Daily Market Reports | Aug 01 2008
By Greg Peel
The Dow fell 206 points or 1.8% while the S&P fell 1.3% and the Nasdaq only 0.2%.
It was end-of-month on Wall Street – a session where volatility usually reigns. While not quite as significant as end-of-quarter, end-of-month is usually a battle between the long funds trying to dress the market up, the short funds trying to dress the market down, and a swathe of investors in between just trying to square the books and crystallise positions. It is never obvious which way things will go.
The Dow spent most of the day down 100 points, and clearly the rush in the last half hour was to sell. The underperformance of the Dow in particular was due in part to the second quarter result from Exxon. The oil producer and refiner reported the biggest ever quarterly profit in US corporate history – US$11.7bn – but at US$2.27 its EPS fell shy of Street expectations of US$2.52. Everyone expected a record profit given the oil price in the quarter, but the “miss” was a result of lower production and much lower refining margins. Exxon fell 3%.
Further weakening the Dow were a good result, poorly received, from Disney (down 4%) and an S&P credit rating downgrade on General Motors (down 4%).
The general early weakness was attributable to the weekly jobless claims number, and a “miss” on the first second quarter GDP calculation. It is the first, and many revisions will follow.
Weekly jobless claims rose by a more than expected 40,000 to 448,000. The monthly moving average – which is preferred as an indicator to the more volatile weekly figure – rose 11,000 to 393,000. Anything above 400,000 is considered a sign of recession. This particular week is significant, as Wall Street is bracing for the monthly employment data tonight.
Economists were hoping for as much as 2.4% growth in GDP for the second quarter, and so were disappointed with 1.9%. This was the quarter of the stimulus cheque hand-outs, so a weak number suggests the third quarter – in which the stimulus cheque effect is no more – might be quite bad. To top things off, the previous two quarters were revised lower. The fourth quarter 07 had been registered as +0.6%, but it fell to -0.2%, to be the first quarter of negative growth since 2001. Many commentators, ignoring “technical” definitions, had already declared that a recession had begun in Q4. The first quarter 08 was revised down from +1.0% to +0.9%.
An interesting element within the GDP result was a very steep drop in inventories. This can be taken one of two ways – either inventories have been run down because businesses have not been prepared to buy at high cost, or they have been run down because consumers have bought on discount offers (stimulus cheques in hand). Either way, the feature of any recession is always a preceding build-up of inventories, when businesses blinded by the good times over-order and then get lumbered with too much product. High inflation often drives inventory build-up, as businesses try to avoid paying more for new stock than what they can sell existing stock for. These days, however, technology has allowed for rapid product deployment, reducing the need to carry vast inventories. Let’s hope the low inventory result is a more positive sign.
In a second day of shrugging off of the stock-oil converse relationship, the fall in stocks belied another fall in the price of oil of US$2.69 to US$124.08/bbl. Oil’s fall is also a result of a weaker than expected GDP.
Another addition to late weakness was the appearance of former Fed chairman, and some might say Mister Credit Crunch, Alan Greenspan. Greenspan suggested that it was more likely the US would still fall into recession than not, and he also suggested that Fannie & Freddie were “disasters waiting to happen”. The government should nationalise the mortgage lenders, he said, and then when things return to normal sell them back to the market. Whatever one might think of the relevance of a Greenspan opinion, his appearance happened to be followed by market weakness.
The late selling took some of the wind out of the financial sector sails, as the sector had been having a reasonable day nonetheless. In the end Fannie was down another 6%, and Merrill Lynch 1% for example, but Citigroup still put on 1%, and shares in battered thrift Washington Mutual jumped 12%. WaMu’s jump came as a hedge fund announced it had picked up 6% of capital.
There was some relief for the gold bugs, as the GDP release sent the US dollar south and gold clawed back US$7.70 to US$913.20/oz. But the Aussie is unpopular at the moment, and it still slipped a bit to US$0.9416. Earlier in the month we were about to hit 99.
It was also an end-of-month affair on the LME. No one has a clue at the moment whether they should be buying or selling, so the traders got together and decided to push half the metals up for month-end and the other half down – none dramatically.
The SPI Overnight fell 48 points.
Happy August.
