FYI | Nov 27 2007
By Greg Peel
US retailers call the Friday wedged in between Thanksgiving and the weekend “Black Friday”. While this might conjure up 1929 stock market connotations it actually implies the opposite. As one of the busiest shopping days of the year, as Americans begin their Christmas rush, it is a day in which retailers usually see their P&Ls move into “the black”, or positive territory.
The stock market was looking to Black Friday sales as a proxy measure of consumer sentiment. They were ultimately pleased – on one preliminary measure sales were up 8.3% year-on-year. Recession? What recession? However, another measure had 4.8% more shoppers spending over the Thursday-Sunday period, but per capita spending 3.5% less. Either way, the results could hardly be called devastating.
When the Dow rallied 181 points in Black Friday trade, commentators searching for a reason hit on confidence in retail sales that day. For there was simply no other news. There were about six people trading on the floor of the NYSE, one came from his firm’s mailroom and another lady was actually a cleaner. Everybody else was on holiday. The session only lasted 3.5 hours, and in that time the Dow rocketed on absolute thin air. Wise heads suggested on Friday night that the rally should largely be ignored.
The Dow did actually open slightly up last night, and roughly held its ground in the morning. But as we’ve all come to appreciate, whatever happens on the NYSE in the morning means little as the afternoon can be vastly different, and the last half hour vastly different again. There was no turn around last night – the Dow began to slide and simply picked up breakneck speed toward the close, ending the day down 237 points, or 1.8%, to 12,743.
This means the Dow has now closed more than 100 points below the August low. The S&P lost a full 2.3%, closing at 1407. It’s August low is 1406. The Nasdaq fell 2.1% to 2540, still holding above its 2451 low.
While the retail news may have been heartening, it was once again all about financials. The news just gets blacker and blacker. News came out of Citigroup that it would be making meaningful cost cuts (read: slashing jobs). One CNBC commentator put the figure at 45,000 of 320,000, although this includes the 17,000 Citi has already shed. The bank would neither confirm nor deny. While often cost cutting is seen as a positive, Citi shares lost another 6%. In this case we have a hot air balloon going down fast and the pilot is jettisoning whatever he can on board to avoid a harsh meeting with the earth.
Over in the UK, HSBC announced it would bail out two of its SIVs and as such bring US$45bn of distressed assets onto its balance sheet. It would also inject a further US$35bn into the funds to keep them afloat. To date, the entire world’s credit instrument write-downs have only totalled US$50bn.
But the news that really set the market careening last night related to mortgage lender Countrywide. In 1932 the US Congress set up 12 federal home loan banks to assist commercial banks failing in the Depression and ensure mortgages could still be provided. These still exist today, and in the absence of anyone else being prepared to provide funding Countrywide has been tapping into one of the Federal banks on a regular basis.
Last night NY senator Charles Schumer stated “Countrywide is treating the Federal Home Loan Bank system like its personal ATM. When Congress created these banks, it never intended for them to be used to prop up mortgage lenders that specialized in deceiving borrowers. At a time when Countrywide’s mortgage portfolio is deteriorating drastically, FHLB’s exposure to Countrywide poses an unreasonable risk.” (cnbc.com)
Schumer didn’t need to say anymore. The implication is he would potentially push Congress to turn off Countrywide’s tap. The US$51bn the lender has hit the Atlanta FHLB for this year is up 81% on last year. The amount represents 40% of all that bank’s advances. If Countrywide’s tap is turned off and no further government support is provided it will surely go bankrupt. Countrywide’s specialty was subprime mortgages.
On this news there was sheer panic in bond markets. Investors fled to safety, pushing the yield on the ten-year down an astonishing 20bps in the session to 3.8%. Around about June the world was worried when the US ten-year hit 5.3%. There’s only been a 0.75% cash rate cut in the meantime. If everyone’s buying bonds the money has to come from somewhere, and the most immediate somewhere is straight out of the stock market.
There is a growing acceptance that the Fed will once again need to cut rates, despite its assertions to the contrary. The Fed announced last night it would step up liquidity injections into the system, and across the pond the ECB was busy suggesting the same. While this might be neutral for the EUR/USD, the dollar still fell again last night – against all currencies including the yen. Assisting the fall were two pieces of news out of China – one that China had made part payment for a big French nuclear reactor order (buy euros) and other that China’s sovereign fund was looking at investing in Japanese stocks (buy yen). The Aussie slipped about another half a cent to US$0.8702, driven more by yen buying than US dollar selling.
Oil slipped US48c to US$97.70/bbl, weakened by expected OPEC production quota increases but held up by the falling dollar.
Gold had another one of its two-minds sessions, rising US$2.00 to US$823.60/oz in heavy trade as investors battled it out over falling oil, falling dollar, renewed credit crunch fears and yen unwinding.
Base metals in London attempted to rally somewhat last night given the previous week’s carnage and the falling US dollar. However, early gains were trimmed in later trade and thin trading left wise heads unconvinced. Lead and zinc added around 4% while copper gave up its gain of 1.5% and nickel similarly its gain of 2.5%.
The SPI Overnight fell 89 points.
While the financial sector continues to roll ever downward, traders are now looking to clues in the “real” economy from the day that follows Black Friday – the twenty-first century’s “Cyber Monday”. Last night kicked off the big internet pre-Christmas bargain bonanza as retailers throw up one-off specials daily for the next week to entice the consumer sector into getting into the Christmas swing. Data from such sales will be closely scrutinised for clues on the R-word.
