunately however, the stock prices of these companies have fallen so low (Citi is down 95% from its highs) that a double-digit move has an imperceptible impact on the indices. Citi, BA and GM are all Dow stocks, but with no clout whatsoever.
So while the banks may have been rallying last night, the broad market was heading in the other direction. While the Obama Administration dillies and dallies, eking out titbits of detail and failing to come up with definitive plans (for toxic debt acquisition, for example), and looking like it is making it all up as it goes along, the market has no confidence. As Geithner fiddles, the real economy continues to burn.
General Electric shares traded to their lowest level in 14 years. The Dow component was once considered a good bellwether of the US economy given its range of products and services. Last night an analyst suggested that the company may have to cut its dividend in order to save its financing unit, GE Capital. It seems the GE Capital model of charging 30% interest on store cards, and damn the bad loans at that level, has begun to fail.
It’s hard to be sympathetic.
The other news of the day, which added further weakness to a market that at one point was at least trying to recover some losses, was that AIG had also approached the government for more support. The insurance giant, now 80% government-owned, will announce the biggest loss in US corporate history next Monday, according to CNBC. Write-downs of all assets, including commercial property, will lead to US$60bn being wiped away.
After that piece of news, Wall Street deteriorated and closed on its lows.
The flight to safety continues in the US Treasury market, thus continuing to support the US dollar. The Aussie has slipped back to US$0.6427. But having hit US$1000/oz on Friday, gold has now stalled. It fell US$1.30 to US$994.20/oz last night.
Gold is at a significant psychological level. It first has to negotiate the expiry of February Comex futures on Wednesday night, and Comex is where the vast bulk of gold is traded, albeit on paper. How many punters have US$1000 calls? It is possible that expiry will bring a sharp pullback, just as any positive news on Wall Street (if there ever will be any) could also trigger a short-term profit-taking rout. But a solid push through US$1000 could set off another big leg up. The market is poised.
Oil commenced trading as the April contract on Nymex last night, falling US$1.85 to US$38.18/bbl. Oil picked up over a dollar of premium from the March expiry to the April expiry, so from Friday to Monday that’s only really a fall of about US80c. Oil weakness largely followed Wall Street.
Metals trading was closing in London just as it seemed the Dow might turn around again, leaving a mixed result of 2-3% increases in aluminium, copper and zinc and a 3% fall in tin.
The SPI Overnight fell 78 points or 2.3%. The ASX 200 has 4% to fall before it takes out its November intraday low at 3217, having already breached the November closing low.
