FYI | Nov 06 2007
By Greg Peel
It was always going to be Citigroup’s day on Wall Street last night following the weekend announcement that another US$8-11billion – some analysts are saying 12 – of write-downs will be booked shortly. Markets across the Asian time zone, including Australia’s, set themselves for what was expected to be a sharp fall in the Dow by taking around 2% of value off the books. At the opening bell, it was looking like the right call.
The Dow opened down around 120 points as Citi shares lost another 7% or so. Pressure came to bear on all of the financial sector. When the day was over, Citi had pulled back to be down about 5% but the biggest story was in the volume traded, which at some 200 million shares was described by traders as simply “enormous”. What this indicates is that the panic sellers met a stiff wall of keen buyers and the battle raged throughout the session. The Dow pulled back to be only down about 60 at lunch, before taking another dive to its lows down 149.
Rumours continued to abound throughout the day, which is now a common phenomenon. Goldman Sachs was back in the frame with suggestions that the investment bank had “hidden” credit market losses in its amazingly positive third quarter result. The same accusations have been made strongly about Merrill Lynch, the suggestion being that deals were done with hedge funds to swap CDO positions off the balance sheet to be warehoused for a year for a fee. Goldmans immediately responded by denying such rumours.
When the sellers were again apparently losing the battle at the lows a swift round of short covering ensued from those who lost their bottle. The Dow shot up in the space of half an hour to be 23 points in the green. It turned negative again in the last fifteen minutes and closed on a down-tick at -51, or down 0.4%. Both the S&P and Nasdaq lost 0.5%.
How low can Citi go? The stock is down 37% from its highs and is 20% below where it was when outgoing CEO Chuck Prince took the helm. While there is still a great deal of consternation in the financial sector surrounding the potential for more write-downs to emerge, focus is now turning to the great CEO shuffle which has begun to occur. It’s been a great month for the executioner. Markets like a change at the top when a company is in its darkest hour, and rumours as to who will soon be running what are also rife. In Citi’s case, not only is it seen as a positive that Chuck Prince is out, but a pervading view that his “model” for the bank wasn’t working even before the subprime crisis hit means traders are looking even further ahead to a grand corporate restructure – something they can only see as positive.
Whatever the outcome, the golden word at present is still “volatility”, with many a more sober trader staying well away from certain sectors until the dust has truly settled.
Over in the bond market attention moved away from rate cut speculation last night and back to “flight to quality”. Yields plunged in the two-year Treasury causing the embattled US dollar to pick up some ground for once. The yen however rallied, which is an indication of a move away from carry trading. Gold slipped back towards US$800/oz. At one point it looked like the risk aversion heights of August were about to return but then the Dow turned around and the relief spread across all markets. If you were only looking at closing prices you would have thought it was a quiet day, with currencies and gold all looking largely unchanged at the death.
Not the case for oil, which fell US$1.95 to US$93.98/bbl. The Kurdish release of Turkish prisoners was enough to allow for some profit-taking while traders weighed up the potential fallout from Pakistan’s imposition of martial law. This has strained relations between the US and its supposed ally in the War on Terror. But whether oil is up or down, the only way for gasoline is up at present as the refined product catches up with the rise in the price of crude. It is, of course, gasoline not crude that impacts on the American consumer.
The other big oil news of the day was the Shanghai listing of China’s major oil company, Petro China. The stock tripled its listing price in what has become the pattern for Chinese IPOs and in so doing has not only become the world’s largest market cap company, but at US$1 trillion it is more than twice the market cap of the previous title-holder Exxon Mobil.
Base metals in London closed when the FTSE was down 1% in response to mid-session weakness in the Dow (and its own Citigroup – Barclays – which is also under the rumour pump). Copper, tin and zinc were all down 1-2%.
A probably slightly confused SPI Overnight put on 13 points, no doubt wondering whether yesterday’s 1.7% fall in the ASX 200 might be overdone or whether it’s better to be safe than sorry. One thing’s for sure however – after lunch time today no one’s really going to care.
Note to readers: The US has now moved off summer time which puts the Dow close at 8am Australian east coast time. This means that the price updates in the Cockpit will occur closer to 9am while this report will be published closer to 9.30am than 8.30am.
