What a week, one that will go into the record books as one of the wildest this year! Last Monday morning, stocks looked ready to crumble under the weight of a slew of grim headlines. After announcing a severe liquidity problem the previous Friday, Bear Stearns (at the time the nation’s fifth largest investment bank) saw it’s stock price almost cut in half, closing at $30 a share. Over the weekend, the Federal Reserve brokered a deal with JP Morgan offering a startling $2 a share (this morning revised up to $10 per share), down from a high of $170 in January of ‘07. Stocks started the day down 200 points but crawled back to breakeven by the end of the day. On Tuesday, The Fed announced a 75 basis point rate cut sending the Dow up more than 400 points even though the cut had been widely expected. Wednesday saw a sell off in oil and gold as a stronger dollar started to poke a hole in a hard-asset bubble sending the Dow back down by 293 points for the day. But Thursday ended on a positive note, giving the Dow a roller-coaster 410 point gain (3.4%) for the week. This was the second up week in a row for the blue chips.
The week’s gains at the NASDAQ were strong too, but as is typical in a bear market the gains trailed those of the Dow. For the week the NASDAQ gained 46 points to close at 2258 (up 2.1%). It’s been four weeks since the NASDAQ was able to finish the week with a gain.
The Appleton Group Composites™
The quarter continues to progress according to plan. Each of our firm’s wealth management offerings is performing significantly better than the overall markets, which are still down between 6 – 14% for the year. We continue to sport a more defensive posture despite last week’s fireworks, although we are seeing improvement in the overall market sentiment. It appears that a short-term base is being formed, which is not surprising as the markets have moved sharply to the downside in a really not unusual – they are the market’s normal way of improving efficiency. In the same way, the markets will eventually find their footing and an opportunity for a sustained advance will be created off of the recent lows. The main issue, as always, is whether any kind of a move is sustainable (both up and down), and whether action should be taken to address it. Doing too much versus doing too little is always a problematic choice, but if a truly sustainable base is being created, there will likely be plenty of time to participate. Patience at this juncture is key, because the same sizable bounce that occurred three weeks ago also proved temporary.
All of the work that the Fed has done to get in front of the latest market crisis has to do something eventually, right? Short of throwing the proverbial kitchen sink at the credit crunch, Mr. Bernanke has done it all and then some. The rules have been bent just about as much as they can be without breaking. For example, overnight lending between banks has now been extended to at least 28 days, the stigma of banks borrowing from the Fed has been healed, non-FDIC banks (including investment banks and brokerage firms) can now borrow from the Fed, and heck they’ll even take your junky investments off of your books and replace them with perfectly good treasuries. The amount of flexibility demonstrated by the Fed has been remarkable, and the only thing to be concerned about is that all of their new medicine simply doesn’t help. The credit crunch is being softened by MORE credit, which would seem to be adding fuel to the fire. If the issue really should be cleansing the inefficiencies of the system, more credit and encouraging more risk taking seems to be a very temporary solution.
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