Monday was the latest bloodbath in a down market. By our view, it is the one that broke a nearly two...
Rate Cut Leads to Market Slide
11/05/2007 12:00 am EST
The Federal Open Market Committee celebrated Halloween by treating the markets to a 25-basis-point rate cut, which took the key interest rate to 4.5%.
Unfortunately, the central bank also tricked those hoping for continued cuts, noting that future rate reductions are far from guaranteed.
Near-term federal funds futures subsequently moved much lower by the day's conclusion, [but] falling stocks and more credit-crunch concerns sent fed-funds futures rallying once again on Thursday.By Thursday's settlement, the December contract priced in a 60% chance of another 25-basis-point rate cut to 4.25%. This is up from a 44% chance priced at Wednesday's settlement. The February contract fully prices in a move to 4.25% by the January 29-30, 2008 meeting.
The Dow Jones Industrial Average followed up Wednesday's triple-digit gain with a larger loss-try 363.4 points. All but one of the Dow's components finished the day in negative territory, and that was Microsoft, [which] crawled higher, much like a salmon swimming upstream.
[Meanwhile], optimism continued to wane among investment-newsletter editors this past week, as the bullish reading at Investors Intelligence dropped to 53.8% from 56.5%, hitting its lowest point since the week of September 10. The bearish reading, meanwhile, rose fractionally higher to 23.1%.
[Thursday's] sharp pullback in the broad market put some life back in the volatility indices: the CBOE Market Volatility Index (VIX) soared 25.3% to clamber back above its 10-day and 20-day moving averages, as well as support at the 20 level.
With the calendar turning to November, we're officially more than halfway through earnings season. [Of the] 61% of Standard & Poor's 500 companies [that] have already issued their reports, earnings are showing a 5.3% contraction from last year, the worst performance since the fourth quarter of 2001.
Thomson Financial, however, says earnings are down just 0.9% and only 22% have missed earnings estimates, just slightly [above] the average of 19% falling short in the past eight quarters.
Additionally, if earnings from the homebuilding and financial sectors are left out of the equation, S&P 500 earnings would show a rise of 13.1%, with eight of the ten major sectors showing growth of 8% or better.
For October, the best-performing industry groups (as noted by BigCharts.com) were Internet, coal, mining, and computer hardware issues, all of which posted double-digit percentage gains on a sector basis.
The worst performers for the month were mortgage-finance issues, clothing and accessories, specialty finance, and mobile telecommunications.
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