Daily Market Reports | Oct 11 2008
By Greg Peel
The Dow closed down 128 points or 1.5% while the S&P closed down 1.2% and the Nasdaq closed up 0.2%.
In November 2002, the Dow Jones Industrial Average of the 30 largest stocks on the NYSE passed through 8000 at the beginning of the last bull run. It did not cross 9000 until June 2003. On the open of the NYSE on Friday, the Dow dropped 700 points to below 7900. Six hours later it traded above 8900. This was the first 1000 point rally ever to be posted in one day.
It was not a straight line, and the closing level clearly suggests it was not fully sustained. At 9.30am the Dow was down 700 and at 10am it was square again. At 2pm it was down 570 points, and for the next hour it wobbled in a comparatively narrow range. Then as the clock approached 3pm the floor of the NYSE went quiet. Traders held their breath and looked out to the horizon. Would it come?
It didn’t. The sea was calm.
When the three o’clock wave failed to hit, they started buying. And they bought and bought. And as the index began rapidly to close the gap the floor traders began to cheer. At 3.30pm there was another loud cheer as the Dow crossed into the green. It immediately rallied over 300 points more.
And then the sellers arrived, quite possibly more mutual fund redemptions, but likely also traders who were brave enough to buy at the lows and were squaring up for the weekend. At about 15 minutes after the final bell (it now takes that long to square up late trades) the Dow had fallen back to be down 128 points at 8451. The Dow had fallen 18% for the week – its worst week since 1933.
Friday’s wild ride did not happen in a vacuum. Turning points were marked by specific pieces of news.
The second collapse of the day came as the card-carrying morons at ratings agency Moody’s attempted to out-moron the morons at rival Standard & Poors by threatening to downgrade the long term debt of Morgan Stanley. When they write the history books about the Crash of 2008, and there will be many, the credit ratings agencies will be depicted as culpable villains.
Having watched fellow investment banks Bear Stearns, Lehman Bros and Merrill Lynch disappear, Morgan Stanley has all week been under severe pressure that has seen its stock price precipitously slashed. Apart from the general financial market calamity, Morgan has yet to officially bed down the deal that sees Mitsubishi Bank buying a 20% stake. Despite constant assurances it will be signed on Tuesday, the market has sold and sold Morgan, including another 50% on Friday at its depth. As the sellers pounded the stock all week, Moody’s decided they had better look to downgrade the bank’s credit. Great job. It mattered little to Moody’s analysts that it was they who put a AAA rating on the debt securities which have almost brought Morgan Stanley down.
There will be many regulatory ramifications once the dust finally settles on this disaster. It is likely the model that sees ratings agencies being paid by the creators of debt securities to rate those securities will not survive. The agencies made some 60% of their profits in the lead up to this disaster by rating CDOs and other complex derivatives.
On the subject of those complex derivatives, Just after 3pm on Friday when the three o’clock wave failed to arrive it was announced that all Lehman Bros credit default swaps had been made good. They will settle at a couple of cents in the dollar, and all collateral has been posted by the institutions on the wrong side of the trade. Thus ends one particular source of fear.
Around the same time news of, or at least rumours of, the policy the G7 hopes to be able to agree on today (Saturday morning Sydney time) flowed out. It is believed the G7 will globally coordinate to allow central banks to stand in the middle of the interbank lending market and guarantee all loans. This is exactly what has frozen the world’s credit market – banks are too scared to lend to each other. With global central bank guarantees, those banks have no reason to fear making loans to each other anymore.
There is also talk the British model of governments stepping in to acquire capital in banks will also be globally adopted.
These pieces of news were enough to spark the late, fierce rally.
Commodities markets close across the world before the NYSE does. Friday night saw a wholesale run on commodities as investors looked to sell anything they had to raise the cash needed to survive this unfolding disaster. It was capitulation.
Copper closed in London down 10% on its 5pm close and down 14% on its 7pm late trading close. That is still lunch time in New York, a point at which the Dow was down 500 or so. Aluminium and zinc closed down 4%, nickel and tin 9%.
Oil fell below US$78/bbl at one stage before settling at US$80.09/bbl – down US$5.69 – having caught only the very beginning of the Dow rally.
Gold fell US$64.80 to US$847.60/oz.
The fall in gold has two implications: (1) the ominous implication of “I will sell anything I own to survive”; and (2) the positive implication that the market felt confident enough to withdraw from the safe haven and take the risk market on once more.
The Aussie dollar traded down to under US$0.64 before marking the 24 hour period down three and a half more cents to US$0.6467.
Treasury bill and bond markets in the US – the other safe haven – also saw money flowing out. It was no flood, but the timid trend that began on Thursday did continue with a little more conviction on Friday. This is a good sign, albeit still an early one, that credit markets will unfreeze.
The SPI Overnight closed – wait for it – up 27 points.
Only a fool would say we have now seen the bottom. By the time you read this we may have had a statement from the G7. What happens next is still subject to palpable fear. It may take years before we ever see stock markets breach the highs they marked in November 2007. But if we have found a bottom, then brace yourself for a very, very sharp initial snap-back rally.
If we have found a bottom.