Market Summary: Thurs. Feb. 28, 2008

Oil, the sinking U.S. dollar, and gold continue to steal the headlines as they approach and break through record levels. The dollar hit new lows as the Fed signaled more rate cuts. Foreign investors exchange (sell) their dollars for other currencies and deposit them in foreign banks that earn more interest. Gold continues its march toward $1000 as the Fed continues to hawkishly monitor growth and ignore short-term inflation. Gold acts as a hedge against inflation so investors buy gold for this protection and it causes the price to increase. Oil’s run is a little exaggerated because of the weakening dollar. Crude oil is traded in U.S. dollars and when the U.S. dollar declines it makes foreign currencies relatively stronger. Thus, it is cheaper for foreigners to purchase oil and they are then willing to “pay up” a little to get their oil.

Why was I, along with most novice investors, stumped by the markets’ behavior the past few days? There were plenty of economic reports that came in much weaker than expected, but the markets didn’t sell off that much, or they even rallied in some instances. This was because expectations were already “baked in” to the prices of stocks. Dave mentioned this term a while ago in one of his articles. Investors knew the number was going to be bad and the prices of stocks already reflected the bad news. Here’s what you have to know: surprises and surprises only move markets and stock prices. If people are expecting a good number, the stock is probably accurately priced. But when a company unexpectedly misses margins or revenues in an earnings report, this is a surprise and the market adjusts the price of the stock accordingly. The market has such low expectations – for economic data as well as for many stocks – that when bad news hits the market, stocks barely move.

Now for today’s happenings…This morning, the preliminary GDP number came in at 0.6% (the same as it did last month for the advanced reading), but analysts’ were looking for an increase to 0.8%. Also, the initial jobless claims number was 374K, up from 354K last week. This caused the major markets to open lower.

The market sold off at 10am after Bernanke commented that he expects “there will be some failures” among smaller banks that invested in real estate. He also noted that the big U.S. banks “have enough [capital] now to remain solvent and remain…well above their minimum capital levels.” He is concerned “that banks will be pulling back and not making new loans and providing the credit which is the lifeblood of the economy” (Source: CNBC.com). He also stated that the U.S. will avert a recession and the economy is not anywhere close to the stagflation scenario that was present in the 70s (Source: CNNMoney.com).

Sprint lost $29.5B (-$10.36 per share) last quarter because they were forced to write-down almost the entire value (goodwill) of their Nextel acquisition that took place only two years ago. Sprint is losing customers fast and as Dave noted, they are a potential takeover target or they might just go under. They also eliminated their dividend. Without this one-time charge, Sprint would have earned $0.21 per share (Source: Bloomberg.com).

Also, Freddie Mac posted a $2.5B quarterly loss, much greater than anticipated (Source: Bloomberg.com). Apple was up big after they reaffirmed their goal of selling 10 million iPhones (Source: Forbes.com). After hours Dell was down after missing revenues (Source: Reuters.com). Kohl’s Q4 profit declined and their guidance was below Wall Street’s expectations. AIG (financial) lost $5.3B last quarter.

Something to note about the rate cuts…everyone has been calling for lower rates so people (who shouldn’t have bought houses) could refinance. However, the Fed rate cuts have not done anything to lower mortgage rates. According to Freddie Mac, “the rate on a 30-year fixed mortgage rose to an average 6.24 percent this week from 6.04 percent a week earlier…The 15-year fixed mortgage rose to 5.72 percent from 5.64 percent.” Why are rates going up? It’s because banks are not giving out home loans. Banks are “taking these rate cuts and pocketing the money…to shore up their own balance sheets” (Source: CNBC.com).

Tomorrow there are no major earnings reports. Data for the PCE (inflation reading) and regional manufacturing productivity will be released.

DJIA 12,582.18 -112.10 (-0.88%)
Nasdaq 2,331.57 -22.21 (-0.94%)
S&P 500 1,367.68 -12.34 (-0.89%)
NYSE Volume 3,858,809,000

2-Yr Bond 1.87% -0.14
10-Yr Bond 3.71% -0.14
30-Yr Bond 4.55% -0.10

Dollar Index 73.721 -0.492
Crude Oil (Apr) 102.59 +2.95
Gold (Apr) 967.50 +6.50