Daily Market Reports | Jan 30 2009
By Greg Peel
The Dow closed down 226 points or 2.7% while the S&P and Nasdaq each fell 3.3%. It was a fairly even reversal of yesterday.
The overnight wires had no trouble determining why the four-day winning streak on Wall Street ended last night. Aside from the usual poor quarterly company results there were yet more disastrous economic data released. The kick-off came with the weekly new jobless claims which totalled 159,000, taking the running average to 4.78m. This is the highest number since the records began in 1967 (but I presume that is nominal and not per capita).
Then there was the new home sales number for December which showed a fall of 14.7% to an annual rate of 331,000 which is the lowest level since 1963 (this time I’d assume as a proportion). This little stat clearly wiped away any premature sense of hope provided by the bounce in existing home sales in the same month, released earlier in the week. But unless developers are as good as giving houses away (and they have done so at times to date) why pay a new home price when a bigger, better pre-loved is probably cheaper?
The durable goods orders number for December was also released, and at down 2.6% marked the fifth straight month of declines.
Anyway, those three numbers and some bad profit reports were the reason why the Dow was down 200, or so it is suggested. However, the Dow was down 100 on the open – before any data came out – having been so indicated earlier by pre-market futures trade. The weak data and results simply added to the negativity but are still a case of get-outta-here. Of course there are going to be bad results and more bad data ahead – it’s a recession.
It is the bigger picture that is more important. It would appear that the Obama Administration has now made two glaring, politically correct and economically ill-fated decisions and a third which is the subject of much debate. Now that the bunting has come down, we have to be realistic about new administration’s policy-making without consideration of colour, creed or political stripe.
Yesterday, the US House of Reps passed Obama’s US$819bn stimulus package. The package as a policy itself is a cause for debate, as are its contents, but the most worrisome part of the package is the US$90bn infrastructure fund, US$64bn of which must, by mandate, involve the use of US steel and only US steel. We are reminded that the Great Depression was caused not just by the Crash of ’29 but by the policy response thereafter – the two biggest mistakes being the raising of interest rates and the move to protect the US economy in isolation by shutting off foreign trade. Obama’s protectionist policy within the package is not universal but simply a proportion of a proportion. But the signal is clear. It is a signal to other big steelmakers across the globe such as, um, Germany, Japan and China that they are on their own.
Hands up. Which three countries together fund almost all of the US current account deficit? Or put another way, who are America’s largest creditors?
Take China for example. China has already made noises about no longer rolling over its massive investment in US Treasury securities and agency (Fannie & Freddie) debt and instead diversifying into other currencies and asset classes. The trillions of dollars being pledged by both the former and new US administrations as economic rescue packages rely on world financing. What if the lines of credit were withdrawn? The US dollar would implode.
And on the subject of China, Treasury Secretary Geithner has chosen the forum of Davos to reiterate his accusation that the Chinese are artificially holding down the value of their currency and are culpable in so doing. This is akin to a small child throwing a tanty and declaring “Dolly did it!”. The reality is: Geithner is absolutely correct. China has been holding down the renminbi ever since the Asian Currency Crisis of 1997. It is this “manipulation” that financed the Chinese miracle by allowing the US access to cheap goods. But who bought those cheap goods on credit? Trillions of the stuff. Geithner may as well accuse China of being at blame for supplying the metaphorical heroin that the US has been gleefully putting in its arm for the last decade.
It is now easy to see why former Secretary Paulson went to great lengths to engage China in stern but respectful dialogue, a practice he carried on from his Goldman Sachs days. I wouldn’t want to be Hillary Clinton right now. First job – appease a seething enemy.
Obama and his cabinet are playing a dangerous game where the world’s most indebted nation is about to go into further levels of debt never previously imagined, only to find its credit cut off.
The third policy measure, still unclear, is that of the “bad bank”. This is the one where you take all the “bad” out of the banks and put it into a new publicly-owned vehicle, leaving all of the “good” in the publicly and privately-owned existing banks. They then figure out how to deal with the bad bank, leaving the good banks to believe that now that they can no longer see all the bad it must no longer exist. And this morning we have Obama on the TV railing against banks which are still paying bonuses. It is not hard to see why this particular policy, while well supported, is causing controversy.
It is also not hard to see why gold shot up again last night, jumping US$18.80 to US$906.30/oz. Gold’s jump occurred despite the US dollar index closing higher in the session.
The US dollar’s rise and the poor economic data nevertheless had the standard effect on oil, which fell US72c to US$41.44/bbl. Base metals in London were mostly weaker with copper and nickel falling 3% and tin 6%.
The Aussie has fallen almost a cent in the last 24 hours to US$0.6525.
After a similar healthy run on the local bourse this week, the SPI Overnight lost 96 points. Given the tepid response yesterday by the ASX 200 to Wall Street’s 3% gains, perhaps today’s losses won’t be quite as severe as the SPI is suggesting. Or maybe all hope will be lost yet again.
