The Markets' Shooting Spree

The markets got the shot in the arm and they had been clamoring for last week, as the U.S Federal reserve slashed interest rates down to 3%, as well as taking another 0.5% off the discount rate. Fading the Fed was the trade to make last week, as traders aggressively sold the initial rally in equities that greeted the Feds decision. Contributing to the sell off on Wednesday was a downgrade of the Monoline insurer FGIC's credit rating from AAA to AA.

Monoline insurers have come to the forefront recently, with a rumored rescue package contributing to recent rallies. Monolines are so called because they operate in one line of business, which is to insure as much as $2.5 trillion of debt globally. The Monoline bond insurers rely on their AAA credit rating because this has a knock on effect on the credit rating of the insured assets themselves. This could be potentially devastating to an already shaking credit market. Markets rallied on Thursday, partly on the back of news that Monoline insurer MBIA (MBI) will keep its AAA credit rating. According to some analysts, ratings agencies are under considerable pressure to hold off downgrading ratings of the two largest Monolines, until the rescue package has been achieved.

The catalyst for rally on Friday was for once not directly related to the credit market. Microsoft's (MSFT) $44.6 billion dollar takeover proposal of Yahoo (YHOO) caused Yahoos share price to surge to over 50%, and U.S futures markets to turn around early sluggish trading. The proposed takeover price represents a hefty 60% premium to Yahoo's previous closing price. Markets were buoyed by the news on speculation that tech stocks are undervalued in general, and that the merger and acquisitions train is back on the rails. The news marked a turn around for tech stocks after Google (GOOG) and Apple (AAPL) had disappointed with earnings reports.

U.S markets managed their biggest weekly gain in five years as the S&P 500 (SPY) rose 4.9% and the Dow (DIA) 4.4%. The Nasdaq (QQQQ) still lagged behind with a gain of 2.8%. The gains came despite poor jobs data and a record drop in year on year new home sales in the U.S.

The top announcements this week in Europe are the MPC and ECB interest rate announcements on Thursday. Analysts speculate that the two could move in different directions, after it was announced that the Eurozone's inflation level remained 1% above the target rate of 2%, and UK manufacturing growth slowed to its lowest level since August 2005. The poor manufacturing figures could open up the door for a quarter point cut in the UK, while the ECB's commitment to fighting inflation could result in a quarter point raise next week.

After rising so far from the market lows it is arguable that we are now overbought in a bear market. Economists estimates for the probability of a recession vary from 50-80%. According to Econoday.com, the yearly Nonfarm Payroll yearly % change is now in negative territory after starting to decline in Q1 2006. While there may be some more upside potential, it is arguable that the route may not be as direct as it was over the last week. A no touch higher returns a profit if a certain level isn't touched before the trade expires. A trade predicting the S&P 500 not to touch 1508 in the next 25 days could return 14% over the next 25 days.

Comments

[JIM]

Apple's earnings were great. You're wrong about that. Idiot analysts didn't care for the forecast...

[Thomas A,Gaughan]

Mike Wright, Why do you say stuff that's not true? Apple's earning were the best in company History. They have 1 Billion dollars in deferred revenue. Mac's sales are growing and their New OS system is a success. Also they have 18 billion dollars in the bank. So if that's a failure, I bet every company out their would like to fail like Apple is. Another words their not failing.

Thomas A. Gaughan

[Brewer]

This is all true, Apple is doing great. But the iPod market is slowing, and traders think that is Apple's #1 market. Remember, about 99% of these guys are using Windows and think it's OK. :-) Truth is, Apple are about to steal the desktop market from Microsoft. They have already taken much of the laptop market.

Used to be Windows had more software. This is about to change as Apple ties iPhone/iPod development to OS X. Besides, we all know Apple runs windows better than Dell, HP or any of the various, generic part assemblers out there. PC is a commodity product.

But stocks are a game to make money, it's not about what the company is really worth, it's about who is going to buy and why. Everyone is looking to make as much as possible. When the stock gets expensive, like Apple at $200, you have to think if you would find that an opportune time to buy. If not, perhaps it would be wise to sell and reload later when the market sells off Apple to cover all their other losses.

[blah-blah]

If I had a nickel for everytime someone wrote that Apple or Linux was going to steal the desktop market from MS, I wouldn't have to buy stocks.

After 15 years, can't someone write something new?