FYI | Sep 27 2007
By Greg Peel
In the wee small hours of Wednesday morning in the US, Dow component General Motors resolved its issue with the United Autoworkers union regarding legacy retirement and healthcare funding and thus ended a two-day strike. GM shares closed the day up close to 10%. As the General is one of only 30 Dow stocks its movement had quite an impact on the average.
The Dow ultimately closed up 100 points or 0.7% while the S&P managed 0.5% and the Nasdaq 0.6%.
Further helping to spark a rally in the broader market was a rumour instigated by a New York Times article that suggested Warren Buffet was looking to pick up a 20% stake in badly hit brokerage Bear Stearns. It was Bear Stearns’ collapsing hedge funds that set off the credit crisis and the stock has been the worst performer among the large houses; its third quarter losses eclipsing already downbeat analyst forecasts last week. Aside from Buffet, other potential suitors were suggested such as Bank of America, which had earlier made a similar foray into distressed mortgage lender Countrywide.
Many a commentator was quick to dismiss the Buffet rumour. If you had a dollar for every time the guru investor is rumoured to be interested in a stock then you wouldn’t need bother playing the market. However Buffet does have a track record, having once invested in Salomon Bros in similar circumstances, but that was an investment he now labels “a mistake”. Nevertheless, that another financial institution should be interested in picking up a Bear Stearns stake at a bargain is not beyond the realms, and the stock closed up nearly 8%. As the financial sector is at the heart of credit crunch uncertainty, this had positive effect on overall sentiment.
That was the good news. Now for the other good news, otherwise known as bad news.
Durable goods orders for August fell 4.9% – the biggest decline since January. As durable goods include everything from aeroplanes to home appliances this measure is considered an important indicator of economic strength, albeit an often volatile one. But because this is bad news it is really good news because it strengthens the case for another Fed rate cut at some point before the end of the year. One wonders now just what bad news that hits the market can actually be treated as bad news. In the meantime Wall Street ratchets up.
It was a bumpy ride for the gold price last night as the market battles it out between those who believe the hard currency needs a pullback and those who aren’t prepared to wait. Many advisors are now telling their clients to take profits ahead of said pullback which means the metal will probably go straight to US$750/oz. It tried when the woeful durable goods number was released and the US dollar took a tumble once more, but if gold is overbought then the greenback is oversold. The dollar turned around at the low and pushed to close higher on the day against the euro/yen/pound/swissy combo but if the yen falls, no rally in the US dollar is going to undermine carry trade currencies. The Aussie rose yet again, to US$0.8766.
Gold finally closed down US$3.30 to US$727.70/oz. Oil did its own thing, however, rallying back US77c to US$80.30. Oil had also been weaker earlier on the durable goods number, but the mood is still a case of buy the dips and a reduction in our old friend inventories helped to push crude higher.
Base metals in London also closed the day stronger, but missed most of the US dollar turn around in the New York session. Hence London saw aluminium up 2%, copper 1%, lead 3% and zinc 3.5% but by the close of the New York session some gains were given back.
The SPI Overnight rose another 42 points into uncharted waters. The correlation of the GM move and the Australian market would be roughly zero, but the Bear Stearns rumour should have legs. Needless to say, its hard to find negative sentiment on the trading floor at the moment.
