Down We Go Again

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By Greg Peel

Wall Street traders looking for Happy Holidays were disappointed last night as markets once again reacted to ongoing bad news in credit markets. The short Thanksgiving week is often a positive one, and usually quiet, but it hasn’t started out that way. Friday’s rapid rally proved ephemeral, as has often been the case recently.

All three indices fell 1.7% last night, the Dow closing down 218 points to 12,958 – breaching technical support at 13,000 and now staring the August low of 12,845 in the face. It closed only slightly off the day’s low. The S&P also broke through technical support at 1450 to close down 25 at 1433. The August low is 1406.

The day started with uninspiring news. The NAHB housing index remained steady in November from October. As October represented a low, there was nothing to suggest any relief. Housing stocks were sold down yet again.

But the big news of the day came from Goldman Sachs. Despite Citigroup’s shares having fallen over 40% from their May highs, Goldmans’ banking analyst last night downgraded the stock from Neutral to Sell. Was he just being a typical Johnny-come-lately analyst? No. The report suggested Citigroup’s credit write-downs to come would total US$15bn rather than the US$8-11bn the bank had previously indicated. These would come from losses in CDOs, losses from SIVs and losses in leveraged loans to private equity deals. He also suggested Citi’s dividend may be in jeopardy – a call made previously by an analyst from CIBC. When that report came out, there was an immediate reaction of disbelief from those in the know, given Citi has trillions in liquid assets. But now that Goldmans has joined the party, the warning is gaining more currency.

The whole financial sector was sold down once more on the back of the Citi downgrade. Citi shares themselves fell another 6%. Fellow Dow component General Motors saw its shares fall 8% as concerns accelerated over losses in GM’s 49%-owned finance arm, GMAC. Countrywide shares fell another 8% as the company looks increasingly like it won’t be able to raise funding for its loan book. This is America’s biggest private mortgage lender.

There was more bad news across the globe.

Britain’s hamstrung Northern Rock has put out the call for takeover offers, but by Friday had only received offers “materially” below its last closing price. It looks continually like the British taxpayer will be propping up Northern Rock for some time.

Japan’s Sumitomo Mitsui Financial Group posted 30% credit-related losses for its first half.

Global insurer Swiss Re announced it had taken a US$1.1bn hit on credit default swaps it had sold to one client to protect that client’s subprime portfolio. Credit default swaps are a bit of a sleeper. Many multiples of actual debt have been “protected” through such instruments, exposing the potential for significant losses to the writers.

The now standard reaction to more financial concerns applied once more last night, as investors sold down currencies against the yen. US Treasuries were once again highly sought, with the ten-year falling in yield to 4.07%. The flight to quality pushed the US dollar slightly higher (except against the yen) and gold down US$4.00 to US$781.40/oz. The Aussie fell almost US1c to be US$0.8841.

Oil rose once more, climbing US80c to US$94.64/bbl for the new front-month January contract. News from OPEC was that it wouldn’t increase output, which doesn’t surprise those who believe it’s already producing at peak output anyway.

The really big moves last night were in base metals, however. Amidst climbing inventories and growing concern over global economic growth and subsequent reduced demand for commodities, investors lost their nerve. All the action came after the official London settlement, when lead fell 8.3%, zinc 7.3%, tin 3.7%, copper 3.5% and nickel 3.4%. The rout continued in New York, where lead and zinc were marked down 8% and copper and nickel 5%.

So much for a good strong day on the local bourse yesterday. The SPI Overnight fell 111 points. How the ASX indices react will still hinge a lot on Rio ((RIO)) speculation nevertheless, with the market holding its breath for the next BHP ((BHP)) bid.

Once the Thanksgiving weekend is over in the US, it’s into the last six weeks before Christmas. In five of the last seven years the Dow has enjoyed its feted “Christmas rally”. Apart from everyone being in a jolly mood usually, it represents the last month or so of trade into the final year closing of the books – a time when fund managers like to push things up to thus post good looking returns. But this time it could be a long six weeks.

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