Daily Market Reports | Mar 11 2008
By Greg Peel
The US went on to summer time on the weekend, which means the NYSE now closes at 7am Sydney time. At the end of this month we go off summer time, at which point the Dow will close at 6am Sydney time.
Last night the Dow fell 153 points, or 1.3%, to 11,731. The S&P fell 1.6% and the Nasdaq 2%. It was not a rollercoaster of bad news and good – it was simply a steady decline on increasing fear and uncertainty.
The economic data for the session were actually positive. Wholesale inventories rose a more than expected 0.8% in January, suggesting that despite recession fears the wholesalers are buying in stock. One could suggest this seems foolish, accept that wholesale sales in January rose by a surprising 2.7%, which is the biggest rise since March 2004. Is this a bucking of the sentiment trend, or will it be retailers who get caught?
But that was about it for anything positive. Blackstone Group – the private equity firm which “rang the bell” at the top of the market last year when it listed at a ridiculous premium just before Bear Stearns announced problems at two of its hedge funds – posted a fourth quarter loss and a big write-down due to the credit market in general and a stake in a bond insurer in particular. Nevertheless, the market was not expecting anything different, and the shares actually managed to rise.
The real concern came from the aforementioned Bear Stearns. As Moody’s moved to downgrade several tranches of Alt-A mortgage securities issued by the brokerage firm, rumours grew that Bear Stearns was having liquidity difficulties. While management denied the claims, the mechanics of what was being suggested were hard to deny. It started with Thornburg Mortgage last week.
Thornburg was last week unable to meet its margin calls, and candidly suggested it was struggling to remain a growing concern. Banks are increasing margins, imposing stricter lending standards and raising borrowing rates. The next step down the chain from the mortgage lenders is the brokerages, who find themselves in a similar position with margin calls. This has forced the swift sale of assets, many of which can find little buying interest. Brokers and banks are together squeezing hedge funds, another step in the chain. The market is de-leveraging as it must, but on to whom does it unload the risk? Asset prices can only go lower.
Shares in bear Stearns fell 11% last night, and the rest of the brokerage and banking sectors were dragged along with it. Right from the outset, there has been a belief the credit crunch will produce a “whale” – a big brokerage or bank that will hit the wall. There have been various victims to date, some very near victims, and other victims being rescued as we speak. But Wall Street is now really beginning to fear the big one. To put things into perspective, last week a credit default swap on Bear Stearns was trading at 400 points over Treasury. Last night that blew out to 610 points.
It didn’t helped last night that FBI agents moved into the offices of major subprime lender Countrywide following allegations of fraud. Or that Thornburg was further downgraded by brokers.
It made no difference either that McDonalds posted strong February sales. Such news is hardly counter-recessionary, given McDonalds is a “staple” for Americans and that increased sales are probably offset at other establishments selling actual food.
Expectation is building that the Fed will have to step in with another emergency rate cut ahead of the March 18 meeting, just as it did in January. The market is factoring in a 75 point cut. Whether this will affect any sustainable bounce in stock prices is debatable, as it is now recognised that nothing the Fed is doing is helping. There is not a lot in the way of important data due out in the US until Friday, when the February CPI is released. The CPI may yet force the Fed to think twice. For the oil price hit US$108/bbl last night.
Back in 2006, when oil was scaring everyone by rising into the US$50-60 zone, analysts at Goldman Sachs released a report suggesting oil could go to US$105/bbl. It seemed a bit far-fetched at the time. Well, on Friday the Goldmans analysts were back, both with an “I told you so” and a new target. If there is any sort of supply disruption ahead, said Goldmans, oil will go to US$150-200. That was enough to send the price up over US$108 last night, before it settled at US$107.90/bbl, up US$2.75.
As a commodity however, oil was a loner last night. Elsewhere commodity prices fell as the US dollar was mixed and general recession fears gained more momentum. Funds have stepped aside, and opened up a hole under recent commodity price levels. Softs all fell, and base metals dropped an average of 3% in late London trade. Gold fell US$1.70 to US$971.60/oz.
The Aussie dollar has finished down more than a US cent to US$0.9164 from Friday’s close to this morning.
The SPI Overnight fell 82 points. The close yesterday at 5180 in the ASX 200 put it just below the January 22 close – the day the market fell 7% – of 5186 (which was also the intra-day low). You have to go back to September 2006 to find the last time The ASX 200 did some work at 5000 before commencing its push to 6851 in November 2007. If it falls to 5100 today, that’s a fall of over 25% from the high.
