Newsletter Fall 2007

MARKET WATCH

The third quarter provided a bit of excitement for investors, and generated a heightened concern for both the state of the economy and the direction of the markets going forward. As the quarter opened, the Fed was on hold with interest rates, the Dow Jones Industrial Average catapulted from 13,408.62 to 14,000.41 by July 19 and leverage was fashionable. Within six days, The Dow, Nasdaq and S&P 500 had given up 5% of their value, as fears concerning the economy began to rock the market. As foreclosures throughout the country continued to mount and mortgage lenders began to succumb to a lack of liquidity in the system, the Fed held the federal funds rate at 5.25% in early August, but by mid month it was quite evident the credit markets were under severe stress and the Fed lowered the discount rate, the rate banks can borrow from the Federal Reserve, to 5.75%.

The Dow crossed the 10% correction threshold in intraday trading on Thursday, August 16th, but managed to close in somewhat better shape and rallied on Friday after the Fed decision to lower the discount rate. While the S&P 500 was down as much as 12% from its July peak intraday on August 16th, it also managed to recover late in the day and rose back to 1,445 by the close on Friday, August 17. The equity markets settled somewhat through late August and over the Labor Day Holiday, but the credit markets were still in flux and the lack of liquidity was evident worldwide as central banks continued to pump billions of dollars into money market funds.

In a move that surprised nearly everyone, the Fed lowered the federal funds rate to 4.75% and the discount rate to 5.25% at the FOMC meeting in late September. These actions by the Fed were an attempt to give confidence to the credit markets and boost their willingness to provide liquidity. While the effects of the rate decrease will take time to make any real difference in the growth of the economy, the psychological results have been quite visible in the stock market, which has posted significant gains following the rate cuts. While the 50 basis point cut in rates has had a euphoric effect on the markets in the short term, it doesn’t necessarily bode well for the market in the long term. When the Fed cut rates 50 basis points in January 2001, the DJIA rose 2.8% and the NASDAQ had its best day ever, rising 14.2%, but by September 10, a day before the terrorist attacks, the indices were well below their January levels.

But for now, all we can do is look at where we have been and try to ascertain, as best we can, where things are heading. The Dow closed the quarter at 13,895.63 and is up 11.49% year to date. The S&P 500 finished at 1,526.75, which is a 7.65% gain for the year and the NASDAQ sits at 2,701.50 at quarter’s end, posting a year to date gain of 11.85%. For such a volatile year, these gains would be quite acceptable as a year end result.

On September 26th, I had the opportunity to hear an Economic Update from Jerry Webman, the Chief Economist with Oppenheimer Funds. His opinion was one of optimism for the economy and its ability to avoid a recession. He felt the moves by Bernanke were bold enough to relieve the credit crunch and shouldn’t be inflationary, due to subdued employment numbers and lower economic growth. While oil prices over $80 a barrel and rising gold prices are unsettling, the Fed’s willingness to raise rates if inflation increases is calming.

John Kaighn

Jersey Benefits Advisors

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Reflection On Fed's Rate Reduction

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson are scheduled to testify before the House Financial Services Committee at 10:00 AM today in regard to the mortgage and credit markets. After the surprise half-point cut in both the Federal Funds Rate to 4.75% and the Discount Rate to 5.25% at the FOMC meeting, the testimony will be focused on the actions by the Fed as an attempt to give confidence to the credit markets and boost their willingness to provide liquidity. While the effects of the rate decrease will take time to make any real difference in the growth of the economy, the psychological results have been quite visible in the stock market, which has posted significant gains the last two days.

As the actions by the Fed are digested going forward, questions will surface regarding just how bad the economic situation is that it warranted a 50 basis point decrease in rates. Also, if the inflation data is stronger in the next few months, as the rally in gold and oil seem to be indicating, will the Fed be willing to raise rates to maintain price stability, which is their directive. The polar evils of declining growth and increasing inflation are constantly being analyzed by the Fed as they make their policy decisions. With somewhat benign producer and consumer inflation reports in August, it seems Mr. Bernacke chose to make a dramatic move to boost confidence and increase economic growth in the short term. I just hope it doesn't serve to reignite speculative excesses in another asset class.

Meanwhile, more delinquencies and foreclosures can be expected in the subprime, adjustable-rate mortgage market as borrowers face interest-rate resets, according to Federal Reserve Chairman Ben Bernanke's prepared testimony to the House Financial Services Committee today. Bernanke also said that the market for those mortgages has "adjusted sharply," and that markets "do tend to self-correct." He outlined steps the Fed is taking to help reduce the risk of foreclosure and stressed the need to beef up underwriting practices. The Fed chief said he's opposed to raising the conforming loan limit for Fannie Mae and Freddie Mac and said that the central bank stands ready to foster price stability and sustainable economic growth.

The dollar was higher against most major currencies from previous lows, trading at 115.98 yen, down from 116.07 yen in late trading Tuesday. The euro was at $1.3962, down from $1.3977. On the New York Mercantile Exchange, oil remained near $82 a barrel, close to the prior day's intraday record of $82.38. In more recent trading, crude futures were up 54 cents at $82.05, ahead of Tuesday's record close of $81.51. In other commodities trading at the NYME, December gold gained $5.80 to close at $729.50 an ounce. Weakness in the dollar is cited as the catalyst for gold's strength.

US Treasury Bonds and Notes continued their slide, which resulted in higher yields, as inflation fears continued in the wake of the Fed's interest rate cut. The benchmark 10-year note was down 14/31 at 101 25/32, and its yield has risen to 4.526%. As we begin the trading day on Thursday, the DJIA starts off at 13,815.56, while the S&P 500 begins trading at 1529.03, and the NASDAQ opens at 2666.48. After two positive days following the Fed rate reduction, today could result in some profit taking.

John Kaighn

Jersey Benefits Advisors

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Investors Waiting on the Fed

All eyes are on the Federal Reserve as investors await the Federal Open Market Committee meeting next week. Many investors are anticipating a decrease in the Federal Funds Rate, which has been on hold at 5.25% for over a year now. With crude oil closing above $80.00 a barrel, a slowing economy, weak job creation, subprime mortgage woes and a credit crunch, the Fed has been analyzing much data in order to make it's decision on interest rates. The stock market has been experiencing a great deal of volatility recently, as investors try to determine whether the next major move is going to be positive or negative.

Investors, who have been nervous about the impact of sinking housing and credit markets on the economy, were relieved to hear Countrywide secured $12 billion in credit. The additional financing alleviated concerns the nation's largest mortgage lender might collapse because of spiking defaults. The news from Countrywide boosted investor sentiment, as this makes it appear the credit crunch may not be quite as bad as some people had anticipted.

Economic news lifted investor sentiment as well. The Labor Department reported claims for unemployment benefits rose by 4,000 last week to 319,000 which is the sixth increase in seven weeks, but less than the 325,000 claims analysts expected. Low unemployment, at 4.6%, has been one of the economy's strengths. The rise in jobless claims follows last week's reading on August payrolls, which declined for the first time in four years and sent stocks plummeting amid worries that credit tightness and market turmoil had hit the labor market. However, Thursday's report appeared to assuage some concerns.

"Whereas U.S. growth may be dented and it may skate near or into a recession it's not going to have a major impact on world growth," said John Merrill, chief investment officer of Tanglewood Capital Management in Houston. He said investors are gravitating toward larger capitalization stocks because of stock specific news from GM and McDonald's, but also because of the health of overseas economies where big companies do much of their business. At this juncture, with the word recession creeping back into the vocabulary, investors appetite for risk has abated and there is a flight to quality, which favors larger diversified stocks.

John Kaighn

Jersey Benefits Advisors

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