FYI | Dec 21 2007
By Greg Peel
Not only did Wednesday’s late release of solid earnings figures for business software specialist Oracle add a positive tone to the market open last night as predicted, it was the saving grace of the day. Tech has been the other big story of 2007, as the sector has provided the only consistently strong returns from a selection of stocks amidst the carnage that has been otherwise all about. It has been a volatile ride, however.
It was volatile again last night, as the Nasdaq leapt 1.5%, enough to drag the Dow up 38 points or 0.3% while the S&P managed 0.5%. Oracle spurred a market return into the tech sector, which is not simply seen as the way of the future but as a safe haven against US economic concerns given the great majority of offshore earnings derived by many of the big tech names.
This was reinforced by the aftermarket profit announcement from Research in Motion, creator of the Blackberry. Shares added 6% on top of the session’s 5% rise as RIM reported a doubling of its profits for the quarter compared to the same quarter last year. Guidance was also better than expected. Another good day in the Nasdaq could be ahead.
But outside of tech, the news was all pretty grim.
The Philadelphia Fed released its index of economic activity last night, and the market was rather gobsmacked. The Philly index concentrates its analysis in America’s mid-west heartland. November fell to a level of -5.7, down from +8.2 in October. It was far worse than anyone had expected. Adding to the woes was the fall of 0.4% in the November leading economic indicators index, which looks ahead sixth months. This is the lowest level in two years. And weekly jobless claims rose ominously to 326,000.
It was Bear Stearns’ turn to report fourth quarter earnings last night, and the pattern was much the same. Bear reported its first quarterly loss in its 84-year history, and a US$1.9bn write-down of mortgage security valuations. US$1.9bn doesn’t seem like much when stacked against the Citigroups and Morgan Stanleys of the world, but Bear is much smaller. The share price did not respond badly however, as the market hoped this was the last of the troubles exposed. Neither did the bank announce a capital injection from Chime.
Fedex is seen as a bellwether for the US economy, and its earnings a leading indicator. Last night Fedex announced a 6% loss for the quarter due to higher fuel prices and a slowdown in activity. Its first quarter guidance was also more downbeat than the Street had hoped.
The US dollar continued its rise against the pound and euro last night, while slipping against the yen. This combination had the Aussie unmoved, but gold fell US$5.20 to US$796.60/oz. Oil slipped US75c to US$90.49/bbl.
In London the base metals markets underwent a book-squaring, window dressing rally, but early strength was later undermined by the rising US dollar. Copper jumped 4% to settle back at up 2%, while lead jumped 7% on the news of Chinese production stoppages, but settled back to up 3%.
The December SPI contract expired yesterday, so now we move to the March contract. The SPI Overnight was up 33 points.
But for me, the story of the day was not tech, not Bear Stearns, and not economic data. It was US bond insurer MBIA. MBIA has been put on a ratings watch by Moody’s and, as of last night, by Fitch, but so far it has kept its AAA rating. Last night the stock was sold down 26% on the revelation that the insurer has some US$8bn exposure to something known as “CDO-squared”. These are instruments which are derivatives of underlying CDOs (which themselves are derived from mortgage packages). As a derivative, the CDO-squared allows an investor to leverage up on CDO holdings. It is another step along the leverage chain – leverage on leverage.
It thought I had seen it all in 2007. The year has been a big, big learning curve for all of us, and I don’t mind admitting I entered 2007 never having been aware of subprime CDOs and what they meant. I was hardly alone. It has been my challenge for the year to get on top of what has been going on in the US and global markets, and my task, and pleasure, to attempt to decipher the mumbo-jumbo and explain it all to you – our valued readers. This Wall Street report began 2007 as only an occasional feature, one that I would write if markets overseas moved significantly. Before too long it became obvious that overseas markets were going to move significantly every day.
CDO-squared? Well that about sums it all up, doesn’t it?
This will be the last Wall Street report for the year. FNArena is shutting down for a two-week break and will return on January 10. Myself – well I’ll be taking another two weeks break on top of that, and returning on January 21. I don’t mind admitting my brain hurts, and I intend to spend the next month doing one whole lot of nothing. The Wall Street report will return in earnest on that day, and will continue to be a daily feature of 2008. Between January 10 and 21, my trusted editor Rudi will provide a quick overnight summary if something of significance occurs.
I would sincerely like to thank all those readers who have made this report a feature of FNArena’s daily news service through their support, and all readers and subscribers who have found all our other articles and features worth a look. I would particularly like to thank those who have taken the time to email with praise for what I and the team are trying to achieve here at FNArena, and equally I would like to thank those who have picked up on errors or who have found other reasons to be critical. Without such feedback – both positive and negative – we would not know how best to keep steering this ship. It is gratefully appreciated.
I wish everyone a very Merry Christmas, a safe and relaxing holiday, and, of course, a prosperous New Year. Who knows what 2008 might bring?
See you in a month. All the best.
Greg
