Daily Market Reports | Mar 31 2009
By Greg Peel
The Dow closed down 254 points or 3.3% while the S&P lost 3.5% to 787 and the Nasdaq lost 2.8%. The S&P 500’s close represented a fall back under the previously significant support level at 802.
The impetus for last night’s falls included Secretary Geithner’s remark on a Sunday night television interview that US banks may yet need more capital injections and President Obama’s rejection of restructuring plans from General Motors and Chrysler. But the fall was also a continuation of Friday’s pullback following a historical 25% rally, on the second last day of both the month and the quarter.
It has been noted here often that the sharpest rallies occur in bear markets, and it must also be noted that those rallies will often be punctuated by even sharper pullbacks. An interesting element of last night’s trade on Wall Street is that all markets traded down rapidly on heavy volume in the first hour but then simply went quiet for the rest of the day. The Dow drifted aimlessly sideways to be down 320 at 3pm until some late buying pushed the close to down only 250. It was as if most players adjusted their books in the morning and then pulled stumps for the quarter.
Treasury Secretary Timothy Geithner is now part way through the process of “stress testing” those US banks granted TARP injections, and clearly the initial prognosis is not a strong one. Geithner suggested on NBC’s Sunday night “Meet The Press” (why does he choose such forums – naivety?) that many banks are still in difficulty and may need further capital injection. The TARP is now about 80% deployed but Geithner suggested that a strong case could be made to Congress to provide further funding on the basis that assisting banks now will prove a cheaper alternative in the long run.
While traders made the assumption that Geithner was referring to middle level banks more so than the marquee names in terms of difficulty, all bank stocks took a hit last night. The bank index is now down 10% after a couple of days of selling, but when you consider it was up 50% from the low over a couple of weeks then it’s hard to find anything to suggest the rally must now have been torpedoed.
Not helping the bank index, however, was news out of Spain that the Spanish government was forced overnight to conduct its first bank rescue in 16 years. Spanish bank Caja Castilla-La Mancha found it was dreaming the impossible dream when a white knight deal from a rival bank fell through. Spain has proven to be one of Europe’s more volatile economies and is suffering heavily from its own residential property crash. Given news on the global bank rescue front has been quiet of late (outside the US) the Spanish bail-out brought things somewhat back to earth.
But the big news of the day which came out ahead of Wall Street’s open was that President Obama had rejected the second attempts by automakers General Motors and Chrysler to provide the administration with restructuring plans. Restructure is a caveat of the government’s capital injections into both companies.
Obama is now prepared to think the unthinkable, and publicly state that perhaps bankruptcy is the only solution. Chrysler is currently being courted by Fiat for a possible 20% stake – enough to stave off bankruptcy – and so the government has given the company 30 days to deal or perish. Not only is any further capital injection dependent on what happens in 30 days, the government’s original injection will also be withdrawn if no satisfactory restructure deal is forthcoming.
No one, however, wants to buy into GM. While this means the company has been granted 60 days to come back with something workable, it won’t be under the command of aptly named CEO Rick Wagoner. The government has asked Wagoner to do the right thing, leaving COO Fritz Henderson to come up with something – anything – within 60 days. Henderson has already suggested that he, too, concedes that bankruptcy may be the only option.
But Americans never like to let their icons go, so one suggestion is a “good car-bad car” solution (based on Citigroup’s original good bank-bad-bank concept) that would see GM split off its more popular Chevrolet and Cadillac brands and let everything else go into bankruptcy. Nevertheless, sceptics in the industry can’t see how this could be done in 60 days and all sorts of bond holder and credit default swap problems are created.
It was a volatile night in currency markets as first the US dollar fell on Geithner’s bombshell and then the euro tanked on the Spanish bank news, sending the US dollar index higher again. Gold was all over the shop, trading as high as US$930 but finishing down US$7.70 to US$916.40/oz.
The Aussie lost over a cent to US$0.6810.
Oil was hardest hit of the commodities, combing a stronger dollar and a weaker stock market with an approaching close of quarter after a three month 90% rally. (Oil has ultimately rallied from around US$32 to around $52). Oil closed down US$3.97 or 7.6% to US$48.41/bbl.
There was very little response on the LME last night, as metals prices fell early on the GM news and US weakness but drifted back in later trade. Traders are noting a lack of commitment from either side as the quarter winds down. Copper had the biggest ultimate move at down 1.4%.
The SPI Overnight fell 57 points. Yesterday’s sharpish fall in the ASX 200 already included news of the Geithner comments during the session.
