Market Up! Market Down! Market Remains The Same!

The week virtually unchanged, but not without some very violent movements.

March 16, 2008       Leave a Comment
By: Jerry Cole - Retirement, Investment

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The market ended the week virtually unchanged, but not without some very violent movements in between. Tuesday the market soared 417 points or 3.5% to close at 12,157 which was its best one day performance in 5 years. The NASDAQ Composite gained 86 points or 4% that day, the biggest one-day gain for the tech-heavy index since March 2003. The gains came thanks to a move by the Federal Reserve to boost liquidity to the financial markets.


There has been a concerted effort by central banks around the world to use every weapon in their arsenal to return credit markets back to normal. However, restoring confidence is not an easy thing to do. Confidence requires faith and trust, neither of which seem to have any traction in the market place over the last 6 months. Every time something positive takes place in the market, something negative rears up to overshadow it. The latest negative took place on Friday when news broke that the Federal Reserve stepped in to grant Bear Stearns an emergency loan.

Bear Stearns is an 85-year-old institution that has survived the depression and two world wars. It is the fifth largest securities and investment banking firm on Wall Street. It has the reputation of one of the most astute risk managers. It has a large mortgage business and its mix of other businesses is less diverse than those of investment banking rivals- a situation that hurt Bear Stearns when the subprime-mortgage problems developed last Spring.

Because investors lack confidence in any securities that are backed by subprime mortgages, Bear has found itself in a severe liquidity crisis. So while the Fed's move to help Bear and keep the crisis from spreading could be seen as positive, the market reacted negatively, seeing the move as another unsettling financial event in the spreading credit crunch.

So stocks got pummeled on Friday, finishing down 194.65 points, off 1.6%, at 11951.09 with 29 of its 30 components in the red. This despite some better-than-expected inflation data. Investors continue to shun potentially risky assets such as stocks, higher risk bonds and of course mortgage debt. In the past few weeks they have even fled seemingly safe products such as municipal bonds and debt issued by Fannie Mae and Freddie Mac, which are government-sponsored enterprises. They are instead flocking to U.S. Treasurys and gold, and money markets, customary havens.

Although gold hit a momentary $1,000 a troy ounce this week, it remains well below the inflation adjusted high set in 1980 ($2239.67). Inflation then was 14% as compared to today's rate of 4.3%. U.S. Treasurys could be getting over-priced as their yields are getting close to record lows. Money market funds are paying at about the rate of inflation or 3.12% on average and are relatively safe but offer no growth.

A money market fund is a type of mutual fund and is not to be confused with a bank deposit or pass book account. The bank deposit is FDIC insured and pays a minimal rate of interest. The money market fund is not insured, but by law have to invest in low-risk securities. Money market funds typically invest in government securities, certificates of deposits, commercial paper of companies, and other highly liquid and low-risk securities. They attempt to keep their net asset value (NAV) at a constant $1.00 per share - only the yield goes up and down. The NAV could go below $1.00 if the investments perform poorly.

So the worry wall is there for climbing. Let's hope we get to the top soon. Meanwhile, remember to keep your risk within your tolerance and keep ahead of inflation.

I invite your questions.

(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)

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Jerry Cole - Retirement, Investment
Jerry Cole has been a Financial Planner for almost 30 years in the Tri-City area and holds and MBA from USC. More from Jerry Cole - Retirement, Investment

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