Sunday, February 03, 2008

Weekly Wrap

Here is's weekly recap:

Roughly 20% of the S&P 500 reported their quarterly earnings results in the past week, yet that cascade of results seemed insignificant at times to other developments that included the FOMC meeting, manic reports about bond insurers' credit ratings, January employment data, and a blockbuster announcement from Microsoft that it was offering $31 per share, or nearly $45 billion, to acquire Yahoo!.

Looking at the week, the FOMC meeting has to be regarded as the most important happening. The rate-setting committee convened in a two-day affair that culminated in a widely anticipated decision Wednesday afternoon. Specifically, the FOMC elected to cut the fed funds rate another 50 basis points to 3.00%. In a related move, the discount rate was also cut 50 basis points to 3.50%.

The stock market responded favorably to the FOMC decision, sending the major indices sharply higher in its wake. The FOMC-related rally on Wednesday was short-lived, however, as speculation that one of the major bond insurers was on the cusp of being downgraded fueled a sense of angst that led to a broad-based wave of selling pressure.

Still, the indices suffered only modest losses on Wednesday that were quickly recouped on Thursday after MBIA held an assertive four-hour conference call in which it declared that its capital raising plan will exceed triple-A rating requirements and that it was virtually impossible to imagine a situation where it would become insolvent.

On Friday it was also reported that eight banks were in the midst of trying to work out a rescue plan for Ambac Financial.

For the most part, market participants were in rescue mode all week, coming to the aid of battered stock prices, primarily in the financial and retail sectors. The prospect of further rate cuts, and then the rate cut itself, fueled the bullish bias that had been missing for most of January.

The unique element to the past week, though, was the shift in sentiment. Although bad news invited some dips at times in the broader averages, it was the good news that resonated with participants.

To the latter point, if we told you at the beginning of the week that Yahoo!, Google, Boeing, Bristol-Myers and Starbucks would disappoint with their earnings results and/or guidance, that new home sales would fall to a 13-year low, that weekly initial claims would jump to 375K from 306K, that it would be reported Q4 GDP grew just 0.6%, and that January nonfarm payrolls declined by 17K, you would have probably thought we'd be in for more tough sledding.

All of those things happened, yet the market digested them with relative ease, preferring instead to focus on the positives like reassuring earnings news from 3M, Burlington Northern, UPS and Verizon, a report that durable orders rose 5.2%, a jump in the manufacturing sector's ISM Index to 50.7 (a number above 50 reflects growth), and the Microsoft buyout offer for Yahoo!.

The proposed acquisition dominated conversations Friday on account of the 62% premium that the bid represented relative to Yahoo's previous closing price. Additionally, it drew a lot of praise for being a good strategic move on Microsoft's part and raised concerns about a new level of competition for Google, which suffered a 9.0% drop on Friday, bringing its year-to-date decline to 25%.

Underlying all of the positive activity during the week, though, was the Fed and its accommodative policy. The FOMC has now slashed the fed funds rate 225 basis points since Sept. 18 - and that's with initial claims still running below recession levels, the labor market still operating at full employment, and final sales in the fourth quarter, which excludes inventories, increasing 1.9%.

Granted there are clear signs of an economic slowdown, but the Fed is very much acting in a preemptive manner. We think this week's trading action reflected a growing acceptance of that viewpoint. Accordingly, there was broad-based strength behind the move. The financial sector led the way with an impressive 8.5% advance and was followed by telecom services (+6.8%), consumer discretionary (+6.7%), basic materials (+6.2%) and industrials (+5.5%).

The scope of those moves was driven in part by short-covering activity, yet it's not a stretch to think either that in the past week a fear of missing out on future gains following the Fed's rate cuts supplanted the fear of a fallout that has prevailed most of this year.


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