Daily Market Reports | Sep 28 2010
By Greg Peel
The Dow closed down 48 points or 0.4% while the S&P lost 0.6% to 1142 and the Nasdaq dropped 0.5%.
It takes sheer genius to shut the gate after the horse is across the paddock and in that context we note ratings agency Moody's last night downgraded the senior debt issued by Anglo Irish bank down three levels and its junior debt down six levels. In the past weeks the largely nationalised Irish bank has had to deal with rumours that it would need to stick its hand out to the EU-IMF support fund and that holders of bonds about to mature may be forced to take a hair cut, all of which the bank has denied.
Three levels and six levels? Long after the event? Gee someone was either having a nice snooze or is just plainly a moron. But that's been the way of ratings agencies since 2007 – they like to be the wimpy ones in the street fight who stand back trembling while someone gets a seeing to and only run in for a swift kick to the head when the victim is already well past it.
For some strange reason Wall Street pays attention, and last night the downgrade was cited as the reason the Dow was down around 40 points at noon, albeit after a 200 point rally on Friday this was no big deal. However, another solid day of fresh M&A announcements, this time across the airline, consumer product and retail sectors, acted as a counter, as did the knowledge any global systemic weakness is simply more fuel for the Fed.
So the Dow was back in the black after 3pm and was hanging on to the flatline when along came renowned Elliot Wave surfer Bob Prechter who was interviewed on CNBC and suggested the Dow was ultimately on its way to 1000. This is not a typo – he said 1000 not 10,000. Wall Street immediately sold again and the indices closed at their lows.
Just as a stopped clock is right twice a day, Prechter has made some great calls over the years including 1987 which really brought him fame but also wrong calls which received little publicity. While Prechter is talking a good “debt problem” fundamental story, realistically he's just making chart comparisons with the 1930s.
Volume was once again below the billion level on the NYSE nevertheless and the VIX is still hanging around 22, suggesting little panic.
The Anglo Irish news was enough to see the euro drop off a bit last night, allowing the US dollar index to have an up-day for once. It rose 0.2% to 79.44. This didn't faze the Aussie, which since the close on Friday is up 0.2 of a cent to US$0.9614.
Commodities played a text book game against a strong dollar nevertheless. Oil rose early in the session but fell back to be up only US3c to US$76.52. The base metals were mostly a bit lower with the exception of nickel, while gold had a rare down-day, falling US$2.40 to US$1294.60/oz.
The real interest was in the US bond market.
I suggested yesterday this week's Treasury auction of US$100bn of two, five and seven year bonds will be interesting given strong expectations of QE2 around the corner, which among other things means the Fed buys Treasuries in the two-ten range. And whaddaya know, last night's auction of $36bn of twos received the highest ratio of demand since August 2007. The auction settled at a yield of 0.441% – once again the lowest level in history. Foreign central banks bought 39% compared to a running average of 35%.
The action in the two-years sparked action up the curve, such that the yield on the benchmark ten-year fell 8 basis points to 2.53%. Tonight is the fives.
The SPI Overnight fell 18 points or 0.4%.
There was one disturbing incident last night. We recall the “flash crash” of May 6 in which the Dow suddenly fell 1000 points in a blip without obvious reason before rebounding just as quickly. Arguably the authorities have never really been able to put their fingers on the reason for this blip, other than to suggest a combination of “fat finger” and lax error control for virtual off-market exchanges.
The flash crash often comes up as a reason why volumes on US stock markets have dropped 30% (year-on-year) ever since; the suggestion being that smaller investors were simply scared out of their wits by the event and have since responded as they did the first time they saw Jaws. But the authorities have since made a big deal out of the fact they have instigated new rules and put in new circuit-breaker mechanisms to prevent another such occurrence.
Well last night it did happen again, albeit specifically in a small Nasdaq-listed stock. It fell from around US$44 to US$4 in a blink and back again, chalking up some 160 trades in the process, despite circuit breakers supposedly kicking in on a 10% move (ie being suspended for a period at US$40 in this case). If you are a retail investor with a stop-loss order in this stock below US$40, for example, you might just have been “stopped out” at US$4, and now you have to go through the long process of trying to get your money back due to error.
It could still be a while before we see volume return to Wall Street.
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