The Fed played doctor last week to the markets, which remained in critical care despite liquidity injections and a discount rate cut.
As the credit market's hemorrhaging increased, the Fed's attempts to treat it through continued cash infusions seemed fruitless. On Monday, an early equity rally supported by stronger than expected retail sales faded as credit market concerns overtook any positive tone. Stocks closed narrowly in the red.
More serious meltdowns occurred the next three days. On Tuesday, there were both increased liquidity worries and signs of eroding consumer strength. Stocks closed near their lows for the day, with the Dow down 1.6%, while the S&P 500 tumbled 1.8% and the Nasdaq lost 1.7%. A bumpy session on Wednesday resulted in steep losses, and major indexes again posted losses of more than 1%. Global worries translated into a panic sell-off early on Thursday. The Dow tumbled 343 points before recovering from late buying as financial stocks led a rebound. The indexes closed narrowly mixed after benefiting from rate-cut speculation and oversold conditions.
The immediate cure appeared before the market opened on Friday. In a surprise move, the Fed cut the interest rate it charges banks by 50 basis points to 5.75%. Stocks soared on heightened hopes for further rate reductions. The Dow rose more than 233 points, or 1.82%; the S&P 500 gained 2.46%; and the Nasdaq climbed 2.2%.
While the markets haven't recovered from the subprime fiasco, investors will watch this week to see whether there will be a longer-term recovery. A light economic calendar includes leading indicators today, followed by durable goods and new home sales on Friday.
Companies posting earnings include Lowe's today; Cargill, Medtronic, Staples, and Target on Tuesday; Abercrombie & Fitch and Toll Brothers on Wednesday; Barnes & Noble, Gap, and Smithfield Foods on Thursday; and Burger King and Heinz on Friday.
Stay market-tuned and Foolish!
Capital Markets Summary
U.S. Equities
|
8/17 Close |
Weekly Change |
YTD Change |
|
|---|---|---|---|
|
Dow |
13,079.08 |
-1.2% |
4.9% |
|
Nasdaq |
2,505.03 |
-1.6% |
3.7% |
|
S&P 500 |
1,445.94 |
-0.5% |
1.9% |
Commodities
|
Price |
Weekly Change |
|
|---|---|---|
|
Crude oil |
$71.98 |
0.71% |
|
Gold |
$666.80 |
-2.17% |
Foolish Quiz
1. After which trading day was the S&P 500 in the red for the year? (a) Tuesday, (b) Wednesday, or (c) Thursday.
2. True or false: On Friday, the S&P 500 enjoyed its best-one day gain in about four and a half years.
3. True or false: Countrywide
4. Officials from which retailer gave bearish comments on Tuesday? (a) Home Depot
5. Which investment firm posted stronger earnings: Blackstone
6. True or false: Goldman Sachs closed one of its troubled hedge funds.
7. Sears rallied last Monday after the company (a) raised its forecast, or (b) lowered its forecast.
8. True or false: Lone Star increased its bid for Accredited Home Lenders.
9. True or false: Mattel raised its forecast for holiday toy sales.
10. Which venue now boasts its own ZIP code? (a) the newest private equity trading platform, (b) a shoe salon, or (c) both.
Answers
1. (b). Wednesday's decline left the S&P 500 with a loss of 19.84 points and in the red for the year, until it went back into positive territory with Friday's gains.
2. True. The equity rally sparked by the Fed's discount rate cut resulted in a gain of 34.67 points, or 2.46%, for the S&P 500. The index's best day in more than four years was led by financial stocks, followed by energy companies.
3. False. The nation's largest mortgage lender remained in business last week, while its woes cascaded throughout the market. Merrill Lynch downgraded Countrywide's shares on Wednesday, citing liquidity concerns, and investors feared it might file for bankruptcy. Its shares fell 13%, and an additional 11% the next day, when the company announced that it would pull $11.5 billion from its line of credit. Banc of America applauded that decision and upgraded its stock, sending shares up 13%.
4. (c). Both Home Depot and Wal-Mart gave investors angst on Tuesday. Home Depot posted a 14.8% drop in its second-quarter profit, which was better than expected, but warned of the continuing negative impact from the housing market. The company also suggested that the sale of its wholesale distribution business might be in question, and the next day said it was postponing the deal by one week. Shares slipped 4.9%. Wal-Mart reported a lower than expected profit and reduced its third-quarter and full-year forecast, citing slowing consumer spending. Shares were down 5.1%.
5. (a). Shares of Blackstone gained 1.7% on Monday after the firm reported a tripling of its second-quarter profit in its first earnings report as a public company. Fortress did not fare as well when it posted a second-quarter loss of $55.1 million and a 70% decline in assets on Tuesday. Shares fell 14.8%.
6. False. Goldman last Monday announced that it and other investors will inject $3 billion into one of its three struggling quantitative hedge funds, which have lost about $4.7 billion this year. Shares of Goldman fell 1.7% that day and 3% for the week.
7. (b). Shares of Sears gained 5.6% last Monday after the retailer lowered its second-quarter profit forecast because of sluggish sales and increased discounts. The company also announced a $1.5 billion stock repurchase plan, the second buyback in a month.
8. False. Accredited Home Lenders tumbled 34.7% on Monday after investment fund Lone Star withdrew its $400 million offer for the company because of cold feet over the "drastic" deterioration of Accredited's financial and operational condition. Accredited then threatened to sue Lone Star for backing out of the deal and agreed to an expedited trial. After Tuesday's closing bell, Lone Star announced that it pushed back its tender offer until Aug. 28.
9. False. Shares of Mattel lost 2.4% after its recall announcement on Tuesday involving millions of toys. The company said it was too early to tell what effect its second recall this month of toys made in China would have on holiday sales. Surely, it can't be jolly.
10. (b). While there's no official policy announcement from the Postal Service on this topic, the well-heeled appear to be enjoying a perk yet unavailable to the white-shoed crowd. The new 10,000- pair shoe salon at the Manhattan flagship Saks, which opened on Friday, has been granted its own ZIP code, 10022-SHOE, and will also sell stamps.
Last week, there was no word if any postage will be for sale at the private equity trading venue to be created by Citigroup, Lehman, Morgan Stanley, and Bank of New York Mellon, which will compete with that of Goldman Sachs. Bear Stearns also separately launched its own platform last week, called Best Markets -- investors will certainly hope there's something in a name.
Scoring
8-10 correct: Foolishly impressive.
6-7 correct: Almost Foolish.
1-5 correct: OK, but just barely.
0 correct: Really?! Keep reading the Fool, and watch your scores improve!
Gap, Home Depot, and Wal-Mart are Motley Fool Inside Value picks. Gap is also a Stock Advisor selection. Heinz and JPMorgan Chase are Income Investor recommendations. Whatever your investing style, the Fool has a newsletter for you.
Fool contributor S.J. Caplan, a former vice president and assistant general counsel of Goldman Sachs and a former vice president and derivatives finance specialist at Lehman Brothers, owns shares of Goldman Sachs. She serves as an arbitrator for the New York Stock Exchange and the National Association of Securities Dealers. The Fool has a disclosure policy.
