Multiple factors combined to help the stock market post gains.
Dec 4, 2007


First, the Fed Chairman's words - the turbulence in financial markets is having an adverse effect on the rest of the economy. He further stated that the Fed would be "exceptionally alert and flexible" in dealing with any surprise the economy might toss up. Market participants took that to mean a further rate cut when the Fed meets on December 11th, 2007. Any rate cut is seen in a favorable light by the stock market since it translates into a lower cost of funds and spurs investments and the growth of companies.

News came out last week that to help homeowners with Adjustable Rate Mortgages (ARMs) that are due for reset in 2008 avoid possible foreclosures, the Treasury Department, in close consultation with mortgage banks and other financial institutions, is finalizing a plan which would postpone the reset of the rate until three to five years into the future. This, however, would apply only to those homeowners that have never been late with their payments thus far. This and other news that the government is not going to be a disinterested bystander but an active participant in helping homeowners, and indirectly mortgage banks and investors in mortgage backed securities, through the current crisis came as a "shot in the arm" to the markets. Big financials such as Fannie Mae, Freddie Mac and Countrywide Financial Corporation saw their stocks post double digit gains.

In other news, oil prices defied earlier predictions of a triple digit price per barrel, and settled down to less than $90 per barrel. News that helped this included expectations that the Organization of the Petroleum Exporting Countries (OPEC) would increase production and supply combined with new forecasts of lower than expected demand for oil this coming winter.

The greenback continues to sell-off against foreign currencies. This should NOT be a source of concern yet as it simply becomes an opportunity to gain from foreign currency denominated assets. In a free market economy like ours, movement in currency exchange rates provides opportunities to benefit from investing in other countries with bustling economies (which usually have a stronger currency). In the case of the US, we are seeing a correction from the overheated economy of a couple of years ago, when foreign countries sought to park funds in US Dollar denominated assets. As the US economy cools off and the Fed keeps cutting interest rates, such correction is expected and actually beneficial in providing equilibrium between different currencies.

Important economic releases awaited in the coming week include total November vehicle sales on Monday, October factory orders on Wednesday, and November unemployment rate figures.


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