The news seems to be more important than the stock market moves these days. We think the stock market's reaction to the latest news from CFC (Countrywide Financial) on Friday is, uh, optimistic. OK, there are stronger words we could use but come on. As the company announces a third quarter loss of $1.2 Billion, the first loss in the company's 25 year history, the CEO, Angelo Mozilo, says that company should return to profitability in the current quarter. There is some questioning of that statement based on the guy selling a bunch of shares recently. With that news the stock made a 30% plus up move to just over 17.
After Merrill Lynch's horrendous earnings' report, the CEO there has decided to negotiate an exit strategy. We're pretty sure the severance package will be more than most of us will make in a lifetime and this is after reporting an $8 billion loss for the company. That's a good reason to get a big severance. Sorry, sarcasm is still alive and well here at the Update. At any rate, the WSJ should have a page 1 article on the subject Monday morning based on what we're seeing online this evening.
Let's take a look at the upcoming week because it looks like a big news week with three big items during the week. The first of course is the the Fed's rate reduction coming up on Wednesday. We think the reduction is almost a lock due to the positioning of the Treasury bills well under the Fed Funds rate, allowing room for the Fed to drop rates. The market has assigned a very high probability for a 25 bps drop this week but we still think there is a possibility for another 50 bps. Tonight we are with the market in assuming a 25 bps drop but we will continue to watch the news over the next few days.
The second big item is Friday's jobs' report. This report indicates the employment situation for the month of October. You remember how the August number was negative when it first came out but then in October there was a dramatic revision in that number as the September number was back into a more normal range. With such unreliability, this number is becoming less important and we think that is by design. We will see how the market reacts to the October number.
The other big number which we think will actually be a little number is the first estimate of the third quarter GDP. We don't know how this number could be good with the huge credit problems that surfaced in the third quarter but the important thing is how the market will react to the number, as always.
This brings us to the analysis of the evening. The stock market thrives on liquidity and we think the liquidity has been challenged even with the Fed trying its best to push money into the system. That money seems to have found a home in the Treasury market more than the stock market or in more productive loan creation. But, we look at the level of the stock market and see how close the Dow is to its all time high and consider that the liquidity must still be there.
Noteworthy is that the Dow is below the those highs for now and we think this week will bring a reaction high, or more commonly called a corrective high here. There will be a point in the week where the market will not be able to go up. That will most likely be right after the rate reduction on Wednesday but we can't know that tonight. We will try to analyze that possibility over the next few days.
This should be an interesting week...