Daily Market Reports | Feb 06 2009
By Greg Peel
The Dow rose 106 points or 1.3% while the S&P rose 1.6% and the Nasdaq 2.1%. Those techs are still drawing a lot of support.
The session began where it left off on Wednesday night, with weakness in the banking sector dragging the Dow down over 100 points on the open. Bank of America – which seems to have taken over from Citigroup as the leader of the disaster banks – fell 20% from the open.
There were also your common or garden record-breaking weak economic data to add to the general malaise, but broken records are becoming a bit of a broken record and are no longer major drivers of volatility on their own. New jobless claims for the week jumped 35,000 to an adjusted 626,000 – the highest level since 1982. Factory orders fell a worse than expected 3.9% in December. That’s five months of consecutive declines and that hasn’t happened since 1992.
By 11am, however, the Dow was crossing the flatline on its way into the green. As BA shares fell below US$4, CEO Ken Lewis announced he had bought 200,000 shares and that five of his executives had collectively bought another 200,000 shares (with guns to their heads?). This was enough to halt BA’s death spiral for now. But ongoing bullishness in the sector for the rest of the session was driven by various rumours.
In the wake of Obama’s decree that executives of TARP-recipient banks would have their salaries capped at US$500,000, news went around that Goldman Sachs and Morgan Stanley were considering giving their TARP money back. Goldman and Morgan are the only two of the five big investment banks still effectively standing alone, although they have since been forced to become commercial banks under the TARP rules. On this news, shares in both banks shot up.
It’s a strange world, isn’t it? When both first received news they were eligible for this new thing called TARP their shares shot up. Now that they’re looking to give it back (at least that’s the rumour) their shares shoot up. Since receiving a TARP injection the shares have gone nowhere but down, but that’s more due to a worsening economy than a specific failure of the policy. But if things are now worse, and they needed the money desperately last September, how the hell can they afford to give it back? And all for the sake of executive salaries.
As far as the market response is concerned, one presumes that if Goldmans and Morgan withdraw from the TARP then perhaps they can unshackle from commercial banking restrictions as well and become investment banks again. With lots of leverage.
The other rumour going around is another old chestnut – the one where the mark-to-market rules for toxic securities are relaxed. Strict mark-to-market rules were brought in in November 2007 when it became clear Wall Street banks were greatly overvaluing the CDOs and other greeblies on their books, thus giving a false impression of balance sheet strength. It made sense that these should be marked to market, but the problem is there was no market then and there is not much of a market today. Every mortgage security became suddenly worthless whether subprime or prime as there were simply no buyers. Does this mean all of them are truly worth zero? No, but the market was, and is, so terrified it would not jump in to buy.
This means that the mark-to-market policy actually made the problem just as bad in the other direction. Instead of overvaluing securities, banks were forced to undervalue securities, and that meant a strain on balance sheets and an unwillingness of counterparties to lend to each other – a credit freeze. A relaxation of the rules would be a sensible step under controlled conditions. Hence Wall Street’s excitement each time this option is trotted out.
It’s all part of a pledge by Obama last night that he wanted to get the banks lending again. This was, again, a positive input. Secretary Geithner then said he should be able to release details of the new rescue plan – TARP II – by Monday. We don’t know what’s in it – maybe Bad Bank, maybe new capital injections, who knows? We’re all sick of speculating.
Across the pond it was cash rate night, and while the ECB held steady at 2% the BoE cut by 50 points to 1%. Both were expected, but the big news in currencies last night was a sudden and inexplicable near 3% drop in the yen against the US dollar. Once upon a time yen selling meant risk appetite was returning because you could borrow in yen at no interest and invest elsewhere. But you can do that now in dollars too so that argument has become spurious. The rumour was that perhaps the BoJ had intervened in an attempt to stop the yen’s destructive appreciation. Supporting evidence was a similar rise in the value of Toyota shares. Toyota sales have been hard hit by a strong yen and Toyota is Japan’s leading industrial company.
Whatever the case, gold decided to keep pushing northward as across the globe cash rates keep falling toward zero, implying rampant monetary inflation. Gold rose another US$9.50 to US$916.10/oz. We won’t call it a clear breach of US$900 yet – we’ve been here before.
The Aussie also added back a cent as the yen fell, rising to US$0.6545.
Oil is bouncing around in a trading range as conflicting news of weak economic data, potential OPEC cuts, building crude inventories and refinery production cuts all confuse the issue. Last night was an up-night, with oil rising US62c to US$40.94/bbl.
Base metals are in a similar spin, and last night’s weak data in the US was enough for mild weakness across the spectrum.
The SPI Overnight rose 56 points.
