FYI | Oct 22 2008
By Greg Peel
The Dow closed down 231 points or 2.5% while the S&P lost 3.1% and the Nasdaq 4.1%.
It was a typically rocky ride, with the Dow down early, square by 10.30am, down 265 at 1pm, and square again at 3pm ahead of the three o’clock wave. This time the sellers moved in again after three, taking advantage of Monday’s strong rise in the index. It was a range of 280 points on the day which, in recent context, implies a gradual diminishment of the volatility level. The VIX volatility index has now fallen back to 53 from its high over 80.
Weakness in last night’s market was largely attributable to various corporate earnings reports. So far third quarter earnings have failed to be in any way disastrous – so far – but it is the fourth quarter guidance accompanying the results which is spooking the market. Guidance has tended to be very dour.
As well it might be. At the risk of sounding like a blind optimist, I offer that coming up with any meaningful guidance in this climate is an impossible task. It is therefore a sensible move for companies to lean to the side of caution and expect the worst. Any overly optimistic guidance would likely be dismissed by the market anyway, and cautious guidance provides for a greater upside than downside ahead. Stock prices have already been trashed anyway, so what is there to gain by being upbeat?
Either way, the skittish in the market are looking at weak guidance and finding another reason to sell, or at least a reason not to be in stocks.
What was overlooked by the three o’clock wave was a very important announcement from the Fed – one that sparked the mid-afternoon rally in the first place. Just when you thought there was nothing more public officials could throw at this financial crisis the Fed has come up with another US$600bn package.
This month the Fed stepped in and offered to buy the commercial paper that companies were unable to sell. Short term commercial paper lending is the means by which companies fund their day-to-day operations. Without it, the economy would stop. The biggest buyers of commercial paper are the money market funds, but money market funds have seen major withdrawals given they are not guaranteed by the government as bank deposits now are. Hence money market funds have no money to buy commercial paper and so the Fed had become the only buyer of commercial paper. The Fed had shored up the selling side but not the buying side.
As of last night the Fed will guarantee commercial paper purchases to 90% of their value. In other words buyers of paper can redeem that paper with the Fed if needs be and only lose the first 10%. This is a way of encouraging the market to climb back onto the monkey bars and start playing once more, safe in the knowledge that the Fed is standing there ready in case someone falls. The economy needs the market to start operating again with itself, not just with the central bank. It’s yet another US$600bn of commitment but it’s not a hand-out as such, merely a backstop fund.
This new initiative proved only fleetingly positive for the market last night but the sellers are always going to be there lurking anyway. They don’t care about any new initiatives, they just want out. It’s all part of the bottoming process.
The US dollar was strong last night, mainly because the euro was weak. This impacted on commodity prices also struggling to come to terms with fears of global economic slowdown. Oil fell US$3.36 to US$70.89/bbl. Copper fell 5% in London, closing when the Dow was at its lows, which proved the biggest fall in a weak session for all the base metals.
Gold also responded poorly to the stronger greenback, falling US$26.10 to US$769.90/oz, while the Aussie took another hammering, down two and a half cents to US$0.6764.
The SPI Overnight fell 71 points.
For what it’s worth, the low in the Dow last night was just above the 9000 mark, perhaps suggesting that level will provide support. I suggested in yesterday’s Overnight Report that the ASX 200 will find resistance at 4300 and that’s exactly where we closed yesterday. We will clearly bounce off today. A break up through 4300 some time will be a good sign.
Another reminder that you can meet Rudi and/or myself this Friday and Saturday at the Trading & Investing Expo at the Sydney Exhibition Centre, Darling Harbour. There will be “show only” subscription offers available and we will be launching a DVD, “Dealing with the Bear”.
