FYI | Dec 15 2007
By Greg Peel
The hoped for Christmas rally on Wall Street has lost all momentum as the market comes to terms with what is simply a gloomy picture. The Dow bottomed out on November 26 at 12,743 and hit 13,727 on December 10 for what was about 1000 points or 7.5%. But despite whatever joy various Christmas rescue announcements may have brought in the short term, you can’t make a silk purse out of a sow’s ear and just leave it under the tree.
Last night the Dow fell 178 points or 1.3% to 13,340 in what was mostly one-way traffic. The S&P fell 1.4% and the Nasdaq 1.2%.
That means the Dow was down 2.1% for the week and the broad market S&P was down 2.6%. The bulk of that loss was in financials. One of the problems confronting any hope of a final fling into the holidays in the coming week is a small matter of tax-loss selling. Australians are familiar with this concept in June, or even May, when a weak market prompts institutions to crystallise losses on bad positions. The revaluations are going to be poor anyway, so why not get something out of it by picking up some tax losses? Most US institutions work off a calendar financial year, so the equivalent occurs in December on Wall Street.
Aside from this phenomenon, there’s little else to feel heartened about. Last night the US November CPI was released, and at a rise of 0.8% at the headline it exceeded Street expectations of 0.6%. The core (ex-food & energy) measure was up 0.3%, which may not seem a lot but is actually the biggest move in ten months. Ten months ago, in that long forgotten era before subprime, the Fed was constantly at the ready to raise rates if it had to.
Wall Street had a tip off on Thursday with a PPI number of 3.2% at the headline and 0.4% core – the biggest headline rise in over 30 years. The bulk of the rise was put down to fuel prices. Now, I’m no economist, but it would appear that 3.2% – 0.8% = 2.4% of cost US companies (the producers of stuff) are currently wearing rather than passing on in their margins. Also, at risk of losing their customers, retailers are no doubt praying that the oil price will recede while taking a short term hit. Everything about a US recession logically suggests the oil price should fall, but still we’re sitting at over US$90/bbl and finding it difficult to move much lower. How long can the retailers hold out?
But there was also good news last night, as November industrial production rose 0.3% after a 0.7% fall in October. This, again, was ahead of expectations. But as good as that news might be, the combination of IP and CPI suggest the Fed either may not have to, or simply won’t be able to, continue slashing rates. For a hopeful stock market this is not good news.
US bonds were sold yet again last night, with the yield in the ten-year rising to 4.24% as further rate cuts look more dubious. Where’s the money going? Not into the stock market obviously, and not into gold. Gold fell US$4.20 to US$793.10/oz basically because the inflation number sparked a big rally in the US dollar, against all currencies. Every cab driver in New York is short the greenback, so the rallies are sharp. But try to find anyone who’ll say other than the US dollar will ultimately fall further. The Aussie fell last night US1.5c to US$0.8601.
And there certainly isn’t any money going into Citigroup – the bellwether US bank. Citi announced smugly only a couple of weeks ago that it would not be taking any of its distressed SIVs onto its balance sheet. But last night the new CEO and lamb to the slaughter – Vikram Pandit – announced US$49bn would in fact find its way onto the Citi balance sheet, requiring even more capital to be redeployed. Apparently Citi has actually managed to sell out of a lot of the toxic mortgage securities already, however. But it still remains to be seen how long it will take to work all the problems through the system, and whether or not Citi will be forced to cut its dividend as many predict.
Oil did manage to fall again last night – US98c to US$91.27/bbl. Oil tries to go down, as it should when a US recession is nigh, but every time there are new supply figures that send it back up again, or snow storms, or shut-downs, or whatever.
Base metals were initially sold off in London again before finding some late support and closing mixed.
The SPI Overnight fell 58 points.
