Daily Market Reports | May 10 2008
By Greg Peel
The Dow was down 120 points or 0.9% on Friday, while the S&P fell 0.7% and the Nasdaq 0.2%. The more pronounced fall in the Dow was due to weakness in three specific components.
The first of those was general insurer AIG, which late on Thursday reported a US$7bn loss and the intention to raise US$12.5bn in capital. The loss was double what the market had expected, and given the biggest hit was taken in losses and write-downs on mortgage and credit products it proved a wake-up call for those in the market desperate to believe the financial sector has now discounted its worst-case scenarios. What else still lurks? AIG was down 9%.
Citigroup provided a shareholder update in which CEO Vikram Pandit was upbeat and all smiles, but which disappointed the growing band of shareholders who want to see Citi broken up into more efficient pieces. That ain’t gonna happen. Pandit intends to offload up to half a trillion worth of non-core assets, including the bank’s residential mortgage business. While this is offered as a positive move, analysts see it as a “no-brainer” and suggest Citi is merely getting rid of a few obvious businesses that don’t really fit in, and getting rid of its mortgage baggage at the bottom. Citi fell 3%.
General Motors fell 4% when it announced it would be providing financial assistance to try and end the 10-week strike at its axle provider.
AIG and Citi helped to lead the whole financial sector lower, and rekindle fears that we haven’t yet seen everything out on the table in the credit crisis.
The materials sector also took a hit on Friday as base metals finally gave way. Despite a mixed session for the US dollar, the nervousness that has been building up in metals reached a tipping point as commodity fund redemption windows began to open. With metals failing to push ahead over the last couple of weeks, weak speculative money decided to move to cash and sent copper down 2.5%, zinc down 3%, nickel down 4% and lead down 6% on the London close. Aluminium was spared a major sell-off, while good old tin just keeps plodding higher.
This is a move many analysts had anticipated, and while further weakness may transpire, weaker metals may provide good buying opportunities in commodity stocks. In the meantime, there’s only one direction for oil. Weekly crude inventories again showed a build, but the combination of higher diesel and heating oil prices in the US, and a growing macro acceptance that global supply is not responding to increasing global demand, saw oil trade over US$126 before settling at US$125.96/bbl – up US$2.43.
The economic news of the day came in the form of the US balance of trade for March. In falling to US$58.2bn, the smaller deficit is in itself a positive for the US dollar. However, breaking down the numbers provides somewhat of a grim economic picture. Imports into the US fell by 2.9% in dollar terms – the biggest decline in six years and despite the surging cost of imported oil. Exports out of the US fell 1.7% – the biggest drop in three years and despite soaring prices for US farm produce.
The numbers thus confirm the US domestic economy is decidedly weak, while the export numbers indicate global slowing as well. A lot of faith has been placed in the weaker dollar providing a boost for US exporters, and thus a safety net for the economy, but it will be up to the emerging world to carry the can as Europe, Japan, and other developed economies begin to slide.
With a mixed dollar gold managed to add only US$1 to US$884/oz, while the Aussie also rose slightly to US$0.9434.
The SPI Overnight fell 11 points, once again looking minimal against a 120 point fall in the Dow. Not that the SPIO has proven much of a day-session indicator of late, as Australia has shown resilient strength in the face of a weaker US. A well-received result from NAB helped to confuse sentiment about the state of the Australian banking sector on Friday.
The aftermarket news for Friday was an earnings downgrade from America’s largest shipper of goods, FedEx. The company was forced to make the downgrade on the back of higher fuel prices, which is warning for the overall economy. FedEx shares were down 3.5% in late trade. The market also looks unfavourably upon companies that chose Friday evening to “sneak in” a profit warning.
In a small note of interest: FNArena reported this week how it now costs the US Treasury more than US1c to produce a penny. Well on Friday Congress voted to bring back the steel penny to replace the existing zinc-copper alloy penny. The last time this happened was in WWII when there was a shortage of metals. While the war-time penny was steel-grey, the 2008 penny will be painted a copper colour so no one notices the difference. Americans are clearly emotionally attached to their penny, as one must ask why you wouldn’t just discontinue its use just as Australia and others did years ago with their copper-based shrapnel.
