Daily Market Reports | Sep 12 2008
By Greg Peel
The Dow closed up 164 points or 1.5% while the S&P gained 1.4% and the Nasdaq 1.3%.
On a day when Wall Street paused to remember colleagues lost seven years ago, the market’s focus remained on whether or not Lehman Bros could avoid its own destruction. Having had time to absorb management’s own rescue plan offering, which featured selling a 55% stake in its investment management business (to no one yet) and spinning off its commercial real estate business (who would want it?) the market sold Lehman shares down yet another 44% last night.
In early 2007 Lehman stock was valued over US$85 and last night it closed at US$4.42, or 95% lower.
When Bear Stearns went under in March, it happened very fast, and no one was quite sure what might transpire. But the Fed stepped in and assisted JP Morgan in salvaging the broken investment bank, noting that Bear was “too big” to be allowed to fail altogether. As the Fed has suggested ever since it would do “whatever it takes”, then the only assumption that can be made is the Fed must do something about America’s fourth largest investment bank if its fifth was “too big”. Ever since Bear disappeared, at first US$2 and finally US$10 per share, Wall Street has tagged Lehman as the next to go. But with the precedent set by the Fed, the market has clearly considered there to be an ultimate backstop. This doesn’t give reason to buy Lehman, but reason to assume the entire financial market would not collapse as a result of Lehman’s demise.
The market had a look at Lehman’s plan and decided, as should have been clear, it was pathetic. Hence Lehman was sold once more from the bell, dragging down the rest of the financial sector once more and sending the Dow down 170 points. But at that point – as has been the case all year in this bear market – the buyers came in to exploit the dip. They bought “quality” financials.
At the same time, oil traded down towards US$100/bbl. Wall Street has been holding its breath somewhat on the oil situation, given OPEC’s move to tighten production and Hurricane Ike’s apparent determination to barge through the middle of oil installations in the Gulf after all. But a funny thing happened last night. The gasoline price took off as a nod to Ike’s forced closure of refining capacity, yet crude oil fell once more – down US$1.71 to US$100.87/bbl. It seems like nothing can stop double-figure oil just now.
The financial bargain hunters and lower oil managed to turn the market around and thus began a wobbly but determined rally to close on the highs. Rumours began to fly that a global “money centre” bank was set to step in and acquire Lehman. Having seen how the market had accepted Plan A, Lehman’s CEO was said to have moved to Plan B and had begun touting the whole box and dice. Bank of America and HSBC were at least two names being mentioned.
We now believe, according to Wall Street Journal sources, that it is B of A about to make the announcement. This news came in after the closing bell. It’s somewhat of a surprise that B of A should be the white knight given it has already swallowed mortgage lender Countrywide in a couple of goes to prevent that institution’s bankruptcy, and now it’s moving into investment banking. Whereas B of A’s money-centre colleagues such as Citigroup and JP Morgan have long had both commercial and investment banking arms, B of A has stuck to the former. Another $2 deal perhaps over the weekend?
The financial sector index managed to rally 2.3% by day’s end, despite Lehman remaining down 44%. More ominously however, shares in America’s third biggest investment bank – Merrill Lynch – remained down 15%. Round 3 coming up in a couple of months?
In economic news, the weekly jobless claims number showed a fall, but not as much as hoped, and the US current account deficit widened more than expected in July, driven by the greatest import of oil in four years at those pre-collapse prices. Such news should send the dollar lower, and it did against most currencies, but not against the euro.
The European Commission has this week added to the chorus of predictions by suggesting Germany, Spain and the UK will all be in recession by year end. Last night the euro fell below US$1.40 and has now fallen 12.5% from its “line in the sand” high at US$1.60. So it’s a case of the US economy being the lesser of the evils, thus the dollar was stronger against the euro.
This is what the gold market is concentrating on, as leveraged commodity plays continue to be unwound. Gold fell another US$6.80 last night to close below the psychological US$750 mark at US$745.00/oz.
Base metals posted an overdue but unconvincing correction in London last night despite weaker oil and gold prices. Technical buying was credited but traders believe there’s no end just yet to the downward trend. Lead, tin and zinc all rose 2% or more, while copper was slightly higher.
The Little Aussie Battler has had another torrid time of it over the last twenty-four hours, trading below US$0.80, but bouncing back a bit last night to US$0.8048. The good news is that one year or so ago, when the Aussie hit US$0.90, I made a bet with my colleague Rudi that it would see US$0.80 before US$1.00. It’s taken a while, but I have now collected and rubbed it in mercilessly.
The SPI Overnight was pleased with a bit of strength returning, and rose 43 points.
