FYI | Aug 23 2007
By Greg Peel
A strange thing happened last night on the New York Stock Exchange – the Dow stayed in positive territory all day. It opened higher, traded in a fairly tight range and kicked at the close. If you’d been a coma these past couple of months and had just woken up, you would not have known anything untoward had ever occurred.
The Dow closed 145 points or 1.1% higher. The S&P and Nasdaq were both up 1.2%. At 3.3 billion shares, NYSE volume was slightly higher than Tuesday but still well short of the heady days of last week.
The real interest, however, was in the Treasury markets. After a week-long flight to quality, investors continued to ease out of the 3-month Treasury bill. Its yield rose to 3.66%, having closed at 3.59% on Tuesday and having traded as low as 2.51% on Monday. The yield on the 10-year bond rose from 4.59% to 4.65%.
Has Bernanke’s discount rate cut worked? Well if stability was the simple goal, the answer would have to be yes. If a comprehensive end to the liquidity crisis was the goal, then it’s still very much early days. In a move that could only be interpreted as symbolic, four major US investment banks – JP Morgan, Bank of America, Citigroup and Wachovia – joined hands and approached the Fed’s discount window last night, each borrowing US$500 million. If we can do it, the banks were likely saying to their lesser colleagues, you can do it too.
That JP Morgan should lead the charge in this gesture is fitting, for it was old JP himself who, when faced with a stock market crash and financial panic in 1907, gathered his fellow bankers together and collectively they injected significant funds into the system. The market stabilised, and the result was the birth of the Federal Reserve. It was JP’s actions that brought about the creation of the concept of the lender of last resort – the central bank.
In the corporate credit market, the news was also good. The wheels of prime lending have begun to turn again. As part of the funding for its Alcan acquisition, global mining giant Rio Tinto closed the books on a US$40 billion bond issue. It closed oversubscribed. The news came through after Rio’s heavyweight partner, BHP Billiton, had announced a record profit and positive outlook on commodities. Both stocks helped to boost Wall Street.
Last night an investment company representing the government of Dubai bought into an MGM Mirage Las Vegas leisure complex project and took a stake in MGM Mirage stock. Arabs buying into a company founded by Jews? Strange days indeed. But the crux of the investment, as far as Wall Street was concerned, is that M&A is not dead.
But there was also bad news last night. Lehman Bros announced the closure of its subprime mortgage arm, resulting in the loss of 1200 jobs. Embattled lender Accredited Home Loans also announced 1600 staff would be cut. The total of job losses in the US mortgage industry alone has now reached 35,000 in 2007. Some 90 mortgage brokers have shut up shop.
While today’s activities generally signify some quiet optimism returning to Wall Street, there is by no means a widespread sigh of relief. Traders suggest today’s movements in stock and bonds – in relatively quiet and calm trading – signify no more than a squaring of the books after a tumultuous period. Stocks and Treasury yields may have run too low for now, but there are few who do not fear what news may yet emerge from this market. And the question on everyone’s lips is: Is there a Bernanke put?
The “Bernanke put” would be exercised if the Fed were to lower the cash rate significantly, as many expect it will. The name comes from the famous “Greenspan put” of 2001, when then Fed chairman Alan Greenspan slashed the cash rate, eventually down to 1%, following the dual effects of the dotcom bust and 9/11. The implication is that no matter what sort of trouble the US financial system gets itself into through foolish excess, the Fed will be there to bail the market out. For the world cannot afford the collapse of the US financial system. Of course, such a put requires the frenetic printing of US dollars, 53% of which are now held by foreigners.
The US dollar resumed its more recent course last night, falling against the euro and pound. It rose against the yen, however, as returning stability again reversed the tide of carry trade unwinding. The Aussie dollar responded accordingly, returning to US$0.8066. Gold was able to rally again, albeit cautiously, adding US$2.70 to US$658.60/oz.
The oil price slipped slightly again as Hurricane Dean was downgraded to a tropical storm as it crossed into the more populous part of Mexico. The September Nymex contract has now rolled over into October, closing down US31c to US$69.36/bbl. Base metals joined in the generally positive mood on Wall Street, with prices in London firm. Copper rose 2.5%, nickel 3%, tin 2.6%, lead 3.1%, aluminium 1.4% and zinc 2.3%.
Despite the week long rally on the local bourse, the SPI Overnight gained another 65 points. The interesting aspect to watch today will be who is leading whom, as good news from BHP Billiton yesterday was reflected in global markets last night.
