The biggest one day rise in 6 months

September 9th, 2008  by Lou Muddaris

Good Morning,

Closing Data

Dow Jones up 290 @ 11,510	NASDAQ up 13 @ 2,269	Gold down .95 @ $801.85
Oil down .12 @ 106.35	FTSE up 205 @ 5,446	Silver down .15 @  12.07
Copper up 56 @ 6,985	Lead up 46 @ 1,837	Zinc up 18 @ 1,746
Aluminum up .5 @ 2,600	Nickel up 249 18,782	Tin up 742 @ 19,715

The biggest one day rise in 6 months

Overnight the Dow Jones closed near its best levels of the day as investors jumped on anything with bank or property in its name subsequently the rest of the market lagged as commodities fell and technology shares suffered. The buying in London was so frenzied the London Stock Exchange closed trading for several hours due to “computer malfunction” (would hate to be short and unable to cover!).Talking of disasters, United Airlines (UAL) the world’s 2nd largest airline carrier was suspended after its shares dropped some 76% on reports that it had filed for bankruptcy causing the Dow Jones to shed 150 points. A “story” was published on various web pages (including the much respected Bloomberg) that they had indeed filed for bankruptcy only it failed to state that it happened in 2002!....I dunno, the lengths some traders will go to make money.

Our market

Happy days! As we highlighted in yesterday mornings Fox Report (via a movie reference) our shares opened on their lows and screamed higher led by the banks, property, construction and in particular those with U.S exposure. We still maintain this bias although volatility will dominate and the “big picture” of slowing world economies is still very much alive. We believe however we have seen the lows in the banks and property shares and view any weakness as a buying opportunity. As for commodities we maintain our view from 2 months ago, i.e. lower, until the world economies show solid signs of a rebound. However, BHP is the stand out, as we recommended on Friday buy circa $37.25.

Freddie, Fannie and the economy. What it all means

Despite like sounding like a comedy act, they controlled over 50% of the $15 trillion mortgage market, hence it had  to be bailed out. Their shareholders won’t agree with their share prices falling 90% overnight and are now essentially worthless but any failure would have lead to a “Financial Tsunami” which would have certainly led to a world wide recession. It was simply too big to let go.

The key to all this is the Mum and Dads who have seen their mortgage repayments balloon out to over 6.5% despite the Federal Reserve cutting rates down to 2%, accordingly many have simply handed the keys back and walked away(only in America!). The Federal Reserve is powerless too influence long term interest rates as they are a function of market forces. Thus, investors/money managers have been buying Government (read treasury) 10 and 30 year bonds as they are safer than mortgage backed bonds; the ones that are issued by Fannie and Freddie. This causes the yields to rise in these riskier debt securities (yields move inversely to prices) and fall in the U.S backed treasuries. This interest rate spread differential has been blowing out since last November and for the 1st time the spread actually narrowed as in effect all mortgage bonds are now underwritten/secured by the U.S treasury. The spread narrowed over 30 basis points overnight ensuring Mum and Dad’s mortgage rate will fall; indeed expect this trend to continue with many economists predicting U.S mortgage rates to soon hit 5.5%.

However, the only concern is if the Government Treasury bonds yields start to rise due to a build up of inflationary pressures then that will naturally push up mortgage rates and we are back to square one! We believe there is little if any chance of this happening as the recent collapse in oil and commodity prices with a weakening economy will ensure low interest rates. Indeed, last night the U.K reported its biggest fall in Producer Prices (PPI) in over 20 years.

Should you want further information on the effects of Fannie and Freddie then please feel free to call us.

Have a good day!

Quote of the day

“Hate leaves ugly scars, love leaves beautiful ones”

Contact your Freeman Fox Stockbroker on 07 3031 9960 or 1800 003 369 Ext 7.

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