FYI | Aug 04 2007
By Greg Peel
“The turmoil in the credit market is the worst I’ve seen in 22 years,” said Sam Molinaro, CFO of Bear Stearns, on Friday night.
Yes well thanks Sam – we know who to blame for that. Molinaro raised the ire of the Wall Street fraternity for just not keeping his thoughts to himself in a market as shaky as this one. There was no cavalry this time – no late surge. In fact it was the opposite in the last hour of trading last night.
The Dow closed down 281 points or 2% to 13,182. Despite two days of rallies, we are now down 818 points or 5.8% from the high. Experience suggests for this to be a genuine correction the market must fall 10%, which implies another 582 Dow points to go. On current form this could be achieved in a matter of days, but then is this a correction or something else?
The broad market S&P 500 fell 2.7% last night to be 7.9% off its high. The Nasdaq fell 2.5% to be 7.8% down.
Appreciation (not) was also forthcoming last night from 6,250 employees of American Home Mortgage. On Wednesday, founder and CEO of AHM, Michael Strauss, told his employees in a conference call that they should remain calm and just keep on writing business. What they didn’t know was that at the same time Strauss was quietly offloading 3 million shares in his company at US$1.17. On Friday, American Home Mortgage filed for bankruptcy. The 6,250 employees have been laid off.
These revelations helped to tip over the market after it had already been flirting with the downside all day. The initial kicker was the June non-farm payrolls figure, which measures new jobs created. The market was anticipating 135,000 new jobs, but the number came in at 92,000. This data is notoriously volatile, and the previous month’s figure is usually amended anyway – sometimes by up to 50%. For that reason wise heads don’t get overly concerned with fluctuations. However, wisdom is not currently the all pervading influence on the market floor.
Just how accurate this figure is is by the by. This is a June number, and as such reflects the state of the economy before the big slide began. If one US mortgage lender has just laid off 6,750 workers, how are these numbers going to look in July, August and September? And how many jobs will be lost on Wall Street?
The problem implied by a lower jobs figure is manifest. The bulls have to date placed their faith in the strength of the global economy and the resilience of the American consumer. Sure, there has been some pain in housing, but with 4.5% unemployment and positive wage growth the fallout should be contained while most Americans have a steady income. But if Americans start losing their jobs, consumption will fall. America represents the biggest consumer market in the world and the greatest consumer of Chinese exports. If Americans reduce consumption, China will reduce exports, which means it will reduce production, which means it will reduce commodity demand. A strong global economy may not remain strong for long.
So the jobs figure was taken as a sign by all markets on Friday. And for once, those markets started acting the way they should.
The US dollar was sold down sharply, particularly against the yen. Yen carry trade unwinding sparked again, which meant the Aussie dollar came under renewed pressure. However, at US$0.8543 this time it was not extensively trashed. With a falling US dollar and a pending RBA interest rate rise, the Aussie is feeling the anticipated dampening effect against carry trade unwinding.
When the US dollar falls, gold should rise. And so it did on Friday, by US$6.90 to US$672.70/oz. However, this move represented a fundamental shift in perception. For as the stock market has been falling, gold has come under pressure from leveraged stockholders selling their hard assets to raise cash for margin calls. On Friday however, gold was simply bought. The “sell everything” mentality gave way to safe haven status. This was further reinforced as gold rose despite a fall of US$1.38 in the oil price. Holdings in the largest of the US gold ETFs hit an all-time high.
The other safe haven – US Treasuries – was still in vogue on Friday as bond buying saw the ten-year yield fall 10bps to 4.68%. This is still very much a short term customary response, as a falling dollar should eventually lead to a liquidation of dollar-denominated instruments.
The oil situation is an interesting one. The US government has been imploring OPEC to increase production and head off rising oil prices. High oil prices are another spear in the side of the American consumer. But OPEC rightly points out that this latest oil price surge has little to do with supply. There is currently plenty of oil around.
Friday saw a fall in the oil price which was put down to the logical effect of perceptions of a weakening US economy (the jobs number). But as we speak, unseasonably hot weather is moving into the South. Temperatures are pushing some 5-15 degrees F above average. As we move into August we also move into the beginning of the hurricane season, which is set off by warming waters in the Gulf.
More bad news came in the form of the ISM non-manufacturing index on Friday. The July number came in at 55.8 following 60.7 in June and consensus estimates of 59.
Once again it was the financial sector hit hardest on Wall Street. Notably, in the two last minute sharp rallies experienced on Wednesday and Thursday, the financials were left at the starting post. Friday saw more significant down moves, including Lehman Bros down 7.7%, Bear Stearns down 6.3%, Merrill Lynch down 3.5%, Countrywide down 6.6% and American Home Mortgage down 52%.
The SPI Overnight fell 123 points.
