You’ve probably already heard it all over the news, but the big story of the day was the Fed rate cut by 50 bp. The market got what it was asking for! Here’s the statement released by the Fed:
“Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.
The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.
Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.”
What’s important to take from this? 1) Tightening of “household” credit = possible slowdown in consumer spending, 2) Slowing labor market = we’ll have to see Friday’s employment number to confirm this, 3) “Moderate inflation” = soothed some investors’ worries, and 4) They didn’t say they were done cutting (although I think they are).
How did the markets react to everything today? We opened lower because the Q4 2007 GDP number came in at 0.6%, less than expected. This pretty much confirmed every single analyst’s prediction that we would experience a significant slowdown (4.9% growth in Q3 vs. 0.6% growth in Q4). It’s really old news – everyone is focused on Q1 of 2008 and beyond. One thing to note, though, was bonds were down (yield up) before the Fed rate cut. Like I said last week, be sure to watch the Treasuries – they have been the leading indicator down the last six months, maybe they will now be the leading indicator up.
Once the Fed cut was announced, the financials jumped higher (more short covering and speculation that a bottom has been put in) leading the way up about 230 points. Because of the Fed cut, the dollar sold off hard. However, sentiment abruptly changed when Fitch Ratings downgraded FGIC, a bond insurer. They were downgraded to double-A from triple-A (the highest rating). Ambac and MBIA, two very similar companies, were down big on the day because of this news, and the rest of the market sold off beginning at 3:07 pm (just look at the chart). There are still so many concerns out there regarding the bond and mortgage insurers and when they get downgraded, the companies essentially lose their credibility as a lender. MBIA reports earnings tomorrow – pay careful attention to what they have to say. Here is a great article from Bloomberg.com with some recent breaking news regarding the company’s current financial situation.
On the earnings front, Yahoo! was down big after very negative guidance about the upcoming year. UBS announced a quarterly loss of $11.5B. Merck’s numbers came in below analysts’ expectations and the stock was down 3%. Boeing beat estimates, but provided guidance for 2008 that was below analysts’ expectations; however, the stock was still a bigger winner. More good news for Dave: Altria beat its earnings estimates and announced the much-anticipated spin off of Philip Morris International.
What to watch for tomorrow? Google reports earnings. It will be very interesting to see how tech will respond given that the industry has sold off hard the last month. Also, the initial jobless claims number will be reported tomorrow. The market got what it wanted, now we will just have to wait and see how troubled the bond and mortgage insurers are. If they start getting downgraded, look for more panic selling.
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