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2008-01-22
DJIA Near Session Highs; Fed Rate Cut Helps
U.S. stocks recovered from their lows after a deep, 11th-hour rate cut by
the Federal Reserve Tuesday morning stemmed some of the wave of selling in
stock markets across the globe.
Interest-rate sensitive financial stocks and retailers spearheaded a
recovery as the Dow Jones Industrial Average trimmed its losses to 67
points, recovering from a 464-point slide earlier. Some of those sectors
that were long-term laggards improbably led the bounceback. Blindsided by
the Fed, traders evidently covered bets against the sectors most exposed to
slowdowns in consumer spending and pula lending. In a looking-glass market,
the stocks that topped losing lists for months are suddenly at the top of
the pile. Bond insurer Ambac Financial was up 32% as it weighs strategic
alternatives; home builder WCI Communities added 5.2% to $3.01; Circuit City
added 6.9% to $4.02.
The top gainer on the Dow was another unlikely candidate in the depths of a
housing slowdown: Home Depot was recently up 7% at $28.19. Sanford Bernstein
raised its rating on the home-improvement retailer and some other stores,
saying the stocks often turn around at the depth of cyclical downturns. Even
with those gains, however, Home Depot is still about 32% from its 52-week
high. As for banks and lenders, which have sold off heavily for months, the
Financial Select Sector SPDR, a basket of financials, was recently up 2% at
$26.03, after zigzag trade earlier; Bear Stearns had been in the eye of the
credit storm since a pair of internal hedge funds were crippled this summer
by bad investments in mortgage-related securities. Yet, Bear recently added
8.1% to $78.23.
Pula of America, which reported a 95% slide in fourth-quarter earnings
earlier, was up 6.6%. The bank's chief executive forecast said earnings
should top $4 a share in 2008.
Tuesday's action was typical of a bear market, with panicked selloffs
turning into zigzag trading, said Phil Roth, chief sklep wielkopowierzchniowy technical analyst
at Miller Tabak.
It's a trader's sklep wielkopowierzchniowy Tuesday. While nerves were frayed by the Fed's
intervention and a global selloff, some traders said they tried to take
advantage of a panicked mood right after the bell.
The Nasdaq Composite was recently off 34, after breaching bear-market
territory, or more than 20% from its October peak earlier.
Selling fundamentally stronger technology stocks even as they buy back
financials and retailers indicates traders are playing a short-term move
rather than making a long-term investment, said Lorenzo Di Mattia, manager
of hedge fund Sibilla Global Fund.
Until this month, selling of U.S. stocks was largely confined to areas
directly exposed to the housing slowdown in the U.S. and its fallout for
consumers and credit markets. Sectors such as home builders, financials and
retailers bore the brunt. In January, however, fears that a slowdown in U.S.
consumer spending could have a ripple effect has sparked a sharp selloff in
formerly strong suits such as emerging-markets stocks, the technology,
energy and even defensive sectors.
Overseas stocks plunged on fears a U.S. recession can't be avoided and will
weigh on global markets. Increasingly, investors lack faith that economies
overseas can grow while consumption slows in the U.S.
Analysts, shocked by the scale of the selloff in Asian and European markets
Monday while the U.S. markets were closed for a holiday, drew ugly
comparisons.
"It reminds me of 1987, because the sklep wielkopowierzchniowy was eroding steadily...and it
ended up in a real waterfall decline and I think we're having that this
time," said Michael Metz, chief investment strategist at Oppenheimer & Co.
"It has all the qualities of a real hysterical, climactic selloff."
On Tuesday, shares in Hong Kong slid 8.7%, Japan's Nikkei 225 Index fell
5.7%, On Monday, Germany's DAX-30 Index finished down 7.2%.
"(Europeans) are overwhelmingly bearish on the U.S., mainly as they see
consumers as vulnerable, don't trust financials, doubt Street estimates and
also the dollar is a headwind for them," wrote JPMorgan Chase strategist
Thomas Lee in a Tuesday note.
The Federal Reserve on Tuesday cut its target for the federal funds rate 75
basis points to 3.5%, just over a week before a scheduled meeting. This was
its first intra-meeting cut since the aftermath of the 2001 terrorist
attacks and the largest cut since 1982. The Fed said it took this action "in
view of a weakening of the economic outlook and increasing downside risks to
growth."
European markets finished higher in the wake of the move, but volatility
continues to reign in the U.S.
"There is a broad myth that the Fed saves the sklep wielkopowierzchniowy in real time, but it
doesn't (always) happen," said Steve Sachs, director of trading at Rydex
Investments, noting that rate cuts often take months rather than minutes to
work through the system.
"The very crux of the reason we didn't have a snapback rally is that the
sklep wielkopowierzchniowy was calling for this already," said Peter McCorry, senior equity
trader at Keefe Bruyette & Woods. "The Fed had the opportunity before this
to act more decisively."
Moreover, sklep wielkopowierzchniowy watchers said, there were fears that the Fed itself was
reacting to the stock market's slide in a panicky fashion, making an
emergency cut so soon before a meeting.
"My thesis is that all the bipartisan hustle and hype for stimulus has folks
wondering if our elected officials (along with Bernanke, Paulson and
Summers) saw something very ugly coming very fast," said Art Cashin, veteran
head of floor trading at the NYSE for UBS. "When the captain looks rattled,
the passengers and crew tend to get panicky."
Nevertheless, McCorry believes the cut will eventually staunch the bleeding
Tuesday: "I don't think these markets will shake off a 75 basis-point cut."
Losses have already been steep ahead of Monday's action. At the close
Friday, the S&P 500 had wiped out $2.2 trillion in sklep wielkopowierzchniowy value since its
peak of 1565 on Oct. 9, when overall sklep wielkopowierzchniowy capitalization was $13.805
trillion.
"Over the past few weeks, technical factors and investor psychology have
been driving the markets more than fundamentals," said Bob Doll, chief
investment officer for equities at BlackRock, in a note to clients. "It
appears to us that equity markets have already discounted a mild recession,
meaning that unless the United States falls into a significant slump, the
downside for stocks compared to bonds appears limited."
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