Daily Market Reports | Nov 20 2008
By Greg Peel
The Dow fell 427 or 5.1% while the S%P fell 6.1% and the Nasdaq 6.5%.
There was little impetus to the upside as the session began and the Dow spent most of the day down about 200 points. At 2.30pm the Fed issued a new set of economic forecasts which were decidedly bleaker than the previous lot. Wall Street attempted a “buy the fact” rally (one that suggests we knew all this already) but by 3pm the sellers were beginning to win again and we ended with a now familiar bout of accelerated selling into a vacuum of no buyers. The Dow hit its lows at the bell. All three indices continue to plum new closing lows. The last low to be taken out remains the Dow intraday at 7773. Last night the Dow closed at 7997.
The Dow closed below 8,000 for the first time since 2003.
In issuing a new set of economic forecasts, the Fed conceded the likelihood of “significant weakness” ahead. It opened the door for further rate cuts – economists are now beginning to believe 0% is inevitable – but also admitted ongoing financial dislocations had undermined the effectiveness of monetary policy easing to date. Let’s face it – the Fed has cut from 5.25% to 1% in a little over twelve months and the Dow is at a new low. In the recession that followed 2001, Alan Greenspan took three years to cut from 6.5% to 1%.
In its June round of forecasts, the Fed predicted US GDP would grow by 1.0-1.6% in 2008 and 2.0-2.8% in 2009. Those numbers have now been revised down to zero-0.3% in 2008 and minus 0.2% to plus 1.1% in 2009. In other words, for the first time the Fed now believes 2009 will not see a recovery from a weak late 2008. It has pushed its recovery expectations out to 2010-11.
In June the Fed did not expect unemployment to exceed 6% in either 2008 or 09. Now it is forecasting 6.3-6.5% in 2008 and 7.1-7.5% in 2009.
While these revisions appear depressing, they are only catching up to consensus economist forecasts. They are not a shock. They do suggest the “good” news of further rate cuts, but as noted above, will it make any difference? When rates hit zero you know the economy is in big trouble. At least we are reminded that one reason we had a Great Depression in the thirties was because the Fed response at the time was to raise rates following the ’29 crash, not lower them. And while unemployment forecasts over 7% seem ominous, in the Depression unemployment hit 25% – and there was no such thing as unemployment benefits.
So it is no surprise the Dow tried to rally after the release of the Fed forecasts last night, but then no real surprise that the selling returned thereafter. This is now the way of things. All we can now look forward to is that the selling will stop when it does.
Focus was on the auto industry again last night as GM continues to make its plea to a cautious Congress for a US$25 bail-out from the TARP. The argument continues as to whether GM should be saved from death or allowed to go bankrupt and the carcass then acquired. But as Wall Street awaits some resolution – maybe due tonight – the other sideshow last night and all week has been the slow demise of Citigroup. Once a commercial and investment banking Goliath, Citigroup has seen its shares sold steadily lower despite a US$25bn investment from the government at around US$15. Citi shares fell 22% last night to US$6.40 from a 2007 high of over US$56.
The old argument has thus returned: Is Citi too big to be allowed to fail? But the other question is: Is Citi too big to be saved?
The US dollar continued to strengthen last night, although falls in commodity prices are these days more closely linked to the stock market than the dollar equation. This is of course self-feeding, and also illogical if you consider lower input costs for the broad economy should actually be a positive, even if the Materials and Energy sectors take the hit. But logic left this market long ago. At the moment, the attitude is purely recessionary and deflationary. Indeed, the Fed also lowered its inflation expectations for 2009.
Oil fell US77c to US$53.62/bbl. Gold fell US$3.60 to US$734.10/oz. Base metals tried to rally early but were again knocked down – not just by a weak Dow but also by fresh reports of ongoing inventory build-up. Moves were not significant other than in tin, which dropped 11% in London.
The Aussie fell one and a half cents to US$0.6382.
The SPI Overnight fell 167 points or 4.7%.
