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Yet another grim day for the markets yesterday.
The FTSE 100 slid 81 points to 6,180, while US markets have now officially undergone a correction, according to Wall Street jargon. The S&P 500 and Dow Jones Industrial Average are now more than 10% below their October records.
It’s the first time in four years that the US markets have fallen that far.
And history suggests they have much further to go…
Research from US research group Bespoke Investment, cited by Bloomberg, indicates that the S&P 500 has fallen by “at least 10% from a recent high, 45 times since 1945”. On average, it then falls another 7.8%. It’s fallen by 20% – the definition of a bear market – 11 times since 1945.
However, the sector that’s causing all the real pain – financials – is already firmly in bear territory. The S&P 500 financials index has fallen 22% since the start of October, and is “heading for its biggest annual loss since 1990”, says the newswire.
Now when stocks are being shunned, that’s often the time when contrarians should be looking to buy. But we’d be very reluctant to look at the financial sector just yet. There are plenty of nasty surprises still lurking on bank’s balance sheets, just waiting to be cleared up – as HSBC showed yesterday.
HSBC puts other banks on the spot
Banking giant HSBC has decided to take a hit from its Structured Investment Vehicles (SIVs). The story behind SIVs is a long one, but put simply, these are financial vehicles that banks have been using to hide debts off their balance sheets, to enable them to dish out more money, without breaching their capital requirements.
The SIVs are set up to buy long-term debt – in many cases, mortgage-backed – from the parent bank. The SIV then sells short-term IOUs to other investors, such as hedge funds. This worked fine – until the credit crunch hit, and suddenly no one was willing to issue short-term loans to anything with a hint of sub-prime about it. So now the banks are finding that these off-balance sheet vehicles are running into trouble. And they are having to back them up, as it’s their reputations on the line.
Rather than sell the SIVs’ assets at fire-sale prices, HSBC has decided to take its two SIVs onto its balance sheet. It reckons it will have to provide a maximum of $35bn in funding by August next year.
It’s a good move for HSBC. As Antony Currie points out on Breakingviews.com, it shows that the bank has “confidence in the credit quality of its SIV assets – just 5% was in CDOs or subprime bonds.”
But it’s not so great for the rest of the banking sector, he adds. “For other banks not to follow suit now looks tantamount to admitting their problems are greater than just a fear-induced liquidity crisis.” Any hint that HSBC’s rivals aren’t following its example simply because they can’t afford to will push share prices down even further.
In his recent Model Investor newsletter, James Ferguson said that the outlook for “global banking is truly frightening”. His recent research into banking exposure to bad debt suggests that “the banking system is nowhere near dealing with or confessing to the size of the losses from the subprime debacle,” and yet “it has still to face the much more generalised attack that would come from an economy-wide recession”. I certainly wouldn’t be looking to bargain-hunt in the banking sector yet.
US recession a “100% likelihood”
It’s not just James who thinks the US is facing a recession. Andrew Lahde, founder of Lahde Capital, also thinks a US recession has a “100% likelihood”, and according to the Evening Standard has been shifting his own money into assets such as gold. “Our entire banking system is a complete disaster. In my opinion, nearly every major bank would be insolvent if they market their assets to market.”
Scary stuff – so why should you listen to Lahde? Simple – his hedge fund, which started shorting mortgage derivatives when set up last year, has returned more than 1,000% in the past 12 months, which according to the FT, makes it “one of the world’s best-performing funds of all time”.
Turning to the wider markets…
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Northern Rock a bright spot on a gloomy day for banks
In London, Northern Rock was by far the day’s best-performing blue-chip stock, adding 28% overall as Virgin Group was named the preferred bidder for the bank. However, news from Hometrack that UK house prices had fallen for a second month in a row saw housebuilder Barratt Developments and REITs including British Land end the day in the red.
And news of the HSBC bailout prompted selling in the financial sector. Overall, the FTSE 100 index ended the day 81 points lower, at 6,180. For a full market report, see: London market close
Elsewhere in Europe, the major indices closed lower on renewed subprime fears. The Paris CAC-40 fell 62 points to a close of 5,458. And in Frankfurt, the DAX-30 was 41 points lower, at 7,567.
On Wall Street, stocks gave up early moderate gains to end the day sharply lower. HSBC, along with Citigroup – under pressure to move $41bn in securities onto its balance sheets – prompted renewed concerns over banks’ subprime exposure. Financial stocks led the Dow Jones down 237 points to a close of 12,743. The tech-rich Nasdaq was 55 points lower. And the S&P 500 lost 33 points to close at 1,407.
In Asia, stocks were mixed today. News that Citigroup is planning to sell a stake to Abu Dhabi investment authority boosted the financial sector and saw the benchmark Nikkei index add 87 points to end the day at 15,222. However, the Hang Seng closed down 416 points at 27,210 in Hong Kong as HSBC weighed heavily.
Gold climbs on ailing dollar
Crude oil had fallen back to $96.94 this morning and Brent spot was at $95.10 in London.
Despite the falling crude price, gold had risen to $827.00 (from $824.70 in New York late yesterday) this morning as the weakening dollar prompted bargain hunters to step in. The yellow metal spiked at $836.70 yesterday thanks to credit concerns in the stock markets. Silver, meanwhile, was steady at $14.74.
The pound had risen to $2.0696 against the dollar this morning, and was at 1.3953 against the euro. And the dollar was at 108.31 against the Japanese yen 0.6739 against the euro.
And in London this morning, Barclays bank said that, due to securities writedowns, there would be no growth in profits this year. The prediction, which is in-line with analysts’ estimates, comes after four years of earnings growth. Barclays shares rose by as much as 2.5% in early trade.
Finally, our recommended articles for today…
Forex is exciting – but gold is more attractive
– As oil exporters move towards abandoning the dollar peg and China grows increasingly concerned as to how to manage its dollar reserves, get ready for some pretty big developments in the foreign exchange markets. For more on where the flashpoints are likely to be – and why gold continues to be the best way to protect your wealth – read: Forex is exciting – but gold is still more attractive
Why buy-to-let will be the British subprime
– News of the crisis at buy-to-let lender Paragon was the latest in a slew of negative signs for buy-to-letters. And given that they have been driving house prices higher for some time, that’s bad news for the market as a whole. Merryn Somerset Webb considers whether off-plan two-bedroom flats in Leeds will be quite so desirable should there be a downturn: Why buy-to-let will be the British subprime