Daily Market Reports | Feb 16 2008
By Greg Peel
The Dow finished down 28 points or 0.2% on Friday, having been down 98 points at its depth. The Nasdaq lost 0.5% while the S&P actually put on 0.1%.
It was very much Friday-before-a-long-weekend trading, ahead of the market close for Presidents’ Day on Monday. George feels like a rest, and Bill could probably use a break as well. Nevertheless, traders were still surprised by the lack of volume given Friday also featured options expiry, and given there were some pretty poor economic data released. They were also a bit surprised that the market pulled back from its lows, but apart from options influence this probably suggests the speculators are still playing the short side.
The Empire State manufacturing index is a business conditions survey for NY state conducted by the New York Fed. Unlike other similar indices, it does not work off a 50 point mark being neutral but a zero mark being neutral. In January the index was +9.03. For February, consensus had the estimate at +5.75. The result was -11.72. The last time the index was negative was a one-off in May 2005, and the lowest level recorded was -16.47 in April 2003 during the recession.
That’s the problem with recessions – the more you talk about them the more likely they are to occur, as everyone becomes cautious about spending. Breaking down the index, new orders, shipments and employment all fell into negative territory, while the prices paid index rose to its highest level in over a year. That is not a good sign.
Maintaining the latter theme, a Labour Department report showed import prices into the US rose 1.7% in January with petroleum products the biggest contributor at 5.5%. In the past twelve months the import price of petroleum products has risen 67%. Food also rose by 3%, which is again significant but perhaps most ominous was the figure for imports specifically from China. It rose 0.8%.
Throughout the whole China-boom, super-cycle, raging commodity price era of 2004-07, global inflation has been kept under control by China recycling back higher input prices into lower prices for manufactured goods. China has been “exporting deflation to the world”. The predominant reason for this has been the seemingly endless supply of Chinese labour willing to work for not much more than a bowl of rice, for long hours, and without any rules about OH&S. Lack of regulation also allowed factories to spring up overnight and intensify competition.
But the Chinese manufacturing industry is operating on wafer-thin margins. Wages have begun to rise, input prices continue to rise (particularly for steel-making), food prices are soaring, and the renminbi keeps being adjusted higher, undermining local currency profits. Inflation in China is running over 6% creating negative real interest rates. Something has to give, and apart from industry consolidation that something is export prices. The more those prices rise, the more the world is exposed to the ravages of inflation which have been artificially curtailed to date by a fixed renminbi. China cannot just float the renminbi overnight – that would bring down its economy in one fell swoop. Instead it must gradually revalue, meaning a slow turning of the global inflation screw.
It is thus no surprise economic data such as Friday’s have renewed talk of dreaded “stagflation” – falling economic growth and rising inflation – a phenomenon that defined the late seventies. It is also of little surprise that the University of Michigan’s consumer confidence measure fell from 78.4 in January to 69.6 in February – the lowest level since 1992 when, you guessed it, the world was in recession.
What was surprising is that Wall Street did not start madly dumping the market on Friday’s news. A similarly poor Philadelphia index sparked just that last month. Holiday weekend and options expiry aside, it would seem fewer players are now in this market. Continually lower volumes support this theory. While rallies are occurring on little conviction, one must ask just how much lower this market can thus go if everyone’s cashed up and on the sidelines. The answer is probably lower than here, at a point where the buyers feel there’s not much more bad news to come out. Stock prices are, after all, lead indicators. If the US is indeed in recession, then Wall Street will be looking ahead to when the economy can start to recover. Is this three months? Six months? Twelve months? It’s too early to say.
An interesting development occurred in the troubled monoline insurance sector on Friday. Financial Guaranty Insurance Co, which was last week downgraded from AAA by Moody’s, is considering splitting off its municipal bond insurance business from its structured finance insurance business. The problem is that Moody’s has downgraded FGIC on the basis of its coverage of toxic CDOs, causing high-quality muni bonds to be innocently caught up in the downgrade. As Moody’s has downgraded FGIC the company, the bonds FGIC insures must, by default, also be downgraded. This would lead to a mass selling of muni bonds by funds with AAA restrictions.
This is exactly the outcome the world is fearing. But if FGIC separates its muni business then that particular company can be granted AAA and the sell-off would be prevented. This is something to consider as the really big insurers – Ambac and MBIA – fight to maintain their own businesses before the regulator acts autocratically.
There was a lot of action in the shares of brokerage Bear Stearns on Friday. The broker that famously set the whole subprime crisis in train has since seen a small stake taken by the Chinese government’s CITIC Securities. The rumour went around CITIC was looking to increase its stake, and maybe even launch a takeover. Bear Stearns refused to comment, but the rumours were hosed down by CNBC reports later in the session. However, the rumour came on the day options were expiring, causing a mad scramble to buy stock. Bear Stearns closed up around 5%. It may only have been a rumour, but it may well prove a harbinger of things to come.
Elsewhere it was largely holiday trading in various markets. The US dollar was mixed, the Aussie climbed higher to US$0.9085, gold fell US$6.20 to US$902.00/oz, oil had a rare quiet day, rising only US4c to US$95.50/bbl, and base metal markets were also mixed.
But not so platinum. Platinum has been rising steadily ever since major producer South Africa began suffering from power outages. Those outages are proving to be more systemic than temporary, and as such the price of platinum has soared – 10% this week alone – to set new records daily. The price has moved from US$1884/oz last Friday to US$2064/oz this Friday, with little end in sight. The main use for platinum is in catalytic converters for automobiles, and its use globally has only accelerated as emission reduction requirements have become more stringent.
The SPI Overnight lost 7 points.
While on the local theme, the Queensland town of Mackay received 625mm of rain on Friday (that’s over two feet!) and has been declared a disaster zone. The Dalrymple coal loader is in Mackay and various companies have coal mines in the region which are still not emptied from the last downpour. While this latest drenching will probably put recovery times back even further, not to mention rail and port delays, the price of seaborne coal will be under even more upward pressure.
