The Fed Is Trying to Avoid A Melt Down.

March 17, 2008
Author: Peter Stolcers, Founder of OneOption

Over the weekend, we learn that J.P. Morgan Chase was taking over Bear Stearns for two dollars a share. That bid came with a government guarantee on $30 billion worth of subprime loans. The Fed also lowered the discount rate by .25% over the weekend. The Fed was trying to stop fear of a financial collapse. If Bear Stearns had continued to do business this week, it would have filed for bankruptcy. That chaos could have thrown the market into a tailspin. As it stands, the market is weak, but the decline has been orderly. A week ago, this was a $70 stock. That goes to show you how quickly things can change. Tomorrow, the FOMC will meet and at minimum, a .5% cut in the Fed Funds rate is expected. I'm not expecting their rhetoric to have much of an impact. They have been extremely vocal and they have demonstrated their willingness to support financial markets. There will be a number of major financial institutions that release earnings this week. LEH, BSC, GS, and MS are on the list. Weak results are baked in the cake. That does not mean that these stocks are a buy. Any one of them could stumble as the credit problems rapidly expand. This is a quadruple witch and we are trading near the low end of the one-month range. That means that we are likely to see option related sell programs during this holiday shortened week. Foreign markets were hit particularly hard and they will not escape this credit crisis. Many of the firms I've referenced provide capital on a global basis and that financing will come at a higher price if it comes at all. I expect the market to decline into the close and I believe we will test the SPY capitulation low of 125 this week. My gut tells me we will break below that support level and the next down leg will begin. image

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