China Swoops On Morgan Stanley

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By Greg Peel

The Dow closed down 25 points or 0.2% last night, having been up as high as 68 early and down as much as 86 in mid-afternoon. The S&P lost 0.1% while the Nasdaq gained 0.2%. Trading volume was low as the market winds down for Christmas and investors shy away from any big position taking ahead of the financial year end.

The positive kick early on came from US number two investment bank Morgan Stanley. The news did not seem particularly good to begin with however. Having predicted mortgage-related write-downs of around US$3bn back in November the bank announced actual forth quarter write-downs of US$9.4bn. Wall Street had pencilled in US39c per share earnings losses for the quarter but the bank reported US$3.61 per share. This is the first time the company has made a quarterly loss in its 73-year history.

Not so long ago this sort of result would have sent the market into a tailspin, but there was more news to come. Morgan Stanley announced a US$5bn investment from China Investment Corp – the Chinese government’s sovereign wealth fund. The investment is in the form of preferred stock at a 9% coupon that must convert into an ordinary shareholding at a later date and will then represent a 9.9% stake. It is very similar in nature to the deal struck between Citigroup and the Abu Dhabi sovereign wealth fund.

The move from the CIC sparked unsurprising controversy, with the pro side saying all is fair in love and war and the con side yelling Red Peril. The Chinese government is, after all, Communist. But the deal is done, and it just goes to underscore the influence we can expect to see in 2008 from this new and vast pool of global wealth – Chime. China and the Middle East have only just begun to pick over carcasses in the US and the rest of the world, and are also interested in very much non-carcasses such as Rio Tinto ((RIO)).

Apart from the Chinese injection, there was a positive spin to the Morgan Stanley announcement in that traders are prepared to believe the bank has thrown in the kitchen sink – that is, this should be the last of it. Financials have already been marked way, way down on concerns over mortgage security valuations so there is more upside potential once the news is finally out than there is downside. Is it really the end? Well that depends on whether anyone comes in to buy mortgage-securities at whatever price Morgan or others are estimating on their books. They can always simply hold them to maturity however, and this is more possible with much needed capital injections.

Morgan stock jumped about 4.5% on the day  but the financial sector remained mixed. Any positive move was dashed after lunch nevertheless when S&P slashed the credit ratings of two bond insurance companies. The two largest insurers – Ambac and MBIA – managed to retain their AAA ratings but S&P gave them a “negative outlook”. This news took the Dow to its lows.

It also sent investors rushing back into 2-year US bonds once more, sending yields down around 8bps to 3.17%. Veteran traders are still shaking their heads over the volatility of this once staid instrument in the last few months.

The US dollar continued to be stronger last night, reflecting selling in the pound and the euro following Tuesday’s massive liquidity injections. The Fed announced its initial auction of US$20bn of 28-day credit was well bid. How does one read that? Good news because banks are taking up the opportunity and thus we might see some loosening in credit markets? Or bad news because clearly a lot of institutions need help? And the ECB has seen fit to massively overshadow any Fed actions to date as far as actual injections are concerned. Does this mean the situation is even more dire in Europe? Perhaps these questions can be discussed over turkey.

The rising US dollar caused only a slight slip in both the Aussie and gold, the former ending at US$0.8589 and the latter dropping US90c to US$801.80/oz.

The fall in gold came despite a jump in the oil price. Yes, it was Wednesday, and Wednesday is the day they roll out the inventory chocolate wheel. They gave it a big spin and – ooh – inventories have fallen to their lowest level since 2005. This sent the oil price up US$1.94. The contract rolled over last night, so we are looking now at February delivery at US$91.24/bbl. And then we’ll get the chocolate wheel back out again after Christmas.

In what was increasingly thin pre-Christmas trade, the base metal complex bounced last night to consolidate recent losses, with exception of zinc. Zinc finished mildly lower in late London trade but copper, lead and nickel saw jumps of 2.5-3.5%.

The SPI Overnight fell 22 points.

In aftermarket news, US business software giant Oracle “beat the Street” by announcing a fourth quarter profit increase of 35%, representing US31cps to the Street’s US27cps. Oracle is considered a bellwether for the health of the US domestic business economy, notwithstanding the strength of its offshore earnings. That the news was good and not bad provides some heart against the more dramatic recession calls. Oracle’s share jumped as much as 5% in the aftermarket, and may prove a positive fillip going into Thursday’s session. The highlights of Thursday will be the fourth quarter profit announcement from Bear Stearns, and another US$20bn credit auction by the Fed.

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