Daily Market Reports | Aug 20 2008
By Greg Peel
The Dow fell 130 points or 1.1% while the S&P fell 0.9% and the Nasdaq 1.4%. Volume was once again extremely light.
The beast with two heads roared on Wall Street last night.
The roar from Head One came in the form of the July purchasing price index, which at an increase of 1.2% on the headline was twice what economists had expected. The core PPI rose 0.7% against an expectation of the usual 0.2%, which will likely have Ben Bernanke wondering whether he could possibly just chuck it in and go fishing. The annualised headline rate of inflation in the PPI now stands at an ominous 9.8% – the highest level since a post oil-shocked 1981. While the market expects inflation numbers to ease once the oil price fall catches up, these figures suggest that even with an easing, inflation will remain uncomfortably high.
The roar from Head Two was highlighted by the July housing starts figure. While a fall of 11% was expected, this lowest level since 1982 only drives home the weak state of the US economy. It’s all about stagflation, and stagflation is a disease central banks are almost powerless to cure. The cures for both symptoms are respectively an interest rate rise and an interest rate cut.
The oil price did not, however, continue its fall last night. A jump of US$1.66 to US$114.53/bbl had three drivers – firstly, the market is worried that NATO has heavily stepped up its rhetoric against Russia, a major oil producer; secondly, Tropical Storm Fay had looked like turning right into the Atlantic but now looks more like turning left towards Gulf installations; and thirdly, when a market falls this far this fast there must always be snappy up-days.
The rise in the price of oil did not help the broad equity market, but it also helped to tip over the US dollar. The greenback should, by rights, rally on high inflation, as it assumes a rate hike is needed. However, this situation is not normal. High inflation only exacerbates the potential for economic weakness, which is not good for the dollar. And like oil, but in reverse, the dollar has been heavily bought up and needs a snappy pullback.
This was all good news for commodity markets, nevertheless. Gold bounced hard back through US$800, jumping by US$14.90 to US$813.60/oz. Base metals have also been hard hit of late, so there was quite a short-covering scramble in London on the dollar’s fall. Copper was up 3%, and lead and nickel 6%, although traders dismissed the bounce as being far from a reverse of trend.
The Aussie ticked up a bit further to US$0.8716.
But the real damage on the day was once again felt in the financial sector. It began with Goldman Sachs warning against buying insurance giant AIG as the analysts are expecting US$9-20bn in losses in its credit default swap portfolio. The Dow component fell 6%.
Then JP Morgan released a dire report on investment bank Lehman Bros, suggesting another US$4bn in credit security losses would be forthcoming in the third quarter. The report added that Lehman would need to either raise more capital or sell something, and it was noted that private equity firms have been receiving unsolicited detailed information about the bank’s investment management unit, from Lehman itself. Lehman shares fell 13%.
The financial index fell 3% as all major banks and brokerages were hit, but it wasn’t going to end there.
After the bell, Goldman Sachs released another series of reports, downgrading third quarter earnings expectations for JP Morgan, Citigroup, Morgan Stanley, Merrill Lynch and, most drastically, Lehman Bros. Further expected credit security write-downs saw the Goldmans analysts shave significant percentages off its earlier third quarter estimates across the board, but Lehmans was the hardest hit. The analysts have turned US$0.68 per share expected earnings into a US$2.75 per share expected loss. The situation appears to be becoming more and more grave for the fourth largest US investment bank.
The SPI Overnight fell 36 points, and today will be a return to the first half of 2008 as investors will rush back into BHP and Rio yet again, and yet again calling the bottom of the commodities market early, and the banks will be sold. Those Goldman downgrades came out after the bell, so all things being equal Wall Street will again open lower tonight, driven down by the financial sector.
