Sub-prime strikes back

11 April 2008

As each year draws to a close, businesses often use November and December to tidy up their books in advance of preparing annual accounts. This year, the house keeping process has seen banks around the world write-off staggering amounts of money as a result of their exposure to sub-prime loans in the US.

This evaporation of billions of dollars worth off assets has seen banking shares nose-dive and heads roll in boardrooms around the world. Among the high-profile casualties has been Merrill Lynch CEO, Stan O'Neal, who left after US$ 8.4 billion of write-downs and a US$ 2.2 billion loss for the third quarter.

Similarly, Citigroup's chairman & CEO Charles Prince had to go after US$ 12 billion of write-downs.

Share prices in the banking sector took an almighty thumping as a result, and the fallout reverberated across the world's stock markets.

Japanese shares seemed to be hit hardest, with the Nikkei 225 losing 8.57% of its value between weeks 43 and 47. It was followed by the Dow – down 6.41% – and the FTSE 100, which fell 5.93% over the same period.

Crane losses

There were much bigger losses for crane manufacturers' shares, however, where IC 's share index dropped a massive 17%, to 549.89 points. This was the lowest the index has been since February 2007, and is only about 5% higher than its position at the start of 2007.

As far as the sector was concerned, the late autumn rout was more severe and more pronounced than the initial sell-off that was seen in the summer when the sub-prime crisis first hit. All the companies in the IC Index saw their share prices suffer double-digit losses over the course of November.

Having said that, steep rises in the first part of the year mean that over the longer term, the IC index still looks stronger than the three mainstream benchmarks. It is up 16.29% on its position at the end of November 2006, well ahead of the up-ish Dow, flat FTSE and ailing Nikkei.

Currencies

There was more instability in November due to the continued plunge in the value of the Dollar. It fell to a record low against the Euro and also lost ground to the Yen and British Pound. Looking back 12 months, the Greenback is 11.79 lower against the Euro, and is down just over 6% against both the Yen and Pound.

The depreciation of the dollar has contributed to the rise in oil prices, because these are measured in Dollars around the world. As a result, the price of a barrel of oil edged even closer to the psychologically damaging US$ 100 level in November.

Demand for oil is likely to rise as the Northern Hemisphere winter deepens, so that milestone looks in serious danger of being reached.

Outlook

The weakness of the Dollar and continuing fallout from the sub-prime crisis are clearly denting investor confidence, and there is little in the near future that will change that. The next critical time for the markets will begin in late January when the financial results season gets into full swing.

It would be foolish to try to second guess this, but there may be more bad news to come from the banking sector.

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