The Dow rose 44 points or 0.4% while the S&P rose 0.4% to the magical 1150 mark and the Nasdaq also thought 0.4% was a good number.
Of the large US banks surviving the GFC, commercial/investment bank Citigroup required the highest level of government equity injection to assure its survival. It was a no-brainer, as far as the Fed and the Treasury were concerned, because if one needed a definition of “deemed too big to fail” Citigroup was the poster boy.
Citi shares entered the subprime crisis in excess of US$50 and bottomed out a year ago at US$1. Last night they closed over US$4 having spent a year riding on said TARP injection, issuing bonds required for ongoing funding backed by a government guarantee, issuing new equity and consolidating assets. In a year Citi has gone from being voted the big commercial bank most likely to go under to arguably offering the greatest recovery upside.
One feature of the credit crisis was that the issuance of preferred stock dried up. Preferred stock is actually a coupon-paying debt instrument that ranks below bonds but above equity in a wind-up, hence the term “preferred”. Wall Street was watching with baited breath last night given Citi was issuing US$2bn of 30-year fixed/floating coupon preferred stock – the first post-GFC preferred issue and the first Citi debt to be issued post-GFC without a government guarantee. A good result would confirm that Wall Street was indeed getting back its risk appetite.
And it was a very good result. Citi was hoping for an 8.875% yield but excess demand enabled the issue to be put away at the lower yield (higher price) of 8.5%. This news helped Wall Street recover from what looked like it might be a weak session last night. The NYSE has struggled with anaemic volumes this week but Citi shares - among the most widely held – have represented around a quarter of the activity. Aside from this issue, speculation of a ban on short-selling as the government moves to unwind its equity holdings has spurred a short-covering rally. Citi shares are up 15% for the week.
Why is this important? I noted yesterday that the US stock market has appeared to have stalled after its 60% one-year rally and one reason is that a lot of funds are flowing not into stocks but into bonds now that credit spreads have eased and fear abated. And let's face it – why not? The Fed cash rate is no higher than 0.25% and yet one of the world's biggest banks is issuing debt at 825 basis points above that. The issue itself may not be government guaranteed, but as Citi is “too big to fail” we know that a government guarantee of sorts is implicit anyway. If everything went awry once more, would the government let Citi go down this time? I doubt it.
So what we have witnessed is a US market overburdened with debt head into a crisis which has been ultimately averted by replacing private debt with public debt. Now that recovery is supposedly underway we're shifting that public debt back into private hands. What has changed from 2007?
On Monday Senator Dodd will unveil the first draft of a new financial regulation bill – the one which is meant to overcome such problems as the “too big to fail” dilemma. Suffice to say there is very little faith on Wall Street that bipartisan support will be garnered in any reasonable space of time. Just look at health. This could go on and on without resolution, and what's more it is intended that the world falls into place as well lest the regulation be rendered impotent. In 1999 the Kyoto Protocol was signed. In 2009 the Copenhagen Summit could still not find resolution on carbon reduction. The world does not have a good track record at swift and cooperative legislation.
Last night the session on Wall Street opened weaker on concerns over the jump in Chinese inflation revealed yesterday. (See Get Ready For A Chinese Rate Rise). The weekly new jobless claims number came out and traders were hoping for more confirmation of a peak in unemployment having been reached, but a fall in claims of 6000 was not as many as economists had predicted.
The monthly trade balance was released, and the good news is that the US trade deficit fell in January. The bad news is that it didn't fall on a rise in exports, which is what America needs to help it dig its way out of the deficit doldrums. Exports fell 0.3%, but imports fell a lot further as demand for imported oil and cars diminished.
The trade balance came hot on the heels of Wednesday's February fiscal budget release, which was a new record deficit.
The Treasury's auction of US$13bn in 30-year bonds was well received last night as well – domestically. Foreign central banks bought only 24%, down from the 40% running average.
The Dow was down 60 points in the first half hour but it quickly recovered, with Citigroup's latest 5.5% rise providing momentum. It then flat-lined for most of the session on weak volume before a sudden burst of buying in the last hour. Notably, that little burst in a thin market took the S&P 500 index to 1150.24. The previous closing high, set in January, was 1150.23. All the talk on the NYSE this week has been about the technical ramifications of breaching the previous high. If achieved, it should signal a new leg up, says Wall Street. It was achieved last night by 0.01 points on spurious late buying in a paper-thin market. Does this really count?
The US dollar index was again sufficiently steady last night at 80.30 preventing base metals in London from again moving anywhere of note, and holding gold to a mere US$3.20 rally to US$1108.60/oz. Oil was up all of US2c to US$82.11/bbl.
The Aussie added just a tad to US$0.9154 after what was an ever so slightly disappointing unemployment release in Australia yesterday.
The SPI Overnight was up 9 points or 0.2%.
The US will be watching its monthly retail sales release closely tonight and then on Sunday New York will go onto summer time. As of next week, the NYSE will close at 7am Sydeny time instead of 8am. After Easter, we go off summer time and the close becomes 6am Sydeny time.
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