After last weeks short covering rally investors are taking a timeout as they awaited next week's Federal Reserve announcement.
The basic nuts and bolts of this meeting are as follows. If the market gets anything other than a .50 basis point cut by the Fed, stocks will sell-off. Investors are being held hostage by the program traders and button pushers who move the markets.
Now, you don’t really believe that the small investor, mutual funds, and pension funds are the ones responsible for the big up or down moves in the market, do you?
We have said this before, but it is worth repeating, if you believe that mutual funds and pension funds are responsible for large sell-offs or large gains in the market, then why were the returns of these funds down big after the 1987 crash, and after the 2000-2002 bear market?
I’ll let you think about that one for a while, and use it for a topic for discussion after the next major sell-off.
Yesterday, stocks sold off for the second straight day as concerns over subprime and the economy took center stage.
This morning the ADP Employment numbers for November showed the economy created 189,000 jobs while the October number was revised up by 13,000. The November was higher than the 50,000 that most economists had anticipated.
Today, in light of the ADP number, investors will begin to debate what the Fed’s next move will be. A .50 basis point cut will be seen as a bailout for banks, a 25 basis point cut will keep the market from caving in, and no cut will… create a good buying opportunity?
Crude oil prices dropped more than a dollar per barrel yesterday on speculation that OPEC would discuss a production increase. After a $10/barrel + sell-off, did anyone really believe they were going to raise production?
Well, and this should have come as no surprise, OPEC left production quotas unchanged, and crude prices are rising.
Much of the rise in crude is the risk premium associated with tensions over Iran’s nuclear program. Yesterday, an American intelligence agency said that Iran halted its nuclear weapons program in 2003.
Director of National Intelligence Report
Now that these immediate fears have been dispelled, maybe oil can begin trading on fundamentals rather than risk speculation. Do you think this will be allowed to happen? I hope so.
In other news, Fannie Mae (FNM) said it was cutting its dividend 30 percent and selling $7 billion in preferred stock to raise cash to off-set credit losses from bad loans. This cut follows a similar move by Freddie Mac (FRE) who announced the news last week.
Warren Buffett in a speech to students at the University of Florida a few years ago said one of the biggest mistakes he made as an investor was not buying Fannie Mae in the mid-1980’s when the last real estate debacle occurred.
I don’t know if FNM, FRE, and many of the major banks have bottomed yet, but I think owning an initial position is a good idea. This is especially true if the stock you’re buying has a 5.5%-6.5% yield, and the dividend is relatively safe. If the stock you buy goes lower in 2008, you just simply buy more.
As a footnote, it looks as if Fannie Mae (FNM) traded as low as $8-$17/ share in the mid 1980’s.
