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This currency, as we
manage it, is a wonderful machine. It performs its office
when we
issue it; it pays and clothes troops, and provides victuals
and ammunition; and when we are obliged to issue a quantity
excessive,
it pays
itself off by depreciation. ~ Ben Franklin, April 1779
The Markets
Ask and you shall receive. Investors were
asking for another interest rate cut and the Federal Open
Market Committee (FOMC) delivered last week as they lowered
the federal funds rate by a quarter percentage point. The
market’s reaction to the cut that day was positive,
but by the end of the week, additional influences came in
to play and the broad market ended down, as measured by the
Standard & Poor’s 500 index.
At any point in time,
as the FOMC ponders interest rate moves, they keep two key
objectives in mind. First, they
try to keep inflation under control and second, they try
to ensure steady economic growth. If inflation is too high,
the FOMC tends to raise interest rates, which increases
borrowing costs and frequently results in slower economic
growth. If
economic growth is too slow, the committee tends to lower
interest rates, which reduces borrowing costs and frequently
leads to a stronger economy.
As you can see, the FOMC has
to walk a fine line here by trying to peg interest rates
at a level that will balance
these two key objectives. In the statement that accompanied
last week’s interest rate cut, the FOMC said, “The
upside risks to inflation roughly balance the downside risks
to growth.” This means the committee is in a “neutral” position
and that they are about as likely to lower rates in the future
as they are to raise them.
Investors tend to wait with baited
breath each time the committee meets and then they tear apart
the accompanying
statement for any clues to the direction of the economy.
At the end of the day though, the committee members are fallible
just like everybody else. Sometimes they get it right and
sometimes they don’t. However, despite the committee’s
fallibility, investors still tend to put a lot of weight
in the committee’s actions.
| Returns through 11/2/07 |
1-Week |
Y-T-D |
1-Year |
3-Year |
5-Year |
10-Year |
| Dow Jones Industrials |
-1.5 |
9.1 |
13.4 |
10.6 |
9.7 |
5.9 |
| Nasdaq Composite |
0.2 |
16.4 |
20.6 |
12.3 |
15.0 |
5.6 |
| Standard & Poor's 500 |
-1.7 |
6.4 |
10.7 |
10.1 |
10.7 |
4.9 |
Source: Yahoo! Finance, Barrons
Past performance is no guarantee of future results. Indices
are unmanaged and cannot be invested into directly. Three-,
5-, and 10-year returns are annualized. Assumes dividends
are not reinvested.
Top Headlines:
- Merrill
Lynch (MER) CEO Stan O'Neal announced
his official departure from the company early this week.
O'Neal plans to leave amid controversy of merger talks
with Wachovia (WB) without board approval and the recent
write-down mess reported last week in the company's earnings
report. (10/29)
- The economy
continued to elude credit market
and subprime worries this week as the Commerce Department
reported
better than expected 3Q GDP growth of 3.9%, marking
the strongest performance in six quarters. Consumer prices
also proved to be positive, rising 1.7% and staying
within
the Fed's comfort zone. (10/31)
- U.S.
manufacturing saw
a fourth straight month of slower growth according to
the ISM Index released this week.
The index fell to 50.9%, with apparel, petroleum
and food leading 9 of the 18 industries reporting growth.
(11/1)
- Income and spending growth slowed
in September with personal income rising by 0.4% and spending increasing
by 0.3%. Core inflation, which excludes food and
energy
prices, also saw a rise to 0.2%. (11/1)
- The FOMC cut
both the Fed funds and discount rate by 25 basis points
at their regularly scheduled meeting
this week, leaving rates at 4.5% and 5% respectively.
The Fed explained that the cut was necessary
to protect the market from an expected growth slowdown
in
the near
future. (11/2)
- Payrolls rose
by an astounding 166,000 in the month of October, easily eclipsing the consensus
of 90,000.
Also detailed in the labor department's report
was the unemployment rate staying steady at 4.7%. Strong
growth
in healthcare and food services led the way
for the month, while banks and manufactures posted a decline
in growth.
(11/2)
 Why
do some people solve problems more creatively than others? Are
creative thinkers different from methodical thinkers? A new
study by John Kounios, professor of Psychology at Drexel
University and Mark Jung-Beeman of Northwestern University
reveals a distinct pattern of brain activity, even at rest,
in people who tend to solve problems with a sudden creative
insight. The pair say creative solvers exhibit greater activity
in several regions of the right hemisphere which is involved
in processing “remote” associations between the
elements of a problem, an important component of creative
thought.
Creative and methodical solvers also exhibit
different activity in areas of the brain that process visual
information. For
example, the pattern of “alpha” and “beta” brainwaves
in creative solvers was consistent with diffuse rather than
focused visual attention. As noted in the Drexel press release, “This
may allow creative individuals to broadly sample the environment
for experiences that can trigger remote associations to produce
an ‘Aha! Moment.’ For example, a glimpse of an
advertisement on a billboard or a word spoken in an overheard
conversation could spark an association that leads to a solution.
In contrast, the more focused attention of methodical solvers
reduces their distractibility, allowing them to effectively
solve problems for which the solution strategy is already
known, as would be the case for balancing a checkbook or
baking a cake using a known recipe.”
Can you figure out this riddle?
I can be
quick and then I'm deadly,
I am a rock, shell and bone medley.
If I was made into a man, I'd make people dream,
I gather in my millions by ocean, sea and stream.
Click here for the answer.
Best Regards,
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