US Market incurs loss despite turnaround

Is Ferderal Reserve’s move too little and too late?

US Stock market rebounded back on Friday, 17 August, 2007. Federal Reserve cutting its discount interest rate was the main catalyst behind this turnaround. Nevertheless, all the three indices posted sufficient losses for the week ended Friday.

The market is in a stomach-churning ride with credit, the lifeline of the economy, supposedly drying up. Market continued to exhibit extremely volatility in all the trading sessions during the course of the week. The credit crunch that began with rising defaults in subprime mortgages - home loans made to people with weak credit histories - is supposedly spreading to other borrowers.

Countrywide Financial’s problems financing its business operations in the last two weeks were the major reason brought the recent turmoil in the forefront. The company said it was being forced to use its 100% lines of credit ($11.5 billion) to fund its operations because other sources of short-term credit were not available.

Countrywide's news fueled a 300 point drop in the Dow at one point on Thursday, 16 August.

On Friday, Federal Reserve reduced the discount interest rate (the rate at which it lends funds to banks) by a half percentage point to 5.75% from 6.25%. It surely saved the market from posting more sizable losses for the week and served as a welcome confidence boost. Market opened up more than 320 points up, but then ended the day being up by 233 points.

But still, The Dow Jones Industrial Average lost 160 points for the week. Tech - heavy Nasdaq lost 40 points while S&P 500 lost 8 points.

The Federal Reserve also added approximately $19 billion (including in repos) to help calm investors this week. , but worries about tight credit conditions and systemic risk continued to weigh on sentiment.

Regarding economic news, the Consumer Price Index report showed that consumer prices rose 0.1% in July, The number was in line with economists' expectations and down slightly from the 0.2% rise in June. The core number, which excludes volatile food and energy prices, rose 0.2% last month, also in line.

The Commerce Department reported that housing starts (the number of privately owned new homes on which construction has been started over some period) fell 6.1% in July to a seasonally adjusted annual rate of 1.38 million. That was the lowest level since January 1997.

Also, The National Association of Home Builders/Wells Fargo index of builder confidence fell to 22, from 24 in July. That was also the second weakest reading since the survey's inception in 1985.

On the earnings front, Wal-Mart, posted disappointing second quarter results and offered a bleak outlook for the remainder of the year, exacerbating concerns about consumer spending. Home Depot too reported its first quarterly sales decline in more than four years due to the housing slowdown. But H-P came out with a blowout report and also upped its guidance for next quarter.

Executive Summary

For the week, all the three indices registered losses. DJIx is down by 1.23%, S&P 500 is down by 1.9% and Nasdaq is down by 3.7%. The Dow is almost 1,000 points lower than its all time high of 14,000 mark which it touched a month back.

US Market seems to be plagued by a number of factors right now – liquidity crunch in credit markets, subprime problems, housing problems and some hedge fund related issues whose health seems to remain unknown for months. Federal Reserve also cut discount interest rates in addition to injecting liquidity. But investors seem to feel, its too little and too late.

For the year, Dow is up by 4.9%. Nasdaq is up by 3.7% and S&P 500 is up by 1.9%. No body is aware as to the extent of the credit crunch or the subprime problem. No one also knows whose fault is it anyway. But it seems that the problem has not been yet been addressed totally and will continue to take a toll on the market in the coming weeks.