Daily Market Reports | Mar 03 2009
By Greg Peel
The Dow fell 299 points or 4.2% while the S&P fell 4.7% and the Nasdaq 4.0%. The Dow slammed through the 7000 mark on the way to its close of 6763. The average reached a height of over 14,000 in 2007. The S&P fell 34 points to close right on 700, representing the low of the day. This is the next major technical level, and late selling suggests the same crowd who ensured the index was knocked through the last important level of 752, thus triggering a Dow Theory resumption of the bear trend, is probably going to try and force the broad market index through this level as well. The next level to consider is 650 – which has been a popular target for more than one group of equity strategists. If you assume 20-30% reductions in S&P 500 earnings, and a multiple of 12x, 650 is about what you arrive at. Notably, the Nasdaq is still to breach November lows, but is not far off.
While Britain’s financial sector has become as much if not more of a basket case than the US financial sector, one of the more robust institutions amongst the carnage had been HSBC Plc. Honkers & Shankers had only fallen 40-odd percent in value from its highs, making it quite the star in comparison to 95% drops in global bank stocks. But reality bit last night as HSBC announced a 70% drop in profit in 2008.
The bank also announced an enormous rights issue to the value of US$17.7bn, and a closure of HSBC Finance in the US. Had the bank never made a US acquisition in 2003, which became HSBC Finance, it would not be in such strife. HSBC shares fell 17% on the London Stock Exchange, dragging the FTSE index down over 5%. The reverberations were felt around the globe. If more robust HSBC needs that sort of capital raising, what are other less stable institutions going to need?
The question was driven home across the pond when AIG announced a US$60bn loss in the fourth quarter – the biggest quarterly loss in US history. The insurer lost US$90bn in 2008, wiping out a decade of profits. But Wall Street had already reacted negatively to this news last week when CNBC provided a scoop preview. Nevertheless, weakness is currently feeding on weakness. The previous US administration had already injected US$150bn into the global megalith, and now this one is to throw another US$30bn at it as well.
The reason why the government will not allow AIG to fall is because its losses stem from the issuance of billions upon billions of credit default swaps – effectively insurance policies for mortgage-backed and other securities. The insurer took no collateral. To allow this business to go under with a mountain of CDS exposures would be like telling Victorians there is no bushfire insurance. It would be catastrophic. AIG operates in countries all over the globe.
Ironically, the company was founded by Americans in Shanghai. As the government (majority shareholder) looks to auction off other aspects of the AIG conglomerate (such as aircraft leasing), bidders include the Bank of China, the ICBC Bank of China, and the Chinese sovereign wealth fund. Bidders for other areas of the business stretch from London to Singapore. It will be a fire sale.
The US market now has to contend with a couple of realities. Firstly, there will be a redemption window opening after March. Secondly, as many big-name stocks (especially, banks, GM etc) fall under US$5 per share, US institutional funds managers can no longer hold them, forcing more sales. Wall Street is on a slippery slope with little on the horizon to pull it up.
Such is also evident from a continuing flight into US Treasuries. Last night the ten-year bond fell back below 3% again, where it had traded in November. Investors continue to seek safe haven in government bonds, forcing the US dollar ever higher. The Aussie fell 0.8 of a cent to US$0.6308.
But the safe haven of gold is not enjoying such support in this latest stock market rout. The run up to US$1000/oz was sharp and sudden, so a fall back to US$900/oz is not a surprise. Gold fell US$18.20 to US$924.20/oz last night. The fear in the gold market is for a repeat of March 2008, when having reached US$1000, gold began to fall heavily as a falling stock market forced margin-called investors to raise cash through gold sales.
Oil’s positive run also came to an end last night as traders again were forced to focus on the simple weakness of the global economy. Oil fell 10% or US$4.78 to US$39.98/bbl.
Economic data releases last night in the US were nevertheless mixed, with consumer spending increasing 0.4% in January – only the second increase in eight months and the largest in fourteen months. The ISM manufacturing index rose from 35.6 to 35.8 when economists expected 34, but remember that anything under 50 still means ongoing contraction. The loser was January construction spending however, which fell to its lowest level in four years.
Base metals in London were remarkably resilient as traders attempted to untangle conflicting data and general malaise. Aluminium rose 2% and zinc 3% while tin fell 3% and the others were relatively steady. Yesterday’s release of CLSA’s Chinese manufacturing PMI showed a greater recovery than the ISM manufacturing index in the US. No doubt this has fuelled hopes that China is on a (slow) path to recovery.
The SPI Overnight fell 78 points or 2.4%.