Yesterday’s Selloff

Calendar August 29, 2007 | Posted by Jorge

I was under the impression the selloff yesterday was a result of the continuation of the housing and financial crisis with housing reports indicating a decrease in median home prices by a good 3%. It seems the market was fixated on another piece of news yesterday, the FOMC minutes from three weeks ago. You can find the entire transcript at FOMC’s Minutes and Statements website. A couple of points I found to be rather interesting:

Participants agreed that the housing sector was apt to remain a drag on growth for some time and represented a significant downside risk to the economic outlook. Indeed, developments in mortgage markets during the intermeeting period suggested that the adjustment in the housing sector could well prove to be both deeper and more prolonged than had seemed likely earlier this year.

Members expected a return to more normal market conditions, but recognized that the process likely would take some time, particularly in markets related to subprime mortgages. However, a further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response. Policymakers would need to watch the situation carefully. For the present, however, given expectations that the most likely outcome for the economy was continued moderate growth, the upside risks to inflation remained the most significant policy concern. In these circumstances, members agreed that maintaining the target federal funds rate at 5-1/4 percent at this meeting was appropriate.

At least the FOMC recognized that there’s a problem, although from the looks of it it feels as if they were still fixated on inflation and the economy. What will be interesting now is how they react at their September meeting now that the subprime and housing markets have tanked with the latest casualty being Countrywide and Bank of America’s $2 billion injection into their company. With the cut in the discount rate and the fact that the FOMC did notice that the housing and financial markets aren’t as stable as they should be, I think they’ll cut the Federal Funds rate by 25 basis points. That should provide a temporary boost in the economy but if what I remember from high school economics still holds, any cut in the rates take about 6 months to filter through the system. It might be even more interesting and not really as shocking to see the FOMC cut rates by 50 basis points, but that might be highly unlikely. I expect the funds rate to drop to an even 5% come mid-September.

Category Categories: FOMC, Market Pulse | Tag Tags: | Comments Comments

  • A nice turn-around today, huh? I didn't expect it either. When the yield of a stock like Bank of America goes above 5% though, with little threat to the dividend, there's bound to be some buyers.
  • Jorge
    Yeah there has to be some buyers. Although I heard from the financial websites that today's rally may have been due to the Fed cutting rates on Friday. I think that's what bothers me the most about playing in the stock market. Any little rumor can swing stocks one way or another. But at least it's fun when you're on the winning side!
  • Jorge,

    I expect downs (like the 280 yesterday) and ups (like the 244 today) to continue for awhile. However, I am just holding for now. I don't plan to make any purchases or sells until a clear direction is established.

    BTW, my portfolio was down 5% yesterday and up 2% today. Still positive, for now :-)
  • Jorge
    Yeah I just caught your reply on your blog a little while ago. My main problem's my inexperience. I've been buying on the way down with a couple of stocks (XTO being one of them). The purchases themselves aren't bad, the timing of the purchases is.

    I'm down about 10% so far which is not a good thing. Thankfully it's 10% of a relatively small amount (under $2000). I'm using this time as more of a training exercise, or tuition even, until I start playing with real money. Good luck tomorrow. If the rumors of a Fed cut are true, I might make back that 10%!
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