Daily Market Reports | Mar 06 2009
By Greg Peel
The Dow fell 281 points or 4.1% while the S&P fell 4.2% and the Nasdaq 4%. The Dow is now under 6600 and the S&P at 682, quite possibly on its way to 650. Last night the Nasdaq closed under 1300 and has now breached its November low.
Wall Street snapped back 150 points on Wednesday following some positive economic spin out of China and a hint that a second stimulus package might be forthcoming. A Chinese stimulus package is not the be all and end all – not the cavalry finally coming over the hill . China has already implemented one US$600bn package to little effect. But with both stocks and commodities heavily oversold it was not going to take much to spark a typical bear market snap-back after days of relentless selling.
In the end, Chinese president Wen Jiabao disappointed. He spoke to government delegates of throwing China’s massive reserves into domestic and offshore investment but mentioned no specific stimulus package. Is this a disaster? No. Wall Street, and the rest of the globe, had simply been clutching at straws. China certainly does have the power to assist a levelling out of world economic contraction and share price stabilisation (witness Chinalco-Rio Tinto) but not completely alone and not overnight.
With that supposed fillip removed, Wall Street last night returned to focussing on problems at home, and those problems are leading to another round of investor capitulation.
Expectations gathered pace that there will soon be some shake-up of the Dow Jones Industrial Average. Citigroup – once America’s biggest bank by capitalisation at US$55 per share – traded under US$1 last night. Cohort Bank of America is trading around US$3, and once iconic Dow component General Motors is trading below US$2. Longstanding member Alcoa is trading near US$5 and thus also vulnerable. With such low share prices, these stocks are no longer having any material impact on the movement of the DJIA. They should thus be removed from the average. Suggested replacements for the bank stocks include credit card facilitators Mastercard and Visa, trust bank Bank of New York Mellon, and even Goldman Sachs.
The weakness provided by the thought of these once great companies departing the Dow is merely symbolic. Fund managers concentrate on the S&P 500 index and will have already sold down such stocks as their percentage weighting in the 500 has decreased. This is part of the problem – cap-weighted indices are open to self-fulfilling stock price movements.
Further news last night had fraudulent credit agency Moody’s (ratings agencies are now admitting they “made up” values for AAA-rated CDOs) warning that two of America’s more stable banks – JP Morgan (a Dow component) and Wells Fargo – were on negative watch. The ratings agencies were complicit at the beginning of the whole financial crisis and they keep fuelling it today.
It is understood General Electric (a Dow component looking uncomfortable under US$7) is also in danger of losing its AAA-rating. GE’s CEO made the potentially fatal error last night of stating that a downgrade would not affect the business. So many CEO’s of banks and other businesses have made similar “everything’s fine” statements in the past two years, just before bankruptcy.
In a move that was largely expected, the Bank of England last night cut its cash rate from 1.0% to 0.5% – the lowest level in the bank’s 315 year history. The BoE also announced it would buy 75 billion pounds in high quality corporate debt and also government bonds over the next three months. The latter is known as “monetization of debt” and is highly inflationary. It is the quintessential “money printing” play.
At the same time, the European Central Bank dropped the EU cash rate from 2% to 1.5%. The ECB has been criticised for being tardy on monetary policy response ever since the financial crisis began, famously raising its rate during last year’s inflation scare when all about were slashing madly. Collectively the EU is an economy equivalent in size to the US, and in just as much, if not more, trouble, but we now have the US and Japan at zero, and the UK at 0.5%, and hence the EU’s 1.5% is looking overly contractionary.
Part of the problem is that the EU cannot monetize debt as the US and now the UK have moved to do. There is no EU bond, only individual sovereign bonds. ECB president Jean-Claude Trichet last night responded to angst by suggesting the cash rate could indeed go lower still. It’s already as low as it’s ever been in the short history of the EU.
Speaking of bonds, it was back to the basics of fear and risk aversion last night as all the usual suspects were once again patronised. US Treasury yields fell around 15 basis points as investors kept piling into this “safe haven”. Gold returned to safe haven status last night after eight straight days of losses. Having clipped the US$900 mark in Wednesday’s trade, gold leapt US$30.50 to US$936.10/oz last night.
Have we now cleared out those early US$1000/oz speculators?
The yen was bought last night against the US dollar, which indicates risk aversion, while the dollar gained against both the pound and euro following the rate cuts. The Aussie has fallen back one and a half cents on weaker economic data and yen buying, to US$0.6368.
Oil turned around from it’s near 9% jump on Wednesday to fall 4% last night or US$1.76 to US$43.62/bbl.
Likewise base metals mostly gave back some big gains. Copper fell 2.5% and aluminium and nickel 3%, while lead and zinc remained steady.
The SPI Overnight lost 50 points.
The Lord giveth and the Lord taketh away.
