Stocks brace for US fraud fallout

Published in the Adelaide Sunday Mail, April 2010 by Stephen Bernard

A "knee jerk" reaction on Wall Street threatens to trip the Australian stockmarket tomorrow after financial shares led US stocks sharply lower on Friday night.

As federal regulators filed civil fraud charges against Goldman Sachs over its dealings in subprime mortgages, the Dow Jones industrial average lost about 125 points, having been down as much as 170.

At times, it fell below 11,000 after closing above that level on Monday for the first time in more than 18 months.

Analysts said the US market had been poised to fall after a steady run of gains in the past two months, and the Goldman Sachs news gave investors a reason to take some profits.

"Basically it's sell and ask questions later," said Quincy Krosby, market strategist at Prudential Financial. "A market that wants to sell off will find an excuse."

Stocks were already lower before news of the Securities and Exchange Commission's charges against the leading investment bank on disappointing earnings reports from heavyweights Google, General Electric and Bank of America.

The SEC charged Goldman and one of its vice presidents with failing to disclose key information to investors regarding complex mortgage-backed securities.

"It's all a knee jerk reaction to Goldman," said Steven Goldman, chief market strategist at Weeden & Co, referring to the market's drop. He said the market's fundamentals, the upbeat economic signs that have powered its rally, had not changed.

Friday's drop followed six straight days of gains that had pushed the Dow to its highest close in more than 18 months. The Dow fell 125.91 (1.1 per cent) to 11,018.66. The Standard & Poor's 500 index dropped 19.54 (1.6 per cent) to 1192.13, while the Nasdaq composite index sank 34.43 (1.4 per cent) to 2481.26.

Investors looked past promising economic news. The Commerce Department said housing construction rose to a 16-month high in March - although construction of single family homes, the market's most important segment, fell.

Economists are also concerned about continued hurdles in the housing market, like rising mortgage rates and the end this month of a homebuyer tax credit.

Meanwhile, Spot Gold closed down $US22 in New York at $US1136.80 and Crude Oil lost $2.27 to settle at $83.24 a barrel.

THE Australian sharemarket finished the week on a sour note after broad-based selling pushed the bourse lower on Friday.

The benchmark S&P/ASX200 index shed 17.2 points (0.34 per cent), at 4984.7 points, while the broader All Ordinaries index fell 16.8 points (0.33 per cent) to 5007.3.

But even before the Goldman Sachs news hit the US, Australian analysts said they expected a temporary pullback on the ASX.

"It has had a really good run through this last month. I wouldn't be surprised to see a bit of a pullback before it heads higher – and I am pretty confident that it will," Macquarie Private Wealth division director Martin Lakos said.

And Dale Gillham, chief analyst at Wealth Within, said he still believed the market would continue to head closer to the target range between 5200 and 5400 points, but "we may see some short-term weakness". "It is possible we may finally be seeing the market fall away for one or two weeks," he said.