Posted on 12/11/2007 5:07:21 PM PST by TigerLikesRooster
Dow drops 300 after Fed cuts rates
Tue Dec 11, 3:53 PM ET
The Dow Jones industrial average has plunged more than 300 points as investors disappointed by the Federal Reserve's rate cut sold off stocks. In late afternoon trading, the Dow is down 303.61 to 13,423.42.
The Fed lowered its benchmark interest rate by 0.25 percentage points, disappointing some investors who hoped the central bank would take more aggressive measures. The Dow Jones industrial average, which had been up about 40 points before the decision, fell 300 points.
Investors had been expecting policymakers would cut rates for a third straight time, though there was debate over the size of the cut. Most economists had been expecting a quarter-point cut in the benchmark federal funds rate to 4.25 percent — but some investors were hoping for a half-point cut in the Fed's last meeting this year, and their disappointment took the market lower.
The Fed as expected also cut the discount rate, the rate it charges to lend directly to banks, by a quarter-point to 4.75 percent.
Fed officials signaled that further cuts are possible if a severe downturn in housing and a crisis in mortgage lending worsen. Investors had sent stocks higher in recent weeks as they grew more confident in the Fed's openness to loosening its policy again.
The Fed's accompanying statement also displeased investors, saying "information suggests that economic growth is slowing," but standing firm on a quarter-point cut for now.
"Expectations may have been for a more meaningful move based on the swirl in the financial markets now. But the Fed is acknowledging that maybe things on Main Street aren't as bad as they are on Wall Street," said Bill Knapp, economist and chief investment strategist for MainStay Investments, a division of New York Life Investment Management.
Broader indexes also fell. The Standard & Poor's 500 index fell 30.57, or 2.02 percent, to 1,485.39, and the Nasdaq composite index fell 52.17, or 1.92 percent, to 2,666.78. Gold prices fell while the dollar was mixed against other major currencies.
Declining issues outpaced advancers by more than 3 to 1 on the New York Stock Exchange, where volume came to 992.6 million shares.
Bond prices rose sharply. The 10-year Treasury note's yield, which moves opposite the price, fell to 4.02 percent from 4.16 percent late Monday.
Oil prices rose, but came off earlier highs after the Fed's decision. Lower interest rates could bolster energy demand from the world's biggest oil consumer. Light, sweet crude for January delivery rose $1.99 to $89.85 a barrel on the New York Mercantile Exchange.
"Time will tell if this restores enough confidence in the system. They're saying that this with the other cuts that we have done should promote growth over time. It's a telegraph that we think this is a sufficient move to alleviate the stresses on the market," Knapp said.
The Fed's rate decision — and Wall Street's disappointment — followed further word of trouble in the banking sector. Washington Mutual Inc. became the latest lender to resort to a massive stock sale to shore up its finances. WaMu's plan to sell $2.5 billion worth of convertible preferred stock follows a move by Switzerland-based UBS AG to sell $11.5 billion in shares to Singapore's sovereign wealth fund and an unidentified Middle Eastern investor.
Some of the market's recent concern has stemmed from recent problems at global banks, including Washington Mutual, said MF Global fixed income analyst Jessica Hoversen.
"Sovereign wealth funds are trying to bail out the financial sector, but they're coming in at vulture prices," she said. "That I think is a big issue for the market. While they want to believe there is still value in the financial sector, we've come a long way down."
Washington Mutual shares fell $1.80, or 9.1 percent, to $18.08 after the nation's largest savings and loan also said it will close offices, lay off more than 3,000 workers, and slash its dividend. The bank also set aside up to $1.6 billion for loan losses in the fourth quarter.
In other corporate news, Citigroup Inc. named Vikram Pandit, the head of its investment banking business, as its chief executive officer, charging him with restoring the bank's profitability and reputation after missteps in lending and investing left Citi with billions of dollars in losses this year. Citi fell $1.02, or 2.9 percent, to $33.75.
Texas Instruments Corp. rose 53 cents to $33.20 after lifting the low end of its earnings and revenue forecast.
AT&T Inc. rose $1.88, or 5 percent, to $39.78 after the telecommunications company said it would buy back 400 million shares and raise its dividend 12.7 percent. The buyback represents about 7 percent of the company's stock and will be completed by the end of 2009.
Beyond the Fed's announcement and corporate news, investors had weighed other economic news. The Commerce Department reported U.S. wholesale inventories were little changed during October, a sign businesses might be trying to keep supplies lean. The flat reading in October inventories came short of Wall Street expectations for a 0.4 percent increase.
The Russell 2000 index of smaller companies fell 18.99, or 2.40 percent, to 772.21.
Overseas, Japan's Nikkei stock average closed up 0.76 percent, while Hong Kong's Hang Seng index added 2.55 percent. At the close, Britain's FTSE 100 fell 0.43 percent, Germany's DAX index shed 0.30 percent, and France's CAC-40 dropped 0.45 percent.
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Ping!
I’m a bit surprised at this.
Way to go Fed! Cave in to the importers and merchants, and see what happens! You should have cut it a half of a point, so we can get some US manufacturing and strength going.
I’m going to anthropomorphise the market and state that it’s throwing a tantrum because they didn’t get as big a cut as they wanted—it’ll rebound tomorrow after they’re all cried out.
However, I think people forget that given the current high level of the DJIA of over 13,000, dropping 300 points has negligible effects.
This is very complicated. The market was rising in anticipation of a 1/2% cut, and with the 1/4% cut it had to back up about halfway. That may sound simple, but it is simplistic rather than simple. The whole market is more than just the DJIA/NASDAC, and includes commodities and bonds and other instruments.
This was the same BS that Greenspam did to run the economy into the ground, only worse as he was RAISING rates, instead of a puny .25 rate cut.
Maybe. The other thing is a kind of rule for the stock market, which is that it always overcorrects at first and comes back gradually. The reaction today is probably an overcorrection and the index will bounce back some tomorrow.
Why does the Fed think that high interest rates caused the problem [so think lowering the interest will solve it]?
I suppose playing with interest rate is the only way to show they are still in charge.
The big disappointment today was over two things, neither of which was the FED funds rate cut of .25%. That was expected and already discounted. The market probably would have sold off somewhat if that was all that happened, since it had rallied lately and was overbought.
The problem was that the market was hoping for a .50% cut in the Fed discount rate, and only got .25%. This rate is too high compared to current bond rates, and is punitive to the credit markets. Also, the statement was considered wishy-washy, as it did not show conviction but rather a wait-and-see attitude. This makes investors feel that the FED is groping in the dark rather than taking control.
Such is life. I think I’ll take my mutual fund and buy real estate.
The market is like a spoiled child. If it doesn't get what it wants, it throws a tantrum.
And the Fed had more to consider...maybe it's waiting for more interest rate cuts in Europe so the dollar doesn't go into free-fall...
Buy speculation, sell news.
I daytrade every day. That said, I have enough ways to make money without making a bet on what the market will do after the Fed decision. I never play the Fed. J P Morgan Chase is one of my favorite stocks. It traded at 48 right before the decision was announced, it went down to 45.50 after the announcement. I cannot remember a solid financial Dow component making such a move on a Fed decision and I have actively traded since BEFORE online trading. You said it was simplistic but you were right, and for the people who play the market it was a pure bet. If you shorted the financials, you made a boatload of money. I am not sure if the market would have bounced too much to the upside if the Fed had a cut a half a point, but there is a good chance the shorts would have been squeezed today, at least in the short term.
Maybe because 17 consecutive rate increases were too much?
Elevator going down.
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