FYI | Jul 18 2007
By Greg Peel
Wall Street has been eagerly anticipating news from Bear Stearns with regard to the state of its two troubled hedge funds which have became the catalyst for the most recent subprime mortgage market crisis. The news broke at 7.20am AEST that Bear Stearns has told investors that the riskier of the two funds is as good as worthless, while the lesser is worth only nine cents in the dollar.
By 7.30am AEST Bear Stearns shares had fallen 3% in the after-market, with speculation surrounding just what hit the bank might take to its bottom line profit which is announced later in the week. Earlier in the month it was announced Bear Stearns would inject US$3.2bn to save the smaller, less risky fund, while the larger, riskier fund would be let go. The bank then downgraded its injection figure to US$1.3bn. At the time, market analysts were speculating the fund’s mortgage securities were worth about 30 cents in the dollar.
This is not good news for the US financial sector, the shares of which will probably all take a hit in New York this evening. Many of the investment banks close to the Bear Stearns problem report this week. The news comes as Wall Street was starting to feel a little less jittery about the subprime situation, allowing the markets to post their spectacular rallies of the past week. Now that Bear Stearns has set a CDO pricing benchmark, there should follow a raft of hedge fund downgrades.
There was further bad after-market news when Yahoo! came out with a fall in quarterly profit and downgraded guidance. The shares fell 3%. Shares in Intel fell 5% after the company released a positive sales result but a much less than expected profit margin.
The after-market announcements followed an otherwise unusually mixed night on Wall Street which saw the Dow rise 20 points or 0.15%, the S&P 500 fall 0.1%, and the Nasdaq jump 0.55%. The Dow did spend a lot of the session above the magical 14,000 mark, but slipped back in late trade to 13,971. At the end of the day, the entire session’s move was put down to a 3% jump in the share price of American Express, which posted a solid result.
Little direction was provided by economic data releases in the US last night, although the market will be in waiting for tonight’s release of the CPI. If the PPI is anything to go by, the news might not be good.
The June PPI headline figure showed a fall of 0.2% following a pullback in gasoline and food prices for the month. However, the core PPI, which strips out food and energy, rose 0.3% – slightly higher than expected.
The National Association of Home Builders/Wells Fargo US housing market index fell to a reading of 24 in July, the lowest since January 1991. While this is also not news Wall Street wants to hear, there was little surprise. The Street has been managing to put houses and mortgages at the back of mind as it continues to accentuate the positive.
Markets elsewhere were largely quiet last night, again muted in anticipation of both the CPI figure released tonight and Ben Bernanke’s testimony to the House of Reps. Bonds and currencies were timid and precious metals were largely unchanged. The only stand out for the evening was lead, which put in another spectacular session rising nearly 5%.
The SPI Overnight, which closed not long after the Bear Stearns announcement, was down 12 points.
