Tuesday, October 28th Afternoon Market Update

Tuesday: 10/28/08 5:00 PM EDT :
A technical bounce in stocks turned into a major rally today as the ascent forced out short positions, thereby adding more upward momentum. The gains came despite more bad economic news. Treasuries suffered from the rise in stocks and bonds finished down steeply.

In late trading, the 10-Year Treasury Note was down by 1-06/32, raising its yield by 14 basis points to 3.83%; the Dow was up by 889.35 points to 9,065.12; and the Nasdaq was up by 143.57 points to 1,649.47.

Following deep losses that left the indices at their lowest levels in over five years at yesterday's close, stocks rebounded this morning as traders picked up what they felt were bargains. Similar activity in foreign markets overnight encouraged this morning's buying. Signs of improvements in short-term borrowing conditions and expectations of a Fed rate cut tomorrow also helped spur the market.

The economic news of the day was not a decisive factor in today's market action. The Consumer Confidence Index hit an all-time low this month and the S&P / Case-Shiller indices (10-city and 20-city) of home prices showed record year-over-year declines in August.

The news caused stocks to momentarily retreat toward unchanged levels but the bargain hunting pushed them forward once again. As already noted, short-covering added fuel to the rally which picked up steam in the last two hours of trading. Stocks had a bigger rally on the 13th, but today's was the second largest. By the end of the session, the Dow had gained 10.88%; the S&P 500, 10.79%; and the Nasdaq, 9.53%.

Oil futures continued to slide today with a barrel of light, sweet crude for December delivery falling by $0.49 on the New York Mercantile Exchange to settle at $62.73. This was the lowest closing price for a front-month contract in almost a year-and-a-half.

The drop in price since a record closing high of $145.29 in early July is not good for the energy sector of the stock market and the reason for the decline -- reduced demand projections -- constitutes a bearish economic indicator. But lower energy prices also mean that businesses and consumers will have more money to spend on other things and that is a plus for the general economy.

With regard to the Treasury market, today's 2-Year Note auction was well-received. Bids exceeded the $34 billion offer amount by 2.49 to 1, the highest bid-to-cover ratio in the last four offerings and above the 2.35 average for the twelve auctions preceding today's.

Noncompetitive bids, a gauge of individual investor demand, were relatively soft, however. They totaled $539 million, the lowest amount in the last eight auctions. The twelve month average was $637 million.

But foreign demand for today's issue was strong. Indirect competitive bids, which include those from foreign central banks, garnered 41.3% of the issue, the highest award portion in the last twenty auctions. The twelve-month average was only 25.8%.

However, bond traders are not only looking at another Treasury auction on Thursday, but new 10-Year and 30-Year issues will be sold in two weeks. With the bailout bill and other debts mounting, the Treasury will be increasing its issuance in the future and those securities will compete with those already in the market.

Tomorrow morning, the report on durable goods orders for last month will be released. In August's report, the Commerce Department said the seasonally adjusted level of orders fell in August by 4.5% and this was subsequently revised in the factory orders report to a decline of 4.8%. This was the largest contraction since January of 2007.

Durable goods are defined as items meant to last three years or more. They are usually labor-intensive to produce, expensive, and therefore often financed. Because of this, the trend in orders provides some insight regarding upcoming production activity and the effect interest rates may be having on the process.

Another decline of about 1.0% is anticipated for September. Several key categories will also be closely scrutinized. Order levels excluding the volatile category of transportation will be reviewed as will the level outside the defense sector (not governed by standard market forces). A third key sub-category is orders excluding defense and excluding commercial aircraft orders. The category is seen as a gauge of core business demand. It fell in August by 2.4%, the largest decline in nineteen months.

The major event tomorrow will be the conclusion of the Fed's two-day, monetary-policy meeting. On the eighth of this month, the policy committee cut its target for the overnight borrowing rate between banks (fed funds rate) by 0.50%. It also made a same-sized cut to the rate charged to banks for loans directly from the Fed (the discount rate). Since August of last year, the discount rate has been cut ten times for a total of 4.00% from 6.50% to 1.75%. Since September of last year, the fed funds target has been cut eight times for a total of 3.75% from 5.25% to 1.50%. In addition, the Fed has also instituted numerous new programs designed to keep credit flows moving.

Despite all of these measures, most observers believe that the committee will vote to cut rates once again by 0.50%. If the prediction is true, it would likely move the markets since traders are likely calculating an uncertainty factor into their pre-statement positioning. But any different outcome from the meeting would have an even greater impact on the markets.