Daily Market Reports | Apr 02 2008
By Greg Peel
After a very apathetic close to the first quarter yesterday, investors with clean sheets found good reason to dive in with some enthusiasm as the second quarter dawned. The Dow closed up 391 points, or 3.2%. The S&P gained 3.6% and the Nasdaq 3.7%. Despite the strength of the moves, it was not what you’d call a volatile day. It was one-way traffic, featuring no last minute spurious rallies. This was solid stuff.
The rally tends to indicate there are plenty of investors now looking for an excuse to buy. The theme for the first quarter was one of finding any reason to sell. After a lot of carnage, Wall Street is loaded up in cash and US Treasuries, just waiting for the moment when someone or something declares it can no longer get any worse in equities. There have been some tacit early signs, such as the rescue of Bear Stearns, yet rallies had not, to date, found momentum. It is unlikely last night’s trading on Wall Street will prove to be the point of “V” bounce for the market – there will probably be some more bumping along the bottom yet. But what last night did show is that the will is there, and all that is needed is greater confidence.
The first fillip to confidence came in the form of the ISM manufacturing index for March, which rose to 48.6 from 48.3 in February. Hardly a move to bet the house on, but it was a rise, and economists were expecting a fall to 47.0. A number under 50 still indicates contraction, but the argument has moved on from whether the US is or isn’t in a recession to just how short the recession might be. Adding to positive sentiment was the news construction spending fell only 0.3% in February when a fall of 1.0% was expected.
But the really positive news came from Lehman Bros. America’s fourth largest investment bank spent March fighting off rumours it would be the next Bear Stearns, and it came dangerously close to seeing a similar “run” on its liquidity. Last night Lehman announced a successful capital raising of US$4bn in convertible preferred stock. Shares in Lehman closed up 18%.
It’s not every day a company can announce an off-market placement and watch its shares skyrocket. In most cases the dilution effect of new capital means existing shares are sold down. And it’s not every day a bank can make what can only be described as an emergency capital raising and have the market see that as positive. When a bank needs to raise capital to survive, rather than expand, you know it has some big problems.
But everyone knows that all Wall Street banks have seen a level of difficulty. That’s why their shares have been sold down 50-60%. As long as they can survive, and as long as the worst appears to be over in terms of massive asset-backed security write-downs, then perhaps the only way is up from here. Lehman Bros was only looking to raise US$3bn. When the issue was four times oversubscribed they raised the amount to US$4bn. Everyone wants to buy Lehman. If that’s the case, it can’t go under, one presumes. And if everyone wants to buy Lehman, the way is clear for the other investment banks and financial sector stocks to raise some capital as well.
This sentiment is in contrast to that prevailing in the fourth and first quarters, when banks across the globe were turning to the Middle East, China and Singapore for emergency funds. The locals were not prepared to buy, and were right. Asian sovereign wealth funds have taken some big hits on their early investments. But now the locals are talking “bottom”. This is a great time to pick up distressed stock, they believe.
The feeling was similar over in Europe. If the US has fretted over Lehman Bros, Europe has fretted over UBS. And everyone outside Europe had grown more concerned about the deafening silence coming from the old world, where it was known the banks of Germany, France, Switzerland and co were just as swept up in the subprime mess as the Americans. But where were the write-downs?
Well they came out last night. Germany’s Deutsche Bank announced US$3.9bn in write-downs but declared its capital position to be sufficient, thus no raisings at this time. In contrast, Switzerland’s UBS announced no less than US$19bn in first quarter-write-downs, topping the US$18bn of 2007. At the same time UBS announced it would seek to raise US$15bn in capital. If this were December, January or even February one might expect UBS shares would have been heavily sold down on the news, and fears of a “run” would surface. UBS has been the big tip to go under, even in the CBD bars of Sydney. But this is the post-Bear Stearns era, and things are different now.
The UBS chairman made his announcement, declared it was a far, far better thing he was doing than he had ever done, and promptly fell on his sword. The market took this as a sign, along with the massive write-down, that UBS had cleared the decks. The capital raising is only a proposal so far, but UBS shares rallied 15% on the news.
The entire financial sector, local and foreign listings like, took off last night, posting double-digit percentage gains. Oh happy day.
It was happy day also for the US dollar. The better than expected economic data were a spur, but on the flipside the Deutsche/UBS write-downs provided weakness for the euro. That meant a double-whammy rally for the greenback, and it took off against all major currencies. It even rose 2% against the yen. The Aussie fell half a cent to US$0.9071.
Alas, this was not good news for holders of gold. Gold collapsed US$35.60 to US$881.70/oz, while silver fell US48c to US$16.74/oz.
Oil also had another down-day, although on a US60c fall to US$100.68/bbl, it was none too dramatic. But it appears we will now test that significant US$100 level.
Base metals were initially sold off heavily in London, as indicated by some steep falls for the mid-session official close. But while the US dollar was driving prices down, the positive sentiment in equities and economic data helped to turn prices around later in the day. The end result was inconsequentially weaker.
The SPI Overnight gained 176 points.
If you add 176 points to yesterday’s ASX 200 close of 5361 you get 5537, which signifies a breach of the significant 5500 level. 5500 proved solid support on the way down, and the index bounced off the figure numerous times before finally smashing through on an opening gap a month or so ago. By rights 5500 should now become a level of solid resistance, and a level at which those looking for some sort of bounce to divest of underwater positions might act. It was a euphoric day on Wall Street, but the wise heads, while more positive, are still expecting further consolidation ahead. As one trader put it, the banks might be able to raise capital, but how are they going to make any money?
