Daily Market Reports | Nov 23 2010
By Greg Peel
The Dow closed down 24 points or 0.2% while the S&P fell 0.2% to 1197 but the Nasdaq jumped 0.6%.
Initial relief flowing from news of the Irish bail-out, which is understood to involve some E80-90bn from the EU-IMF emergency fund, wavered last night as Moody's alerted the market that the shifting of bank debt onto the government balance sheet could result in a “multi-notch” downgrade to Ireland's current Aa2 rating.
Unlike Greece, which earlier in the year took a E110bn hand-out before the preemptive emergency fund was established in response, Ireland's woes lie more with its banks which are haemorrhaging from a collapsed property market rather than a simple case of overblown budget deficit. The deficit is nevertheless substantial, so taking on the banks' bad loans only serves to exacerbate the situation. Hence Moody's always helpful concern.
Further destabilising news came from the Irish Green Party which announced last night it would abandon the ruling Coalition of which it is a junior but necessary member once the bail-out funds were in place and the new 2011 budget had been passed. This move will force a general election in January.
Last night's action reminded markets that an organisation as useless and incompetent as Moody's can still impact on sentiment and that politics is as much a part of sovereign risk as debt itself. Irish bond spreads blew out again as talk resurfaced of an inevitable restructuring of Irish bonds (haircuts for bondholders) and Portuguese bonds also copped the same treatment on suspicion.
If that weren't enough, news came through that the FBI had raided the offices of three US hedge funds in what is understood to be the beginning of a more wide-spread attack on alleged insider trading. Gordon Gekko is back on our screens and back in our world, it would seem. It is suggested the investigation will not be contained to a couple of rogue funds but will spread right up to the major banks and brokerages.
Here we go again.
What has traders most concerned is that the raids represent a “Madoff response”. Given the SEC was so embarrassed by its extraordinary incompetence and arguably criminal negligence in ignoring mounting evidence of the Madoff Ponzi scheme, it has come back with all guns a-blazing and is now likely to try and find a red under every bed. The problem with “insider trading” is that while certain abuse is clear as crystal, there are grey areas in between that which is non-public inside knowledge and that which represents full public disclosure.
For example, it is common practice for stock analysts to get on the phone and chat with officers at the company which is being analysed. An example would be for a retail analyst to ring David Jones in December and ask “How's business looking this week,” and get the reply “Mate, the place has been chocka, we're flat out keeping up”. On this information the analyst might consider raising his earnings forecasts.
Now – is that “inside trading”? It's certainly common practice. And any member of the public, arguably, could go into a DJs store and draw the same conclusion. Had the officer told the analyst “Mate, keep it under your belt, but we're going to be announcing a big profit upgrade next week,” and the analyst acted upon the tip, then that would clearly be insider trading. Between the extremes, it becomes less clear. It is understood the FBI's accusations involve “networking” in which traders attempt to glean information from companies which may, or may not, be “inside” depending on what is inconclusive current legislation and interpretation of that legislation.
If the raids represent a fresh interpretation of what constitutes inside information, then look out.
While the above developments saw the Dow down around 150 points at lunch time, the weakness was not sustained. Clearly there are those who see buying opportunities each time Wall Street dips. One thing we do know is that for all the investigations and law suits which have transpired post-GFC to date, little has actually resulted in terms of share price impact. Goldman Sachs had to pay a US$550m fine but they covered that out of petty cash. And law suits that are brought can tend to drag on for many years.
European fears saw the euro dip once more following its previous bail-out bounce and it was down 0.7% to just over US$1.36. The US dollar index thus ticked up to 78.64 but the Aussie was also a little stronger since Friday night at US$0.9888.
Gold unsurprisingly jumped US$13.20 to US$1366.70/oz while base metals copped the hit, with all bar aluminium falling around 2%. Oil slipped US25c to US$81.51/bbl.
If you want to sell Treasuries then it's always good to pick a day when sovereign debt issues across the pond are a talking point, and as such the US Treasury's auction of US$35bn of its always popular two-year notes received solid demand, albeit the 0.52% settlement yield was up from the record low 0.40% last month. Foreign central banks bought 38% which matches the running average.
The only economic data release of the day was the Chicago Fed national activity index for October, which rose to minus 0.28 from minus 0.52 last month. This implies improvement but still contraction in this zero-neutral measure.
The SPI Overnight fell 27 points or 0.6%.
The SPI move seems a bit steep compared to Wall Street but perhaps it represents a QR National ((QRN)) hangover. The transport stock hit the board yesterday and surprised all and sundry by not dropping below its $2.55 listing price. I've heard no rumours that the Queensland government was in buying to ensure it looked good, although we know that for such a big Australian company a local institutional take-up of only 54% is way below most Aussie large-caps.
It just goes to show you only need say “China” to a foreigner and he will start drooling, whereas the locals are wary of the amount of assumed Chinese growth over the next how ever many years already built into the price. Retail investors stayed away in droves.
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