Daily Market Reports | Mar 24 2009
By Greg Peel
The Dow rallied 497 points or 6.8% while the S&P rallied 54 points or 7.1% and the Nasdaq rallied 6.8%.
The more representative indicator – the S&P 500 – smashed through what was twice a previous support level and thus now a resistance level at 802 and just kept kicking. Wall Street jumped from the open, stabilised during the day, and then accelerated on the death to close at its highs. Wall Street had been heading toward the end of the first quarter mostly short, and has had to turn that around. Underinvested funds would have been jumping back in in panic.
The Dow closed the session at 7775. It is interesting to put this to context. The following is an extract from The Overnight Report of February 11:
“Rooky Treasury secretary Tim Geithner came out of his hole last night and saw his own shadow, leading Wall Street to declare there will be another six weeks of winter. The disappointment was palpable as Geithner rattled off a series of support plans for consumer loans, mortgage holders, toxic asset purchases and bank capital injections that was big on Monopoly money dollar amounts but lacking in any detail. It was a statement of goals, not a statement of action. They are the same goals that both this and the previous administration have been bandying about since last year. On Wall Street, it’s Groundhog Day.
“And so we are now back in November. The Dow closed last night at 7888, not far from the previous closing low.”
The fall in the Dow on February 10 (NY) was 383 points, precipitated by Wall Street’s disappointment in the above. The new administration was meant to save the world and this was the big announcement Wall Street had been waiting for. In particular, Wall Street wanted to hear a plan that would involve the removal of toxic assets from bank balance sheets. Instead, Geithner mentioned something about a public-private partnership, provided no detail, and moved on. Clearly, a man who had been in the job five minutes only had the kernel of a plan. Wall Street has had to wait until March 23 for that detail to be developed and unveiled. It has indeed been nearly six more weeks of winter.
And winter has seen Wall Street go to hell and back. The S&P fell From 869 on February 9 to 666 on March 9 – a fall of 23% (measured from the top down). The rally began on March 10 when Citigroup announced it had actually made a profit in January-February (ex write-downs), and the S&P closed last night at 822. That’s 23% back again (but measured from the bottom up). So one might say that we’re not really in any better position than we were six weeks ago, which was not in a great position.
However, Wall Street clearly loved the detail in Geithner’s toxic asset plan. And why wouldn’t it – the plan involves the taxpayers taking all the risk and the private investors making all the money.
In short, the Obama administration is going to throw another US$500bn-US$1trn at getting toxic assets (mostly mortgage CDOs) off troubled bank balance sheets. This time the money won’t come directly from the Treasury’s printing press however. Instead, the Federal Deposit Insurance Corporation will provide loans to the effect of up to six times leverage. The initial investment will be put up 50/50 by the taxpayer and the private sector.
The problem began with excess leverage and now will be solved with leverage.
The FDIC is an independent government body which guarantees bank deposits and is funded by – you guessed it – the taxpayer. So a thumbnail sketch has the taxpayer earning 50% of any profit for about 90% of the risk and the private sector taking 50% for about 10% of the risk.
That is why the Dow was up 500.
It’s early days, and the plan will be first put up to public and Congressional scrutiny (although the public portion of the unleveraged investment comes out of the existing TARP fund and thus Congress does not get another vote). Wall Street is rather concerned that Congress might respond with some heavy tax burden on those in the private sector who profit from the deal, just as they have attempted to impose a 90% tax on bonuses earned by executives of banks with TARP funded capital.
I will cover the plan more extensively in an article later today.
The other good news for the day was a 5.1% jump in existing home sales in February. Has the US housing market bottomed?
The jump does not necessarily indicate a bottom, but it might indicate a slowing of the rate of decline in the market. What was notable about this figure is that most of the sales occurred in areas of the US hardest hit by mortgage foreclosures. Some 45% of existing sales in February indeed involved a house in foreclosure or a “short sale” – one in which a bank has already foreclosed and is looking to sell below the loan value. What this suggests is the bargain hunters are out. It does not suggest the market has suddenly decided house prices will start to rise again. Indeed, house prices were down 15.5% year-on-year in February.
As is the case in parts of Australia now, US house prices have fallen in the hardest hit areas such as Florida and California to levels which, when combined with lower mortgage rates, are equivalent to the current rent on the same property. This is a good indicator of a potential bottom, but remember that US unemployment is growing and will continue to grow before the economy sees any turnaround.
The Surge on Wall Street provided an unsurprising surge in commodity prices last night. The new May delivery contract for oil jumped US$1.75 to US$53.83/bbl – the highest level since November. Copper jumped 4% on the LME – ditto. All base metals except nickel and tin put in good sessions.
Gold unsurprisingly did not have a good session, falling US$13.30 to US$939.30/oz. There is an element of contradiction here, however. Last week gold rallied significantly on the Fed’s announcement of quantitative easing, given the inflationary implications of such a move. Last night the US government announced yet another plan involving lots of money, although this time the possible US$1trn is not straight off the press but involves leveraging existing funds. The result was a perceived reduction in risk, and hence a lesser need to hold gold if you are holding it only for ”world disaster” protection.
What we usually find is that these gold sell-offs against reduced risk are the short term horizon, whereas the long term horizon definitely includes a potential for inflation.
The US dollar finished mixed last night although it was lower against the euro, and most notably against the Aussie (which benefits from higher commodity prices). The Aussie is up nearly two cents to US$0.7046 since Friday.
One interesting point to note, vis-a-vis risk, is that while the VIX volatility index did fall over 6% last night it is still only at 42. The VIX has struggled to breach the 40 level which is basically where solid support lies. Charts aside, if the VIX is failing to fall below 40 it means Wall Street is still buying put option protection, which means not everyone is convinced about this rally.
The SPI Overnight jumped 88 points or 2.5%.
The Australian market caught wind of the Geithner announcement on toxic assets via published leaks on Sunday. Hence the rally yesterday which appeared to belie a 122 point fall in the Dow on Friday. Trading in today’s market therefore already involves a head start.
