TOPICS > Economy

Global Markets Soar on Likely Fed Interest Rate Cut

October 28, 2008 at 6:10 PM EDT

JIM LEHRER: The Dow Jones Industrial Average did close up a whopping 889 points today. The question is, why?

And we pose it to Jim Ellis, the assistant managing editor of BusinessWeek magazine in New York.

Jim Ellis, welcome.

JIM ELLIS, BusinessWeek Magazine: Thanks, Jim.

JIM LEHRER: What happened, Jim? That was unexpected. What happened?

JIM ELLIS: It was unexpected. I mean, there was a confluence of sort of good news.

First of all, a lot of investors woke up after the weekend and figured out that there’s real value in this market. I mean, Warren Buffett’s been saying it for a couple of weeks, but people are looking at the value — the way we value markets is what times earnings are stocks selling at? Right now, it’s about less than half of what it was last October.

So people were seeing that they could pick up stocks like Alcoa for less than five times earnings. The entire market is selling for less than 11 times earnings. It would have been closer to 25 or 30 just a year ago. So that was one reason.

The second reason was that people are finally convinced that international central banks are really serious about putting a floor under the banking business. That’s a good thing. It means that the financial system won’t totally collapse.

And then, lastly, we’re seeing some real hope now that interest rates for credit are actually starting to come down. Banks are more willing to lend to one another and in the LIBOR rate and the rate that banks use to lend to one another in London is coming down.

And this morning, both the Bank of England and the Swiss National Bank offered $20 billion to their own banks to prop them up. Only $10 billion was requested. That means that banks are finally finding other ways, market ways to support themselves, rather than having to go out and, you know, basically put their hand out for the federal treasury.

JIM LEHRER: And the Federal Reserve here in the United States is supposed to — is expected to lower interest rates again tomorrow, correct?

JIM ELLIS: Right. I mean, the big question now is not whether it’s going to happen, but how much? In other words, will the Fed go down a half point, which most people expect, though, in the financial futures markets, there’s a 40 percent bet now that the Fed might actually drop three-quarters of a point.

That’s unprecedented. And it also is going to — it might put us down below 1 percent interest, which is amazing.

With losses, value is easily found

JIM LEHRER: Yes. Now, back to the first reason you gave, that people were buying, they see bargains. Is that what they're doing?

JIM ELLIS: That's it. I mean, basically, value investors are people who believe, you know, you only buy stocks when they are selling cheaply. As long as you think the stock will continue to stay in business, if the company stays in business, then you buy when others don't want to buy.

That's what's made Warren Buffett rich. And a lot people are saying these are too cheap to actually pass up.

JIM LEHRER: Should this be seen then as a one-day wonder, Jim, or -- and it will go back down again tomorrow, or is it possible to even speculate?

JIM ELLIS: It's very difficult to talk about, you know, are we at a bottom? I mean, trying to pick a market bottom is like trying to catch a falling knife. It's not the kind of thing that most people want to willingly do.

However, we've seen the market come down a lot in the past year. We've lost about -- here in the U.S., we probably lost about $12 trillion in market value just since last October. Globally, stocks have come down more than $24 trillion.

You're a lot closer to a bottom today than you would have been a few weeks ago. The other thing is that market bottoms are normally marked by a lot of volatility, as we're seeing now, and a lot of people saying that the worst is -- you know, that the world is over.

We saw that with the confidence numbers earlier today that said people have never been this worried about the economy. Those are usually marks that we are approaching a bottom.

JIM LEHRER: And usually when that kind of figure comes out, that usually affects the market negatively rather than positively, does it not?

JIM ELLIS: Well, but in this case a lot of people are thinking that there's, A, not a lot of reason to go down any further. And they're also becoming more and more convinced that a lot of money that's been sitting on the sidelines, too frightened to invest, is going to come flooding back in.

A lot of people in the financial markets make money only when they're investing. They're not making money on just holding cash. And so a lot of investment funds, a lot of hedge funds want to come back in. They're just waiting for what they consider to be a lower mark in the market.

JIM LEHRER: And this could have been that day, right? We don't know yet until tomorrow comes.

JIM ELLIS: Well, I think it might be -- it's dangerous to say that this is the day, but I have a feeling that, if we could maintain this for another couple of weeks and let the volatility drop, the intraday trading volatility, then people will feel safe about coming back into the markets.

JIM LEHRER: OK, Jim Ellis, thank you as always for your information and insight.