Wednesday, November 07, 2007

Market Down Hard on Wednesday

Well, that was different. We knew that the market might open down on Wednesday but to actually stay down and go down further, well, that is hard to believe. We mentioned GM last night with their $39 billion news and figured the market could swallow that whole and not have much trouble coming back from that. You know, it's company specific so the broader market could keep going, or so it would seem.

For its part, GM was down but not that much and not even close to the lows from earlier in the year. So, what was going on this morning? From what we could tell there were a few comments coming out of China suggesting that country would start investing in "strong" currencies while getting out of "weaker" ones. What is the weakest currency on the planet? That would be the US dollar. It seems only about a week ago that it was at parity with the Canadian dollar and today it traded at 1.10, oh my.

What exactly does China mean? Looking at their huge holdings of US Treasury bonds denominated in US dollars, they could mean that they won't be buying any more and they might just decide to sell some of what they have.

The other implication here is that the US dollar is suffering a major selloff that will cause a flight from the US stock market. A lower dollar suggests higher inflation and a poor store of value for investors. The Fed (there they are again) has been lowering short term rates putting even more pressure on the dollar.

The subprime situation is getting more attention, too. The New York Attorney General Andrew Cuomo has ordered a review of all Washington Mutual (WM) appraisals and mortgages purchased by Fannie Mae and Freddie Mac. It seems the purpose of this investigation is to find out if Fannie or Freddie should stop purchasing WM's mortgages because WM "improperly pressured appraisers to provide inflated values that best served the lender's interest." WM sold $24.7 billion of loans in 2007 to Fannie and another $7.8 billion to Freddie.

The Attorney General's comments are particularly harsh, "WM compromised the fairness of this system by illegally pressuring appraisers to provide inflated values. Every company that buys loans from WM must be sure that the loans they purchased are not corrupted by this systemic fraud." As you might imagine, WM didn't fair too well in the market on Wednesday dropping nearly 20% to close at a seven year low near 20. WM had been in the high 40's earlier this year.

But, after the market closed on Wednesday, CSCO, a familiar name, announced their earnings which were pretty good, actually. The problem was that the normally optimistic John Chambers expressed some concern about the future. The market took one whiff of this and sold CSCO on that news. CSCO was down almost 10% in after hours and has put a drag on stock futures in general this evening. The Asian markets are also down in reaction to the US stock market and CSCO.

Let's see what Thursday brings us...

FSI arithmetic: 110.64
FSI Cap weight: 109.92

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