Daily Market Reports | Oct 01 2008
By Greg Peel
The Dow rose 485 points or 4.7% while the S&P gained back 5.3% and the Nasdaq 5%.
Volume on the NYSE was described as reasonable in comparison to Monday, but there are some factors to consider. Firstly, Tuesday and Wednesday are Jewish holidays and that means a lot of Wall Street players and NYSE traders were absent. Secondly, it was the last day of the quarter. The former suggests less volume and the latter more, but both suggest increased volatility.
The question thus arises: How much of last night’s rally was “real”? Experienced traders always wait for “day two” of such turnarounds, whether up or down, for greater confirmation of reversed mood. Let’s just say there was plenty of chatter about deceased felines on the trading floor.
The reason for the bounce was threefold. Firstly, it is not unusual to see a decent bounce-back after a big drop as bargain-hunting buyers emerge from the dust, and thus force shorts to be covered. But as we know, the volume of short positions has been greatly reduced with really only market-makers in options and other instruments being allowed to trade short.
Secondly, after yesterday’s rout Congress has stepped up to suggest where there’s a will there’s a way, and that despite Monday’s rejection of The Plan all sides are committed to reaching a resolution by the end of the week. Suddenly the defiance has abated to a degree.
( I have painted myself into a bit of a corner here by having referred to Paulson’s initial plan as “Plan A” and the bill that went to Congress with several concessions as “Plan B” in the past few reports. Now that a new bill is being hastily negotiated, I would have called that “Plan C” but the world’s media have already begun to call it “Plan B”, being only the second version of the bill. So I may have to fall in line to avoid confusion.)
Thirdly, and most importantly, the regulators have a plan of their own.
Prior to November last year, US accounting standards allowed for asset-backed securities to be “marked to model”. This meant that the holders of those securities could decide for themselves how much they were worth. The reason this was allowed was because there was no exchange traded market to provide price visibility, and no two CDOs, for example, were even alike. Trade was conducted “over the counter”, and CDOs very rarely changed hands again once initially sold. Without any way of confirming valuation in such an opaque and complex market, the FASB had to be content just to leave banks and brokers to assign a value for themselves.
Inset Dracula and blood bank analogy here.
When two Bear Stearns hedge funds went down in July last year, arguably triggering the credit crisis, they did so holding billions in CDOs they couldn’t sell. If they couldn’t sell the CDOs, how much were they really worth? Zero?
In November last year the FASB altered the rules to now insist that all asset-backed securities be “marked to market”. This meant institutions had to value the assets on their balance sheets at the price someone was prepared to pay, rather than what that institution thought they were really worth. There was no market. Thus began the great “write-down” avalanche which has destroyed balance sheets, led to credit downgrades, and bankrupted banks and brokerages.
In a move akin to installing a fire extinguisher in a smouldering ruin, the SEC and FASB are now suggesting qualification of the accounting standard to allow institutions to now mark their assets to “fair value”.
So what’s “fair value”?
I will discuss this in a story later today, but let’s just say there is scope for institutions to return asset valuations to those being used before November. In one fell swoop, this could mean huge “write-ups”, restored capital, and an unfreezing of credit markets.
It could also mean The Plan becomes redundant.
Exactly what the regulators have in mind is as yet unclear, but let’s just say that all financial stocks shot up last night by the same amounts they fell on Monday, or more. At least one regional bank’s shares were up 90% (albeit off a an almost bankrupt base). This accounting rule change could single-handedly save Wall Street. (And it could also reignite the underlying, fundamental problem).
A near 500 point up-move in the Dow in one session is historic stuff, but when history is being made every day one is driven to indifference. ( I can’t believe I could be indifferent now having traded through 1987’s 500 point fall, but that was 25%, not 5%.) What was quite remarkable last night was the performance of the US dollar. Having closed steady on Monday despite a near 800 point drop in the Dow, last night the dollar index rallied 2.5% on a near 500 point Dow rise. And it did so knowing that the US Treasury’s printing press in currently being warmed up for its most exhaustive assignment yet.
Once again we return to the conundrum of whether the dollar should collapse when The Plan is implemented, due to its debasement, or rally in the hope The Plan saves the US and world economies. Either way, all these fluctuations are the stuff of short term volatility driven by uncertainty, and cannot be considered long term trends.
As a result of the dollar’s rise, the gold price collapsed. Gold has risen from under US$735 to over US$900 in a heartbeat because of its “safe haven” or alternative reserve currency status. So we fell US$35.40 to US$871.20/oz last night, which is only to be expected.
Oil, however, has “decoupled” from the US dollar. A rising dollar should mean a lower oil price, but if the dollar is rising because the world economy might be saved, then it also means demand for oil should return. Hence oil was up US$4.27 to US$100.64/bbl. More volatility.
Base metal trading in London smacked of its usual confusion, unable to match oil’s rise given the dollar’s fall and generally not sure which way to run anyway. Mostly steady was the result.
On a surging greenback, the Aussie fell another cent to US$0.7903. There was no reinstatement of carry trades to support it.
The SPI Overnight rose 127 points.
Yet again one is forced to say, don’t believe that we have this time posted the absolute bottom. We may have, but volatility still reigns. The longer term player will never begrudge the first 5% of a rally if it truly is a rally, but we are still very much in a bear market.
