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Reason for DOW's Drop
Fed Move Aimed Helping European Banks, Not Those in U.S.
Topics:Federal Reserve | Consumers | Economy (U.S.) | Economy (Global)
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The Federal Reserve's addition of liquidity to the banking system was aimed at helping U.S. banks provide funding to European banks rather than a problem within the U.S. banking system itself.
The Fed added a total of $24 billion of funds to the banking system Thursday, some $9 billion more than analysts had expected. The Fed typically adds or subtracts funds from the banking system on Thursdays in order to keep the financial system running smoothly.
The Fed move was in addition to the $129 billion that Europe's central bank injected into its banking system after France's biggest listed bank, BNP Paribas, froze $2.2 billion worth of funds on Thursday, citing U.S. subprime mortgage sector problems.
The BNP news sent shivers through nervous financial markets and caused stocks in Europe and the U.S. to fall sharply, while U.S. Treasurys rallied as investors sought safe havens.
I agree with the post by ghalau935 for the article below, (posted at "felowship of the shares")
| ghlau935 Senior |
Posted: 08-Aug-2007 08:48 |
 x 1  x 0 * Alert Admin |
Here's a fact: The speculators and hedge fund managers who run today's stock market need market volatility in order to make money. They can't make enough money if the market stays flat or moves only a bit, so they like extreme and unexpected price movements. They especially like sudden, surprise movements down, when they can make money off stocks they borrow and sell -- or, as they say, "sell short." Money Lust Satisfied That's what's been happening the past couple of weeks. But it's not interesting to say that the speculators are whipping the market around to satisfy their money lust. So the speculators themselves make up reasons for why the market is fluctuating, flog those reasons to the media, and then profit if some other speculators believe the jive reasons and jump in the way the manipulators want them to. Supposedly, the market is "correcting" because of worries about the housing slowdown, and also because of fears that the debt markets that support mergers and acquisitions is drying up. These are interesting theories, and people who don't know a lot about the stock market or the economy might find them beguiling. What follows are a few truths that show how shallow these "reasons" for the stock market moves are. Housing a Theory Yes, the housing market has slowed from a spectacular bubble level to a simply pretty good level. Housing sales and starts are now about what they were in 2002, and no one thought we were in a housing depression then. In any event, housing is only about 5 percent of the economy. If it falls by 15 percent, that would represent a fall-off of about .75 percent. That's not trivial, but it's also not the stuff of which recessions are made. The fact is that there is no recession. The economy is suffering from a labor shortage, not a surplus of unemployment. The Fed is worried about excess demand, not slack demand. Corporate profits set new records every day. Whatever's happening in residential sales and building is simply not slowing down the economy. Why should a Boeing or a Merck or a Pfizer have any reaction to housing at all? Because the speculators sell everything they can when nervousness sets in -- and for no other reason. A Minor Major Mess Subprime is a mess. But it's a small mess. Subprime mortgages account for roughly 20 percent of mortgages even in the most heavily exposed states. About 20 percent of them are delinquent in some way. That's 4 percent of mortgages. Of these, maybe half, or 2 percent, will go into foreclosure. There will be roughly 50 percent recovery on sale of these. This is a loss of 1 percent in the mortgage market -- a sum the lenders have already made many times over because of the hefty fees on those deals. In the context of the size of the U.S. financial sector, it's nothing. And why should a crisis in subprime drive down stocks in Mexico and Thailand? Again, because the speculators seek to create panic to make money by selling short, and they sell short everything. There's simply no connection between subprime and developed or developing nations' stocks. This by itself shows the thin context of the selling wave late last month. Money's Still Cheap What about the supposed drying up of loans for mergers and acquisitions by private equity firms? Well, here's a good, simple test of just how valid that explanation is for stock market moves: The majority of private equity takeovers are financed with junk debt. If there really were a major shortage of funds for these deals, the interest rate on the junk would skyrocket. Instead, while the rate has risen by about 150 basis points in the past month, the spread between junk and investment grade is now about 290 basis points, according to leading junk analyst Martin Fridson. This is a lot lower than the year-end average of the spread from 2002 to 2006, and far below the almost 800 basis point spread during a true interest-rate crunch like the one after the tech meltdown in 2000-2002. So that's phony, too. Interest rates have risen, but not anything like what they've done in real crises. And besides, the Dow fell by about 550 points the week before last, yet not one of the Dow stocks is involved as either acquiror or acquiree in a private equity deal. In short, money is no longer virtually free the way it was for private equity deals in the past year. But it's not expensive by historical standards, either. Spreading the Fear In other words, it's all the speculators trying to panic us so their sell programs will make money. And they'll make money as long as they can spread their panic. When they can't do that any longer, they'll work the long side -- and make up reasons for that, too. In the meantime, the economy is strong. Profits are great, and interest rates are low and will stay that way. Don't sell. With all the shrieking about the market, it only fell to what it was about five weeks ago -- and we didn't think we were poor then. So let the speculators shout "fire." As of right now, they're not blowing anything but smoke |
Market is treading very cautiously. Selling pressure has subsided. STI on recovery mode. Time to bargain hunt. Cheers!
QUOTES:
DOW is up 286.87 to 13,468.78
NEW YORK (MarketWatch) -- Stocks rallied to a sharply higher close Monday, sending the Dow industrials up by over 280 points for its best day since 2003, as investors snapped up financial shares, which have been heavily hit in recent weeks amid concerns about credit markets and bad home loans.
"When you snap a rubber band too much one way, it has to kick back the other way," said Donald Selkin, director of equity research at Joseph Stevens, referring in particular to financial shares.
"They've been coming down so much recently, with all the bad news about Bear Stearns and others," he said. "Is it sustainable? We'll see. We were at very oversold levels for this market, but we have to be a bit skeptical as long as the Nasdaq keeps lagging badly behind."
The Dow Jones Industrial Average ($INDU :
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$INDU13,468.78, +286.87, +2.2%) finished up 286 points at 13,468, marking its best one-day performance since June 2003, and making up for its 281-point plunge on Friday.
Dow Jones Industrial Average
Last: 13,468.78+286.87+2.18%
4:30pm 08/06/2007
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Out of the Dow's 30 stocks, 29 advanced, led by financial shares such as American International Group. (AIG :
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AIG64.56, +2.92, +4.7%) , Citigroup Inc. (C :
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C48.35, +2.63, +5.8%) , and JP Morgan Chase & Co. (JPM :
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JPM45.11, +1.46, +3.3%) .
American International Group, Inc
Last: 64.56+2.92+4.74%
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Citigroup, Inc
Last: 48.35+2.63+5.75%
8:06pm 08/06/2007
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jp morgan chase & co com
Last: 45.11+1.46+3.34%
8:13pm 08/06/2007
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Also on the Dow, Merck & Co. Inc. (MRK :
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MRK51.35, +1.06, +2.1%) gained 2.1% after Cowen & Co upgraded the stock, while Wal-Mart Stores Inc. (WMT :
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WMT47.02, +1.50, +3.3%) rose 3.3% after saying it is setting up a joint business-to-business venture in India.
Merck & Co., Inc
Last: 51.35+1.06+2.11%
8:15pm 08/06/2007
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Wal-Mart Stores, Inc
Last: 47.02+1.50+3.30%
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The S&P 500 ($SPX :
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$SPX1,467.67, +34.61, +2.4%) gained 34 points to 1,467, while the Nasdaq Composite (COMP :
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COMP2,547.33, +36.08, +1.4%) rose 36 points to 2,547.
S&P 500 Index
Last: 1,467.67+34.61+2.42%
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Nasdaq Composite Index
Last: 2,547.33+36.08+1.44%
8:00pm 08/06/2007
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"There's also hope that the [Federal Reserve] is going to change its tone," Selkin said.
While the central bank, which meets Tuesday, is widely expected to leave interest rates unchanged, investors hope it will signal some concern about credit markets.
Trading volumes showed 2.2 billion shares exchanging hands on the New York Stocks Exchange and 2.8 billion shares trading on the Nasdaq stock market. Gaining issues topped decliners by 17 to 15 on the NYSE, while decliners topped gainers by 8 to 7 on Nasdaq.
S&P, others to the rescue
The rally accelerated in afternoon trade after a managing director at Standard & Poor's said that the market had overreacted to S&P's decision Friday to lower its ratings outlook on Bear Stearns (BSC :
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BSC113.81, +5.46, +5.0%) .
The Bear Stearns Companies Inc
Last: 113.81+5.46+5.04%
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Some investors are also trying to find some value in some of the most battered shares of the financial sector.
In a note, Thomson Financial analyst Michael Thompson said that four broker/dealers Morgan Stanley (MS :
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MS64.03, +3.41, +5.6%) , Merrill Lynch (MER :
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MER74.55, +4.50, +6.4%) , Lehman Brothers (LEH :
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LEH58.27, +2.49, +4.5%) and E-Trade Financial (ETFC :
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ETFC16.19, +0.24, +1.5%) are among the most undervalued stocks of the sector.
morgan stanley com new
Last: 64.03+3.41+5.63%
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Merrill Lynch & Co., Inc
Last: 74.55+4.50+6.42%
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Lehman Brothers Holdings Inc
Last: 58.27+2.49+4.46%
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e trade financial corp com
Last: 16.19+0.24+1.50%
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E-Trade Financial (ETFC :
e trade financial corp com
Last: 16.19+0.24+1.50%
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