The theme of the week on US markets remains the sub-prime meltdown, with Wall Street selling anything associated with sub-prime, credit, securitization or default issues. Lack of comment on the matter in the recent FOMC economic policy statement did not reassure the markets. Bear Stearn’s chief financial officer described the credit market as the worst in 22 years, and the problem is spreading across the globe. France’s biggest bank, BNP Paribas, suspended pricing on three of its funds due to liquidity problems in the US securitization market. Bear Stearns Co-president and Co-Chief Operating Officer Warren Spector resigned Sunday.
There was speculation over the week that Goldman Sachs is the latest to fall prey to the sub-prime debacle. Reports are circulating that two of its hedge funds have fallen sharply in the last few weeks and were selling down positions.
President George Bush asserted Thursday that US economic fundamentals were strong despite the downturn in the housing markets and that financial markets were well positioned to weather the credit concerns. The DOW saw a drop of almost 3% on Thursday.
Quant-based Asian hedge funds are unwinding numerous positions, leading to speculation that the funds may be in some trouble.
Macquarie Bank continues to be hit hard in Australia and reported last week that two funds faced losses of up to 25%. Babcock and Brown was also sold down in Australia due to concerns about the credit market.
Telstra – Australia’s largest telecommunications company – disappointed investors with a lackluster full-year profit result and a conservative forecasted earnings growth of 3-5%. The market was hoping for an upgrade of up to 14%.
In Japan, Daikin Industries had a good run after reporting that net profits had more than doubled in the quarter to June.
In addition to the troubles at BNP Paribas in France relating to the US securitization markets, the European Central Bank made an unprecedented overnight cash injection into the market Thursday to prevent the financial system from seizing up.
The increasingly risk-averse sentiment among investors extended to base metals on the London Metals Exchange Thursday, as they suffered an uncharacteristic drop-off.
Earnings season has taken off but is being overshadowed by the re-pricing of risk in global markets. The market is being sold down due to widespread manifestations of sub-prime, credit or default troubles. World leaders have taking pains to ensure investors that their economies remain sound.
Market jitters will continue as the US sub-prime market drama plays out. Global fundamentals remain strong, however, and the re-rating of risk was a necessary jolt to the credit markets. Financial stocks – in particular investment banks – continue to be hardest hit. With the continued pullback, there is an opportunity to acquire long term investments at attractive prices.
Head of Fundamental Analysis
HUBB Financial Group