This is The Wall Street Digest Hotline Update for Tuesday, December 11, 2007, at 6:00 p.m. EST.
Wall Street was disappointed with the Fed's 25-basis point cut in the discount rate. Stock prices plunged after the mid-day announcement. At the close, the Dow sank 294 points, closing at 13,432, while the Nasdaq lost 66 points, closing at 2,652. Oil closed $1.28 higher at $89.14 per barrel, and gold closed $11.70 lower at $801.80 an ounce.
Wall Street was expecting a 25-basis point cut in the Fed Funds rate and a 50-basis point cut in the discount rate. The Fed did cut the Fed Funds rate by 25-basis points, but Wall Street was extremely disappointed with the 25-basis cut in the discount rate. Wall Street wanted a deeper discount-rate cut to assist the process of liquefying the credit markets. The Fed governors meet every two weeks, which will allow further rate cuts, as needed.
The dollar fell immediately after the Fed's rate cut. The Fed Funds rate is still more than 100-basis points above the 2-year Note. Consequently, I expect further rate cuts totaling 75- to 100-basis points during 2008.
I would continue to avoid the following sectors: financials, brokerages, banks, and the insurance companies. No one knows how much collateralized debt obligations (CDOs) these companies still own, nor do they know what the CDOs are worth. I would also avoid the housing sector. I would not purchase a home or a condo, nor would I bottom-fish the housing stocks. The housing market will not bottom during 2008 in most markets.
Stay fully invested! Stock prices in China, India, Asia and the emerging markets will outperform the U.S. stock market because of the falling dollar. Global/international investments will enhance your investment returns as local currencies rise against the falling dollar. Stay close to our telephone/e-mail/website Hotline Updates.
The next Hotline Update will be on Friday, December 14, 2007, at 6:00 p.m. EST.