Daily Market Reports | May 06 2008
By Greg Peel
The Dow closed down 88 points or 0.7%, while the S&P and Nasdaq lost 0.5%. The Dow has slipped back under 13,000, while the S&P is holding at 1407.
Mergers & acquisitions, or lack thereof, was one of the major focal points for Wall Street last night. As was announced over the weekend, a frustrated Microsoft pulled its offer for Yahoo – a move which sent Yahoo shares crashing 15% in last night’s session. Micrososft’s longstanding bid of US$31 was raised to US$33 on Friday, but when Yahoo CEO and co-founder Jerry Yang insisted on US$37 Microsoft walked.
Yahoo shares fell to around US$24 – still higher than the less than US$20 price they were trading at when Microsoft made its US$31 offer back at the end of January. Is this just a tactic from Microsoft? Wall Street believes the first bid was a pretty good price and disgruntled Yahoo shareholders are now baying for Yang’s blood.
Another M&A deal of interest has been the Bank of America US$7 offer for subprime mortgage lender Countrywide. One Wall Street analyst suggested last night BA should abandon the deal altogether and come back with a more realistic US$0-2 offer. Were the bank to pay up it would be looking at US$30bn in write-downs off the bat, the analyst suggested. Another Wall Street analyst independently suggested the BA deal would likely be renegotiated. Shares in Countrywide fell 10% to around US$5. Last year they were trading at US$40.
While Yahoo rattled the tech sector, Countrywide helped the financial sector index down 2%.
The other major focal point for Wall Street last night was the price of oil, which shot over US$120 again before settling at US$119.97/bbl – up US$3.65. Over the weekend the temporary lull in proceedings in Nigeria was broken again as rebels attacked pipelines. With demand out of emerging markets failing to collapse it appears that nothing short of world peace will bring oil back below US$100.
The jump in oil set the retailers crashing once more. The jump was also assisted by the US dollar, which turned tail after a few days of strength. The dollar was being played in a thin market which saw most of Europe and the UK closed for bank holidays, while there is also a two-day holiday in Japan for Golden Week. Nevertheless, the news which set the US dollar falling was not pretty.
The Fed announced last night that a survey confirmed consumers and businesses had found it more difficult to borrow money over the last three months. More than half the banks surveyed said they had tightened conditions for commercial and industrial loans, commercial real estate loans, residential mortgages, home equity loans and credit cards. Virtually no bank had eased credit terms for any type of loan, the Fed reported.
This survey is a wake-up call for those who have been touting the easing of credit conditions in the US in the aftermath of Bear Stearns. The evidence is to the contrary. Of particular concern is the spread of what was once called the subprime crisis into consumer loans at a time when inflation is biting hard. The Fed has now cut the cash rate by 3.25% to 2% and opened the floodgates of liquidity to more and more comers, yet nothing has improved. If anything, the situation is worse in 2008 than it was in 2007.
The falling US dollar and credit market report helped gold regain some life, the precious metal rallying US$18.30 to US$873.90/oz. Base metal markets were also stronger in what there was of holiday trade, with copper shooting up 3.4%.
Is this deja vue? Techs, financials and retailers are down, commodities are up, oil is at US$120, the US dollar is weak. Credit conditions are asphyxiatingly tight and M&As are being abandoned. What was the rally about again?
The only twist in the sad old tale last night was a surprisingly positive ISM non-manufacturing index result of 52 – up from 49.6 and against consensus of 49.3. This figure above 50 indicates the US services industry actually expanded in April after three months of contraction. It was not enough to save Wall Street however.
The Aussie battler leapt US1.2c over 24 hours to US$0.9469 despite the RBA making its rate decision this afternoon. The bulk of the move came in the local session yesterday following the release of a TD-MI inflation gauge figure that shocked even the creators. A weak US dollar helped sustain the move.
The SPI Overnight was down only 10 points, no doubt dampened by the rise in commodity prices.
