FYI | Dec 04 2007
By Greg Peel
It was a quiet night’s trading, with traders largely taking a breather after last week’s 3% rally. While the mood was still solemn with regard to mortgages and the economy, the market believes a 25 rate cut is in the bag and that should put a dampener on any major weakness. The Dow fell 57 points or 0.4%, wiping out Friday’s thin-air fifteen minute rally. The S&P lost 0.6% and the Nasdaq 0.9%.
The November ISM manufacturing index fell to 50.8 from 50.9 in October, which was a decline but clearly not a disaster. Any mark below 50 implies an economy in contraction. More worrying were numbers from General Motors, whose total vehicle sales fell 11.4% in November. GM stock took a battering. The trend was not otherwise precipitous however, as Ford surprised with a 0.4% increase after twelve months of falls. Sales leader Toyota posted a 0.3% gain which is modest compared to the usual numbers. Chrysler was down 2%, while Nissan and Honda posted reasonable gains.
On the mortgage front, Boston Fed president Eric Rosengren threw in his two cents by suggesting the subprime foreclosure situation will still get worse before it gets better, while in the meantime Treasury secretary Paulson declared his mortgage rate freeze program is closer to development. The idea is that those in the market holding adjustable rate mortgages, and with the financial capacity to hold a mortgage but for the crippling rate adjustment they are about to face, will have those rate hikes frozen for the time being.
The plan has been met with much criticism, and much scepticism. The critics argue strongly that the only way to overcome the mortgage crisis is to let it play out of its own accord. This would prove unfortunate for those who will be unable to pay for their mortgages at the adjusted rate, but then what are they doing with such a mortgage in the first place? Buying a McMansion, no doubt. The same argument has been put forward over Paulson’s so-called Super SIV, which is the US$75bn fund put together by a group of banks in order to warehouse currently worthless CDOs. The criticism? It’s a matter of not solving a problem but simply prolonging its existence.
The sceptics further argue that Paulson’s mortgage freeze plan may look good as a policy on paper, but they wonder aloud just how it might be implemented. Who is going to be negotiated with in order to re-jig an ARM mortgage? A hedge fund investor in Paris?
Oil began the day weaker as the pullback looked set to continue. But having spent most of the day in the 88s, oil bounced back when some OPEC members started spouting about not needing to raise production at all. Iran was the main antagonist, which is hardly a surprise, while US ally Saudi Arabia merely suggested the negotiations were “wide open”. The whole thing’s a crock anyway, as OPEC sets targets collectively and proceeds to constantly break them individually. If production targets are raised, they’re usually only raised to a level representing what is actually being produced already. Besides, the International Energy Agency believes OPEC is already running at full capacity. Nevertheless, oil closed up US60c at US$89.31/bbl.
The US dollar went back into “normal” mode, falling against all major currencies except the yen. The Aussie slipped slightly to US$0.8802. US Treasuries continued to be sought, and yields are now very close to the previous low set in 2004. The ten year is at 3.88% compared to 3.86%. The bond market is worried about further credit problems, and not about inflation. Clearly it is expecting more than one rate cut ahead.
Gold largely put back what it lost on Friday, rallying US$7.80 to US$790.90/oz. Base metals were weak late in London on continuing slowdown fears. Lead and zinc were down 3%, copper and tin 2% and nickel and aluminium 1%.
The SPI Overnight was down 20 points.
Wall Street is readying itself for economic data this week, starting with December consumer confidence tonight and culminating with the jobs report on Friday. Good numbers would be good, and bad numbers simply ratify a rate cut. Perhaps if they’re really bad the market will rally in anticipation of a 50 point cut? It’s going to be one of those weeks. The Fed makes its decision next Tuesday.
