FYI | Jul 11 2007
By Greg Peel
Goldilocks’ porridge was looking a bit tepid last night. There has been great faith placed in moderately rising US wages and low unemployment as indicators the US consumer had no reason to stop spending, despite a bit of low-end trouble in housing. What is an economy after all if it’s not driven by people buying stuff? And with recent data suggesting the US economy is accelerating out of its slump the scene had been set for expectations of a solid second quarter profit season.
The profit season got off to a bad start last night as bellwether retailers Home Depot and Sears both announced below-expectation results. Sears went further to slash ongoing guidance and copped a 10% share price shellacking as a result. Dow component Wal-Mart also copped a sympathetic hiding.
Homebuilder DR Horton also came out with a dreary outlook for the housing market which ostensibly saw no bottom ahead and anticipated a hit on consumer spending. Last night’s downgrades followed earlier disappointment from Alcoa and printer giant Lexmark. While traders were reminded that the first quarter result season also started poorly, before rebounding strongly, consumer sentiment is very much on trader’s mind as the pall of the mortgage crisis still hangs over Wall Street.
And the pall became more of a miasma as Moody’s announced the downgrading of 399 sub-prime residential mortgage-backed securities (RMBS). Standard & Poors also announced it may downgrade some US$12 billion of similar instruments. And S&P went one step further.
“S&P also said it’s changing the way it evaluates subprime RMBS, partly because of unprecedented levels of misrepresentation and fraud, combined with potentially shoddy initial loan data,” CNN reported. “The new approach will be applied to new RMBS deals and could affect the ratings of other mortgage-backed securities, such as RMBS issued this year, the agency noted.”
The fear is that such a move will have an effect on everyone along the credit food chain. If there wasn’t already such a fear. The financial sector was hardest hit last night as the likes of Lehman Bros, Bear Stearns and Merrill Lynch all fell more than 3.5%.
The Dow fell 1% or 148 points last night while the S&P 500 lost 1.4% and the Nasdaq 1.2%. The Nasdaq has been particularly strong this last week as America has orgasms over a telephone. Already Apple has announced the impending rollout of the iPhone “nano” to allow even the poor people of the US to be connected, just as it did with the iPod.
An acceleration of concerns in the mortgage market led to a flight to credit quality, such that US 10-year bonds, which last week threatened to push through 5.20% again, fell sharply to 5.04%. The US dollar also plunged against the euro once more to a new record low of 1.3747 and a new 26-year low against the pound of 2.0279. It also fell to a multi-year (is it 18 now?) low against the Aussie at US$0.8621.
The precious metal market responded accordingly, with gold pushing up US$3.60 to US$663.10/oz, while previously downtrodden silver managed a 2% jump, up US25c to US$12.91/oz. Apart from the dollar sell-off, the gold market was once again heartened by the ever-rising oil price which shot up over US$73/bbl last night before settling US62c up at US$72.81/bbl for August delivery. While the oil price is good for the energy sector (and Exxon’s in the Dow) rising oil prices are potentially another nail in the American consumer’s coffin.
Despite the US dollar fall the base metal markets were largely weaker last night with copper giving up over 1% and nickel over 2% (again) in New York. Nickel has now reached about a 40% retracement (while lead has achieved the opposite). The scene is set for some further profit-taking on the local bourse today with the SPI Overnight down 63 points.
In other news, China’s trade surplus blew out to a record US$26.9 billion in June – more than expected and 87% more than last year. There were already protectionist rumblings in the Clinton camp, and this won’t help. More on that later today.
