iBooyah.com Week in Review: August 7-12, 2006
Weely Review: August 7-12, 2006
I am sure most will agree this has been a volatile week for the financial market and the world. Let us reflect on some of the important events that occurred during the week as these events influences our investment decisions.
FOMC
The FOMC finally decided to hold the federal funds rate at 5.25%. This marks a turning point in the FOMC’s view towards monetary policy. After 17 straight increases, the Fed finally decided that enough is enough. As I have previously mentioned in my post, the signs of a slowing economy are all there, especially in the housing market.
There are more homes on sale today than in previous past 5 years. Inventory is up and buyers are hard to find. Homes are now remaining much longer on the market. The mortgage rate has been increasing steadily over the past 17 months. A typical 30 year mortgage rate now stands around 6.75%. Prices of existing homes continue to increase, but at their slowest pace in 5 years. It would appear the Fed’s mission of slowing down the housing market has been achieved.
The question now is if their actions will result in a “soft landing” or will drive our economy into a recession. This remains to be seen and will eventually be revealed in the coming months. My view is the Fed stopped at the right time and everything will be okay. I don’t foresee the same affect as the previous tightening cycle. The main reason why I believed the economy will continue to grow, but at a sustainable rate is due to healthy corporate profits. The situation is a stark contrast to the dot com bust where many companies failed due to ridiculously flawed business models.
War
In the beginning of the week, the War in Middle East continued to escalate with no end in sight. Casualties on both sides were beginning to mount. The numbers of refugees on both sides were also starting to get out of control. Israel also announced they will continue their offensive to disarm Hezbollah. Towards the middle of the week, the United Nation (U.N) finally agreed on a draft resolution to the conflict. The U.S and France played in important role. The resolution was initially rejected by both sides; offensive measure continued. Late Friday, the world received news that Israel and Lebanon has accepted the proposed resolution calling for a cease fire. Let us hope for the best as peace would be in the best interest of everyone.
The financial market did not get a chance to react as this news came after the stock market closed. In my view, this is a good thing as these types of news need to be properly digested. We will see the affect next week. Here is to peace!
Terrorism
Thursday was an interesting day for all of us, more so for those folks that were traveling by plane. The British uncovered another terrorist plot to blow up airplanes bound from the U.K to the U.S using a form of liquid explosives. Arrests were made and the media was all over the story. Airports across the U.S quickly went into heighten alert. The first thing airports across the country implemented was to ban any form of liquid. These include water, toothpaste, mouthwash, makeup and etc. There goes more of our freedom!
The stock market reacted quickly to the news and the airline stocks took the brunt of the sell off. Perhaps it is a good time to start looking into the airline stocks and see if there are some deals. Companies like American Airline (AMR) and Southwest (LUV) appears is looking like a good buy. I'll analyze these companies in the coming weeks.
Oil
Last Sunday, we received word that BP will be shutting down oil production in Alaska due to rusted pipes. With record profits these oil companies are making, you would think they would do a better job of maintaining these pipelines. The economy will have 400,000 barrels less of crude until this is repaired. This news drove the price of oil to nearly $78 per barrel on Monday. As a result, the overall market sold off on the news. The market was already nervous about the FOMC’s decision to be release the next day. The BP news provided additional reason to sell.
The price of oil finally stabilized toward the end of the week at around $75 per barrel. Perhaps the news of the cease fire in the Middle East will provide some relief next week. However, do not expect our gasoline prices to drop anytime soon. The $3 per gallon is here to stay, unfortunately. In my view, investing in oil companies is still the way to go. Look for weaknesses and consider buying the Chevron (CVX), BP (BP) and Conoco Phillips (COP).
