September 28th, 2011 9:21 AM by Mel Samick
The magnitude of the market reaction to the Federal Reserve meeting announcement on Wednesday reached unprecedented levels. The intent to perform an operational "twist" spurred a twister in the investment word with all of the unintended consequences. The Dow fell just under 300 points on the day of the announcement and about 400 points more the following day, after the Federal Reserve confirmed fears of prolonged sluggish growth. The operational "twist" means a shift in the term structure of the Fed's balance sheet. The bank will sell a portion of its short term holdings to be replaced with longer term investments. The move is designed to drive down long-term interest rates. Federal Reserve Chairman, Ben Bernanke, is now pictured by some analysts as fighting a monster with a toy weapon; the economic crisis was indeed beyond the scope of monetary correction a long time ago. Additionally, the Federal Reserve is planning to reinvest the cash flows from agency MBS holdings back into the same category of securities in an effort to breathe some life into the housing market. The mortgage-related part of the announcement came as a surprise to the markets and triggered significant moves in the mortgage bonds market.
Unlike the Federal Reserve, the Bank of England announced on Wednesday that they will resume purchasing assets to decrease the cost of borrowing for businesses in an attempt to revive their anemic economy. In England, as opposed to the U.S., conservatives support governmental intervention of that nature.
Apart from the news of the overall economic standing, little happened in U.S. this past week. An array of housing market-related indicators demonstrated further weakness in that area; builders' sentiment fell from 15 to 14, while a healthy market would generate a number above the 50 range. Their grim mood was supported by Housing Starts at a 5% decrease in August as compared to July; Existing Home Sales was up 7.7 percent on foreclosures, hinting of a further slide in housing prices. Jobless claims, by the way, fell slightly on Thursday, not that the market really cared about that bit of slightly positive news.
Recently, Netflix, the movie rental company, changed its subscription plans. As a result of what was perceived as an unpopular action, a significant number of customers cancelled their subscriptions and the stock slid to half of its previous value in a matter of two weeks. The Netflix CEO, surprisingly still the same CEO, appeared before the public this past week to apologize for the recent quagmire. The announcement of the DVD-rental arm spin off that accompanied his speech added to the anger on the company's recent actions. The story perhaps should be written into business school books as an illustrative example of how the product and structural changes should not be done as one would not come across such a grossly mishandled business change very often.
The Greek debt crisis occupied investors' minds at the beginning of the week as the EU increased pressure on Greece to boost their reforms, threatening to cut the lifeline of credit support. The measure would bring the country into default within a month. On a new wave of the crises escalation, the IMF warned that the banks would get into a huge capital hole if forced to devalue Greek debt (and potentially other sovereign debt) on their balance sheets. In that case, per IMF, private capital markets, as a preferred source for recapitalization, may not be willing to step in. As a result, a government bailout will become inevitable. The IMF annual meeting concluded this past Saturday with the pledge to contain the European debt crises, sending a more upbeat message to the markets.
There will be a flurry of news coming our way this week. New Home Sales will be reported on Monday; Tuesday's Consumer Confidence is released, and on Wednesday, Durable Goods Orders will be announced. The week gets busier towards the end; on Thursday we will hear about GDP, Jobless Claims and the Pending Home Sales Index; on Friday, Personal Income and Outlays, Chicago PMI and Consumer Sentiment will be the focus of attention.
Information Provided by NYCB Capital Markets