This was an active week in the financial markets. In fact, this was an historic week in the financial markets. We saw a huge interest rate cut from the Federal Reserve, the seemingly overnight disappearance of a venerable investment bank, and three days of triple digit swings on the Dow Jones Industrial Average.
The week started with the news on Sunday that the Treasury had assisted in the sale of Bear Stearns to J.P. Morgan Chase. It was a maneuver designed to ensure that Bear Stearns could open for business Monday morning following a dramatic drop in liquidity as firms that traded with Bear began to question whether Bear would be solvent to complete the trades. Although terms are not finalized, the purchase price is likely to be $2 per share, after Bear Stearns closed last Friday at $30 and Thursday at $57. This rapid deterioration is a reminder of the downside of leverage and the importance of liquidity.
The Federal Reserve cut the federal funds rate ¾ of a point on Tuesday. They were widely expected to cut somewhere between a half and full point, and splitting the difference was agreeable to the stock market as the Dow rallied 400 points. The schizophrenic market then sold off 300 the next day, then rebounded 300 on Thursday. The Fed is walking the tightrope of trying to jumpstart lending and economic activity through lower rates while not stoking inflation.
A market that is this volatile is one that is trading with high emotions. These swings can present opportunities to the disciplined investor with a long term perspective. It's hard to predict how the history books will be written, but I have a feeling we will be talking about the events of this week for years to come.
If you have any questions please call us at 877-442-0042. Please feel free to forward this email to your friends and family by clicking on the forward link at the bottom of the page. As always it is a pleasure serving your investment needs.
Have a great weekend!
James B. Bell, CFA
http://www.garrisonassetmanagement.com/
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