Four at Four: Where Does It End?
Posted by MarketBeat Staff
January 25, 2008, 4:07 pm

The driving factor in the market’s return from the depths this week was the Fed’s decision to jump in early on Tuesday and take a hefty three-quarters-of-a-point whack out of the target for its benchmark short-term interest rate a little more than a week before members of the Open Market Committee were scheduled to sit down in Washington for the first of this year’s regularly scheduled deliberations on the price of money. Despite the surprise party the Fed threw for the markets on Tuesday that meeting is still on, and traders generally expect policy makers to deliver another rate reduction, though opinions vary on just how much the Fed will loosen the spigot. Whatever the ultimate size of the cut, some on Wall Street are wondering whether the ongoing interest-rate tango between markets and the central bank is bound to end up in tears. Economists at Lehman Brothers note that if the Fed delivers a half-point cut next week, they will have cut rates by well more than 1% in a matter of days. "If this already aggressive Fed was to ratify these new expectations and the markets were to benchmark once again, where would it all end?," they wonder.

Options in Merck and Schering-Plough traded heavily as the Food and Drug Administration said Friday it will review clinical-trial data on Vytorin, a cholesterol-lowering drug co-marketed by the pharmaceutical giants. Merck and Schering-Plough have faced criticism they delayed reporting results of the drug trial, which showed that Vytorin was no better than standard treatments at slowing artery-clogging. "As soon as the FDA said that they were going to be making comments today, the options market reacted in kind," said Adam Futterman, managing director of options sales and trading with WJB Capital Group. A measure of expected volatility in the stock prices of Merck and Schering-Plough spiked to its highest level in at least a year. Options volume soared to up to five times average levels. – Shira Ovide

Fresh data on new home sales hit the wires next week, and many investors are likely to be keeping a close eye on the number of new homes still languishing on the market, after a report on existing-home sales this week showed inventories had actually fallen. That’s a plus for those worried that a sudden uptick in inventory would further depress prices. But the prevailing view remained that reduced spending by consumers overall would overwhelm any benefit from the lower inventory, and some even questioned the validity of the numbers. "The drop in inventories can be misleading." Patrick Newport, U.S. economist at Global Insight, wrote. "The months’ supply and the inventory estimates are not seasonally adjusted. Our seasonally adjusted estimates show inventories and the months’ supply numbers essentially unchanged over the past four months." – James Willhite

Apparently not enough people are going to the mattresses. Shares of Tempur-Pedic got the stuffing pulled out of them today, dropping nearly 24%, after Canaccord Adams said that mattress purchases for strapped consumers have become "extremely discretionary" and that demand for a soft place to rest one’s head "has fallen off significantly as economic uncertainty mounts." Approximately 80% of mattress sales are replacement purchases, Canaccord said, so "when the economy gets challenging, consumers can keep sleeping on the bed they slept on last night."

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