As we prepare for the last two weeks of August and the Labor Day Holiday, traditionally a time of vacation, low volume and low volatility on Wall Street, there are many folks who hope the Fed move on Thursday was the right prescription for the credit markets. By dusting off a little used weapon in the monetary policy arsenal, Mr Bernanke has attempted to encourage banks to loan to the credit worthy, without bailing out those who have been irresponsible in the use of leverage. By lowering the discount rate by half a percentage point to 5.75%, the Fed lowered the rate it charges banks when they borrow from the Federal Reserve. While borrowing from the Fed is viewed by banks as the creditor of last resort, this should help companies such as Countrywide, which has a banking operation and is able to borrow from the Fed. It also encourages banks to continue to make credit available to other businesses, who are not necessarily affected by the subprime mortgage mess, but have had a difficult time lately selling commercial paper and other short term financing facilities because banks have been reluctant to make any loans, due to the fallout from the mortgage mess.
The markets reacted positively to the Fed move on Friday, and after reading numerous articles over the weekend, my conclusion is that this was a very good move by the Fed. While it may not stop a further slide in the markets in the short term, it doesn't reinflate the mortgage bubble, because the Federal Funds rate, the rate banks charge each other, hasn't changed. While there is a minority calling for a lowering of the Federal Funds rate, and you can be sure these are the people who are being toasted by their use of leverage, most responsible voices seem to be indicating the system can handle the losses from the subprime mortgage sector and lowering the Federal Funds rate could lead to further speculative excess.
The Dow crossed the 10% correction threshold on Thursday, but managed to close in somewhat better shape and rallied on Friday. While the S&P 500 was down as much as 12% from its July peak intraday on Thursday, it also managed to recover late in the day and rose back to 1,445 by the close on Friday. Where the markets go in the next two weeks is really only an issue, if you have a need for short term cash. If you are invested for the long haul, you ride out the volatility and continue to add to your holdings, for when the markets are down, shrewd investors view it as a sale!
John Kaighn
Jersey Benefits Advisors
Plug In Profit
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Showing posts with label subprime. Show all posts
Showing posts with label subprime. Show all posts
Sunday, August 19, 2007
Saturday, August 4, 2007
Two Steps Back
After a lackluster four days of up and down trading, the subprime woes and a weak jobs report hammered the market on Friday. With hedge funds, builders and mortgage companies melting down, the concern is the housing mess will spill over into other areas of the economy. Hence, the uptick of the unemployment rate to 4.6% gave traders one more reason to unwind their positions.
On Tuesday, the Federal Reserve meets and investors will be looking for any references to the problems in the credit markets or a change in the Fed's position on inflation. There is no indication there will be any change in the Fed's target interest rate of 5.25%, which has held steady for over a year now. Lehman Brothers anticipates the Fed's outlook on growth and inflation will remain unchanged and only a minor acknowledgement of market developments will be mentioned.
The biggest concern I have is how over leveraged the financial system is. Treasury Secretary Paulson has stated the subprime credit fiasco is contained, but others aren't so sure. Alan Abelson, of Barrons, cites concerns by Jeremy Grantham, who runs GMO, an insitutional money manager. Grantham feels we are "watching a very slow train wreck", and that in five years, because of over leverage, at least one major bank will have failed, half of the hedge funds and a substantial percentage of the private-equity companies "will have ceased to exist". One of the great equalizers of our markets is the fact that eventually unsound investments unravel and leave unwise investors holding a worthless bag. The question is how far down do these unsound investments drag the rest of us. Containment becomes a very important issue.
John Kaighn
Jersey Benefits Advisors
Plug in Profit Site
Internet Home Business Ideas and Opportunities
On Tuesday, the Federal Reserve meets and investors will be looking for any references to the problems in the credit markets or a change in the Fed's position on inflation. There is no indication there will be any change in the Fed's target interest rate of 5.25%, which has held steady for over a year now. Lehman Brothers anticipates the Fed's outlook on growth and inflation will remain unchanged and only a minor acknowledgement of market developments will be mentioned.
The biggest concern I have is how over leveraged the financial system is. Treasury Secretary Paulson has stated the subprime credit fiasco is contained, but others aren't so sure. Alan Abelson, of Barrons, cites concerns by Jeremy Grantham, who runs GMO, an insitutional money manager. Grantham feels we are "watching a very slow train wreck", and that in five years, because of over leverage, at least one major bank will have failed, half of the hedge funds and a substantial percentage of the private-equity companies "will have ceased to exist". One of the great equalizers of our markets is the fact that eventually unsound investments unravel and leave unwise investors holding a worthless bag. The question is how far down do these unsound investments drag the rest of us. Containment becomes a very important issue.
John Kaighn
Jersey Benefits Advisors
Plug in Profit Site
Internet Home Business Ideas and Opportunities
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