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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Ben Bernanke is an idiot.
sw
I long for the days when adults worked in the financial markets and they weren’t slaves to computers and programed selling.
The junky only got a disappointingly small “fix,” so he’s having a bad reaction.
“simplistic,” IMO, is just what those wall street brokers are. I often wonder how many are on the Soro’s payroll??
There absolutely no reason or sense in today’s afternoon action - and it plays havoc with 401k plans that millions of retirees depend on.
And while it is true treasury rates are way below fed funds at this point, corporate debt is still above the new rate. Corporates are a full point over treasuries these days. So banks can get positive carry.
As for the volume of credit being provided, it is indirectly very high. The Federal Home Loan Banks have injected nearly $200 billion in fresh credit since August. The money supply, broad, is actually growing at a 16% annual rate (MZM) since the credit "crunch" began, which has completely offset the decline in commercial paper outstanding, and then some.
Even mortgage debt has increased - it stands over 6% higher today than a year ago, despite the blowups.
The market irrationally hoped that the Fed would cut aggressively until Fed Funds caught the T-bill - which if it happened would effectively mean the banks could pick the rate themselves by bidding up treasuries. The Fed is doing the right thing here - focusing on the real economy and not on the panicky bankers on Wall Street.
The real economy is still going fine. Jobs are rising by 100,000 a month, enough to hold the unemployment rate steady at a low 4.7%. Wages are up. Even household wealth is up, despite real estate prices, on new debt and stocks since the summer, plus foreign investment translating well in currency terms, etc.
The Fed has cut rates a full percentage point since the summer. That is rapid reduction any way it is sliced - and they will probably do another quarter point in January. The truth of the matter is, a lot of unsound finance was done and many large finance companies are in trouble. The realistic ones are curing themselves by raising new capital to cover old losses, aggressively marking to market or unloading unwanted assets that did not work out. That is what they should be doing.
There is no need for the Fed or the government to panic and to firehose more funny money at the problem. That doesn't solve things, it papers them over. In case everybody forgot, that is how we got into this mess in the first place. We don't need another round of it. A bankrupt set of financial minds on Wall Street want to bring back the punch bowl - but we will all be better off if they get pink slips for Christmas instead.
They are the crowd that screwed this up...
Thanks for your input. Point taken on Corporate debt. Given what your wrote about Corporate yields, what do you think of Corporate bond funds here? I’m heavy with cash right now (48%), and MMF yields are obviously dropping. I’ve done pretty well with a short-term bond fund, but not sure if that’s the best spot on the curve going forward.
What do you think of the Central Bank(s) deal announced this morning? I haven’t seen any good articles on that yet?
Fed swap action and managing LIBOR
As for corporates, they are a buy right now sure. The corporate yield curve is nearly flat, with 5% to 5.5% available across the board, for AA securities. I think the right risk level you want to be in is AA to A - the AAAs are too low and the riskier stuff too risky. As for the maturity, that is a bet on rate direction. I think in the short term it is down, based on central bank actions. I wouldn't go all the way to the longest maturities though. One, they probably won't move as much in rate terms, and two, in central bank actions touch off inflation the rate decline could be temporary.
I think the intermediate investment grade corporates look pretty safe - 5 to 10 year maturities and 4 to 6 durations. If corporate rates decline a full percentage point, which is quite possible if you look at what treasuries have already done, those will break a double digit return for the year.
Short, 2 year corporates are a safer bet, in the sense that even higher rates wouldn't hurt much. You'd just hold to maturity can get 5% per year. But they don't have the potential upside of the intermediates, and I think significantly higher rates in the next year are unlikely, at least in the middle of the curve. Instead the Fed will continue to cut until Fed Funds is down near where T-bills are today (3% range).
For the more speculative, LIBOR futures are a way to bet that the money market turmoil will pass. Another way - requires significant bravery - is to buy stock of the financial companies, which are pretty cheap right now. The best time for that is probably still 6 to 12 months off, however.
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