Fed Cuts Rates Half Point To Lowest Level in 4 Years

The Federal Reserve slashed a key interest rate by half a percentage point as it seeks to revive an economy hit by a long list of maladies stemming from the most severe financial crisis in decades.

The central bank on Wednesday reduced its target for the federal funds rate, the interest banks charge on overnight loans, to 1 percent, a low last seen in 2003-2004.

The funds rate has not been lower since 1958, when Dwight Eisenhower was president.

The cut marked the second half-point reduction in the funds rate this month. The Fed slashed the rate by that amount in a coordinated move with foreign central banks on Oct. 8.

In a brief statement explaining Wednesday’s action, the Fed said the “intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and business to obtain credit.”

The central bank said it had room to lower rates because the spreading economic weakness was lowering the risks that inflation would get out of control. Indeed, the weakness has caused dramatic declines in the price of oil and other commodities.

While many economists believe the country has already fallen into a recession, they think the aggressive efforts by the Fed to cut rates and take other actions to unfreeze credit markets will keep the country from plunging into a prolonged and deep downturn.

The Fed’s action was expected to be quickly followed by a reduction by commercial banks in their prime lending rate, the benchmark for millions of consumer and business loans, by a similar half-point.

Global Recession Fears Grip Market

There was no mistaking the fact that global recession concerns unsettled the market this week.

How do we know?  Let us count the ways:

  1. Closely-watched Libor rates, which is what banks charge each other for dollar loans, continued to come down across all terms, yet the market showed little regard for this improvement other than in Monday’s session
  2. 30-year bond yields hit their lowest level (3.87%) since regular issuance began in 1977
  3. Oil prices plunged 11% to $64.50 per barrel even as OPEC agreed to cut production by 1.5 million barrels per day
  4. The dollar index surged nearly 5% in a flight-to-relative safety trade
  5. Foreign markets unraveled Friday after Sony issued a profit warning and the U.K. reported a 0.5% decline in third quarter GDP
  6. An increasing number of companies communicated plans to cut the size of their workforce
  7. Companies reporting third quarter earnings were united in their cautious outlook; Dow Chemical went so far as to say it will likely see a global recession through most of 2009

There are other items one could point to, yet no matter where fingers are pointed, the fact remained that the prevalent order of the week was to sell stocks.

A factor that weighed heavily on the major indices was the idea that a lot of the selling was forced selling by hedge funds needing to meet margin calls and redemption requests.  Their forced selling presumably fueled more selling by sound accounts anticipating redemption requests of their own, as well as selling by individual investors who simply couldn’t tolerate the continued volatility, which spiked to another record high this week.

Gold is Getting Hammered – Maybe You Should Buy

Good Time To Buy Gold

Good Time To Buy Gold

“Speculative selling continues to hammer commodity prices,” wrote James Moore, an analyst at TheBullionDesk.com. Meanwhile, gold was also “under pressure as the dollar rallied.”
Gold is often seen as an investment safe haven whose prices tend to rise when the economy falls into troubles, but its recent slumps have defied conventional wisdom. 
“The fact that gold did not head higher during the current leg of the crisis seems to reflect a combination of the rise in the dollar, deleveraging of commodity positions, sales to meet margin calls, and the unwinding of the long gold, short dollar trade,” wrote Natalie Dempster, an analyst at the World Gold Council.
Price      Change    %
GOLD 100 OZ FUTR (USD/t oz.) 717.400 -17.800 -2.42

Dollar Hits Two-Year High Against The Euro

“This is just another stage of the credit crisis,” said Birinyi Associates analyst Cleveland Rueckert.

“Now we’re seeing the effects in world economies of the trickle down effect of the last year and a half.”

The sell-off in commodities has hit gold, oil, base metals, sugar and grains and is tied to the soaring dollar. The dollar hit a two-year high against the euro on Wednesday as investors move away from investing in foreign markets and look to the dollar as a safe haven. Whereas earlier in the year many investors hid in commodities pushing prices higher than demand warranted, now there’s a big move to cash, Rueckert said. This hurts dollar-priced commodities, which appear cheaper as the dollar gets stronger.

The euro fell to $1.2886 against the dollar from $1.30, while the pound fell to $1.6208 from $1.6698.

Other currencies are also depreciating as central banks try to inject capital into their financial systems. The United States has been doing the same, but the dollar is still benefiting as a safe-haven play.

Money Fleeing the Market at Rate Typical of Bottoms

Posted Oct 22, 2008 12:47pm EDT by Aaron Task in Investing, Recession

As the market struggles to find its footing, debate is raging over whether the kind of panic typically associated with market bottoms has occurred in recent weeks.

It’s too soon to judge whether a sustainable bottom has occurred, “but there is a bit of capitulation going on,” says Liz Ann Sonders, chief investment strategist at Charles Schwab & Co.

According to Sonders, outflows from mutual funds in the first two weeks of October exceeded the record $75 billion of redemptions set for the entire month of September.

Breaking things down further, the most dramatic outflows have come from assets tied to commodities like oil and gold, as well as emerging markets, which have suffered even more dramatic declines than the Dow and S&P.

That level of “I give up, get me out”-type activity — which is also evident in massive redemptions from hedge funds – is typically associated with market bottoms. Conversely, mutual fund investors were most bullish at the market’s peak in early 2000.

To be clear, Sonders isn’t a market timer or declaring the bottom has been established. Her message remains unchanged: have a plan, stick to it, stay diversified and periodically rebalance. But when panic – or even just fear — is in the air, it’s probably too late to go to cash, which may feel “safe” but typically proves to be a long-term loser after adjusting for inflation, she notes.

Fed To Buy Frozen Money Market Assets

Show Me The Money

Show Me The Money

New Money Market Investor Funding Facility (MMIFF)

Fed To Buy Frozen Assets To Meet Redemptions from Money Market Accounts

Federal Reserve will help finance purchases of up to $600 billion in assets from money market mutual funds which have suffered redemptions from investors seeking the safety of government debt. The program start date should be announced by the end of this week. Holy Hell, what’s next?

Gold (GLD) – SPDR Gold Shares

On 10/16/2008 – Bought GLD at $80 per share.

SPDR Gold Shares (GLD)

SPDR Gold Trust (the Trust), formerly StreetTRACKS Gold Trust, is an investment trust. The Trust holds gold, and from time to time, issues the SPDR Gold Shares (Shares) (formerly streetTRACKS Gold Shares) in blocks of 100,000 Shares (Baskets) in exchange for deposits of gold and distributes gold in connection with redemptions of Baskets. The Shares represent units of fractional undivided beneficial interest in and ownership of the Trust. The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion. The sponsor of the Trust is World Gold Trust Services, LLC. The Bank of New York is the trustee of the Trust. HSBC Bank USA, N.A. serves as the custodian of the Trust’s gold.

Silver (SLV) – iShares Silver Trust

On 10/10/2008 – Bought SLV at $10 per share.

Silver (SLV) ETF

Silver (SLV) ETF

iShares Silver Trust (SLV)

is a grantor trust. The purpose of the trust is to own silver transferred to the trust in exchange for shares issued by the trust. Each iShare represents a fractional undivided beneficial interest in the net assets of the trust. The assets of the trust consist primarily of silver held by the custodian on behalf of the trust. The sponsor of the trust is Barclays Global Investors International, Inc. The activities of the trust are limited to issuing Baskets of iShares in exchange for the silver deposited with the custodian as consideration; selling silver as necessary to cover the sponsor’s fee, trust expenses not assumed by the sponsor and other liabilities, and delivering silver in exchange for Baskets of iShares surrendered for redemption. The objective of the trust is for the value of the iShares to reflect, at any given time, the price of silver owned by the trust at that time less the trust’s expenses and liabilities.

Fidelity, Vanguard Join Treasury Program

Hail Mary Pass

Hail Mary Pass

Fidelity Investments, Vanguard Group and T. Rowe Price Group said they are joining the U.S. Treasury Department’s guarantee program for money-market funds, meaning all the major fund families will participate in the program.

Wednesday is the deadline to join.

The program, announced Sept. 19 in the midst of the largest-ever run on money-market funds, is intended to calm investors fears. It insures all money-market holdings as of Sept. 19 in the event any funds break the buck. Continue reading