Daily Market Reports | Jul 16 2008
By Greg Peel
The Dow fell 93 points or 0.8% while the S&P fell 1.1% and the Nasdaq rose by 0.1%. The Dow closed at 10,962, the first close below 11,000 since July 2006.
In yet another extremely volatile session, the Dow was down 228 points on the open, before spinning around to reach up 68 at 3pm. At the stock market’s low point, the VIX volatility index crossed 30. As every man and his dog is now looking for a level over 30 in the VIX as a sign of a market bottom, it happened. Is the egg leading the chicken?
The weak opening was driven by comments from Ben Bernanke at his scheduled bi-annual testimony to Congress and coincident testimony to the Senate Banking Committee. For the first time Bernanke saw both inflation and economic growth as problems, whereas for a long time it was growth but not inflation, and more recently inflation but not growth. He may have stopped short of using the S-word, but he did suggest the US economy is facing “numerous difficulties” and that there are “significant downside risks” and that in trying to deal with the situation the Fed faced “significant challenges”. This was not the sort of testimony one buys a stock market on.
However, bottom-pickers try to buy stock markets at the bleakest hour – when negative sentiment reaches a pinnacle. Did the VIX give the signal? Or was the intraday bottom formed because on the Bernanke testimony of a weak US economy, and in the absence of any news on strikes, be they by oil workers or jet planes, oil fell US$6.44 to US$138.74/bbl – its biggest percentage (4.4%) drop in 17 years?
Parallel to oil’s price fall was an understandably weaker US dollar, although while the greenback fell against the yen, pound and Swiss franc it struggled to fall against the euro. The euro appears now reluctant to retest the high of US$1.60. One surprising element of the recent turmoil in financial markets is that it hasn’t appeared to spark any major unwinding of the yen carry trade. For while the yen is being bought once more, the Aussie dollar has jumped US0.7c in 24 hours to reach US$0.9789. In that period it had also breached US$0.98.
Whatever catalyst one may wish to choose as the bottom indicator, the rally failed. In the last hour it was back to business as usual as late sellers pushed the Dow back below 11,000. It is not yet time to call a bottom necessarily.
Also failing to send Wall Street to a positive close was a statement from the SEC regarding “naked short selling” in the primary dealers (investment banks such as Lehman) and in Fannie & Freddie. While traders were left confused over the vague statement, the implication appears to be that short selling in these names will be prohibited unless scrip is previously borrowed.
To short-sell a stock, it is incumbent on the seller to “borrow” scrip from a long-holder. One must “hold” a stock to sell, but one can borrow the stock at a fee and then return it to the lender when the short position is bought back. However, it has also been possible to short-sell first and then worry about borrowing later – at least by the time it needs to be given back. In this way a trader can slam and slam a stock on a whim to either trigger or join the sort of panic sell-offs we’ve seen in Fannie Mae for example. It has been noted recently that some stocks have become difficult to borrow. Lehman is a good example. There has been so much short selling in Lehman that scrip being held by those actually willing to lend it out has become thin on the ground. This dearth of scrip should act as a dampener on further big sell-offs, and it will if traders are obliged to borrow first and sell later.
So did this announcement work? No. Lehman Bros might have been up 6% on the day but Fannie and Freddie were both down over 25% once more, most of it on the death. The regulators are trying to throw everything at it, but the market simply wants to sell. The late selling could well have been driven by day-traders who picked up stock at the bottom.
Confirming Bernanke’s dual economic weakness/inflation fears was the June wholesale inflation number. At 1.8%, the headline PPI well exceeded expectations of 1.5%. It was mostly the effect of the oil price however, as the core reading (ex-food & energy) rose only 0.2% by comparison. As the gap between core and headline widens, the indication is that the underlying economy is more likely suffering deflation in its weakness. It is only commodity prices bucking the trend at present. Is it the beginning of an oil price correction this time?
The deflation argument is supported by the June retail sales growth number, which at 0.1% was less than the 0.4% the market expected.
All in all it was a mixed day in the financial sector, with some beaten-down stocks rallying back hard and others being trashed once more. The broader market liked the fall in the oil price, but the energy sector didn’t.
The gold price shot up again on Bernanke’ comments and the weaker US dollar, peaking at around US$987 but falling back eventually on the lower oil price. It closed up US$4.70 on the day to US$977.00/oz.
The falling oil price also sparked a sell-off in base metals, with recent star aluminium a casualty at down 3%, and copper down 1%. The big hit was taken in zinc however, which fell over 7%.
The SPI Overnight was down 37 points.
Two weeks ago a US$6 fall in the price of oil would have sparked a huge rally in US stock markets. But despite the intraday bounce, Wall Street still closed weaker last night. It is very unlikely that was the bottom.
