Thursday, September 13, 2007

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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