The Overnight Report: When Bear Meets Bull

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This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed up 290 points or 2.6% while the S&P gained 2% and the Nasdaq a miserly 0.6%.

We all know what the impetus for the rally was. In case you popped off to Mars yesterday, see yesterday’s stories with any reference to Fannie and Freddie.

In yesterday’s Asian time zone, Australia was up 3.6%, Hong Kong 4.3% and Tokyo 3.4%. In London, the FTSE was up 3.9%. At one minute after the opening bell in New York, the Dow was up 350 points precisely, or 3.1%. But the broad market S&P jumped only 2.6% and the tech-laden Nasdaq 2.1%.

By 11.01am, the Dow had fallen back to be up only 149 points. At 11.13 it was up 237. At 12.11 it was back again to up only 96 but at 1.01 it was up 198. At 1.59 it was up only 116 points and eventually it closed up 290.

Can I get off this ride please? I’m feeling a bit ill.

In Australia yesterday, by contrast, it was pretty much one-way traffic. In the foyer of the ASX a band played Happy Days Are Here Again. Realistically the vast majority of Australian investors, stock brokers and analysts had never even heard of Fannie & Freddie in 2007. Those who had still didn’t know exactly what they were. Something to do with mortgages? Bailed out by the government? The US is in a housing slump – ah, that must be good news. Buy.

But is it actually good news?

Let’s not forget, for starters, that the market is in a bear phase. Bear markets mean rallies are sold when investors are getting a bit hopeful and dips are bought only when investors think the end of the world is nigh – again. If we needed any particular example, take last week’s trading in the Dow. On Monday the Dow was up 250 at lunch, but the sellers moved in and the session closed flat. There were two days of little movement, and then on Thursday the Dow fell 350. On Friday morning, the Dow fell another 150. At that point it was down 750 points from the Monday lunchtime high. The buyers (or short-coverers) moved in and the session closed flat. Sell the rallies – buy the dips.

Last night the Dow opened up 350 and was immediately sold down. Here we go again. However, therein followed, as the movements above indicate, a rollercoaster ride as the sellers and buyers battled it out – as the bears and bulls faced off on the floor of the NYSE. It was a mighty bout. They could have sold tickets.

Up until last night, the bulls had mostly capitulated each time the bears moved in. But this time they tried to stand their ground. Why? Because of the Fannie & Freddie bail-out. The bull argument goes as follows:

(a) The bail-out will stabilise credit markets, allowing mortgage rates to fall; (b) the housing market will thus also stabilise; (c) confidence will return; (d) the US economy can go back to focussing on growth; (e) the US dollar can thus continue its strength; (f) the market’s been down far enough anyway and we’ve been looking for a time to buy.

But the bears would say:

(a) The bail-out was necessary under the circumstances, but will only prove another temporary fix, just like Bear Stearns was; (b) if the government had to bail out F’n’F then they must have been in a much worse state than they were letting on; (c) a fall in mortgage rates is still going to make little difference when there is eleven months worth of housing inventory on the market; (d) if you’re about to go into foreclosure at a mortgage rate of 6.5%, you will likely still go into foreclosure at 6.0%; (e) the government’s massive injection of funds devalues the US dollar; (f) the government’s massive injection of funds devalues US Treasuries (higher bond yields mean higher mortgage rates); (g) this alone will not save the US economy, and certainly won’t save the global economy; (h) like it or not, we are still in a bear market.

And so they fought it out. There were obvious winners – home builders for example – and there were non-participants – the materials sector went from nowhere to down, tech stocks were mostly sold. But the attention, of course, was on the financial sector.

Fannie and Freddie each lost about 95%, but we knew that would happen. Bank of America, which has recently acquired the biggest private mortgage lender, Countrywide, shot up 8%. JP Morgan, the most respected commercial bank, gained 5%. Goldman Sachs, the most respected investment bank, added 4%. But Lehman Bros is still in a fight for survival. It lost 12%. At the end of the day the financial sector index gained a modest 4.3%.

And the battle was also on outside the stock market. Gold bugs would have been very disappointed to learn that the US dollar did in fact rally against most currencies, rather than fall on the further dilution of the greenback’s value. Gold hit about US$817 in Asian and early New York trade, but ultimately closed down US$1.60 to US$801.40/oz.

The Aussie dollar, which has been all over the shop since Friday, finished the 24 hour period down another half a cent to US$0.8165.

Base metals rallied initially as the US dollar initially fell, but when the dollar turned around, metals struggled to hold on to gains. Lead, nickel and zinc closed modestly higher, but aluminium was weaker and copper fell another 1%.

The oil market had a lot to contend with. Apart from a whipsawing greenback, OPEC is about to meet and possibly cut production, or not. Why anyone cares is a mystery, as OPEC always says one thing and does another. Then there’s Hurricane Ike. Just when we thought the Gustav scare and subsequent false alarm might be the end of it for this season, Ike is thumping Cuba as a Category 2 and is predicted to follow Gustav’s exact same path toward Louisiana.

So the oil market is wondering, is Ike a meaner turner?

With all that to digest, oil closed up a mere US11c to US$106.34/bbl. At different points it traded up over US$108 and down below US$105.

After yesterday’s big rally, the SPI Overnight was down 23 points.

A euphoric London pushed BHP Billiton ((BHP)) up 3% and Rio Tinto ((RIO)) 4% but in New York BHP finished slightly lower than its Friday close.

So does the Fannie & Freddie bail-out mark the end of the bear market or not? Unfortunately, not. It is definitely a positive for the market in general, another step along the path to when the next bull market can truly be called. But it is also just another stop-gap measure, just as Bear Stearns was. Even Hank Paulson admits as much. When Bear Stearns was saved the bulls cried huzzah! It’s all over. How wrong they were. F’n’F is much, much bigger than Bear Stearns, but that just shows that the leak in the dike is a much bigger one this time, needing a much more substantial plug. And those plugs are costly.

Has confidence really returned? No. And here’s an example of why.

If there has ever been a beaten down sector in 2008, its airlines, particularly in the US. The fall in the oil price has brought airlines back from the brink but the macro outlook is still touch and go. Last night an insignificant regional newspaper published a story on its website suggesting UAL – the parent company of United Airlines – was filing for bankruptcy. Again, that is. It last filed for bankruptcy in 2002.

Several wire services picked up the story and the word spread. UAL shares collapsed – from US$12.30 to one cent. Yes, down 99.99%. But then the regional newspaper quickly realised someone had made a grave error and actually erroneously reprinted a story from 2002. UAL shares returned to US$10.92. The one cent trade was a blip (probably a short hedge fund saw no buyers on the screen for a moment) and was cancelled. The official low in the stock was marked at US$3.00.

This is a story of ready, shoot, aim. That’s what a bear market’s all about.

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