Tuesday, December 11, 2007

FED cuts Expected 25bps, Markets Throw Pre-organized Fit

It is days like today that I really get a chuckle out of the financial world. Sometimes events unfold in such a way as to let you see what's going on behind the scenes. Today seemed like that kind of day.

Mortgage Losses "Contained" to the Summer Still Showing Up
I think when all is said and done the word "contained" will disappear from the vocabulary of the financial world. The well known subprime problems were well contained until they were not. The disaster that was the major banks and lenders earnings shortfalls were supposed to be contained to the August-September credit crunch. Here are a few headlines from the past few days:
H&R Block 2Q Losses Widen on Mortgage Meltdown
Freddie Mac expects $10-12 billion credit losses
Mortgage Problems Force WaMu to Close Offices, Slash Over 3,100 Jobs and Drop Subprime Loans
UBS takes new $10bn subprime hit
Now I am not a rocket scientist (merely a molecular biologist) but I am pretty sure it is now December, its cold, and it is not summer anymore. Who would have thought losses would continue after this summer? It came like a freight train out of no where! I think the new wording will probably be something like "loan losses restrained to 2007" as the word restrained at least rhymes with contained so it rolls off the tongue. Of course any economic commentator's opinion that said the losses were contained is not worth a bucket containing piss, but that will not stop them from talking now will it?

FED cuts Expected 25bps, Markets Throw Pre-organized Fit
Obviously the big news today was the FED cut interest rates 25bps, as well as the discount window by the same. The FOMC statement was the usual baloney, and it still actually mentioned inflation that according to the FED numbers does not exist anyway. As they say over at Minyanville, it's not the news but the reaction to the news that matters, and that is what provided a glimpse into the markets today.

First off, 25bps was what was expected. FED futures only were showing a 30% chance of a 50bps cut. If the market really wanted a cut of 50, they should have fixed those futures more because you know the FED hates to disappoint! But alas, its all in the dance. Here is the reality of the situation in regards to the FED:
  • They WANT to slash and burn rates down to the 2-3% level
  • They WILL cut that deep and that hard, probably by next September
  • They NEED to prevent a panic on the dollar
  • They REQUIRE some iota of credibility

Now how is the FED going to get to 2-3% on the FED funds rate and not bury the dollar and lose all credibility? Glad you asked!

The answer is: The MARKET will help them out! (Reciprocal Bailout? Feedback Bailout Loop?

The sell off today was as fake as any I have ever seen. The players put out an instantaneous drop, and then closed on the lows. The DOW was off 294 points. By staying under 300 points any major panic was averted. It was in effect a "pre-organized fit" to protest the 25bps cut. All the usual suspects were out in force saying all the same things:

  • The FED is behind the curve
  • 25bps will not help the housing market
  • FED is asleep at the switch

You have heard it all before. I will not debate whether 25bps as opposed to 50bps is really going to make any difference at this point, you know the answer to that one. The point is that all the whining and the fake selling provides cover for the FED. The markets will regain ALL of today's losses this week. The reason will be a new line about how the FED will have to get more aggressive with rate cuts because the markets are tanking, even as they are still solidly positive for the year!. After a bunch of headlines and complaining, perhaps next week another large down day will occur. Then the FED can jump in with another cut and claim the instability of the market demanded action.

It really seems that clear to me. There is no chance the markets will not rally into years end, regardless of today. The FED cannot wait until the late January meeting to make another move, and nothing moves markets like an "expected" surprise rate cut.

I could be very wrong. This could be the start of the major downturn that is surely to come. It just doesn't feel like that. It feels fake and all for show. With a little less than 3 weeks in the year, we will not have to wait long to find out.

Housing Market Participants-Question

With housing being the dominant factor in the economic mess we are faced with, I may start a regular section that asks one question of the real estate industry that needs to be answered before a bottom can be realised. Today's question:

  • With the rampant mortgage fraud and inflated appraisals that were common during the boom, are the price gains from said actions to become permanent? If so, why?

Simple as that really. I have a new poll up, please vote!

Have a good night.


Anonymous said...

Today's show was a joke.....

Everyone was acting and playing their part..... except one of the players.


Let me get this straight the rates are cut, the dollar holds its own and GOLD doesn't perform?

I smell a rat.

Anyone else dig this too?


PS Yeah I am still bullish on gold but what the hell is going on here?

Anonymous said...

Re: Gold
The forces at work are deflationary, not inflationary.

Re: Fed action
The Fed had nothing to gain and everything to lose by being overly aggressive with a cut. Cutting won't really help the fact that banks aren't lending. It wouldn't really help ARMs. It would hurt the dollar. It would re-inforce that the market can bully the Fed and further cut it's credibility.
Now the Fed will begin it's real work, by adding liquidity via less conventional means in order to get the liquidity where it will do the most good. FF and DW cuts are much too blunt an instrument. That was Greenspans mistake and there's no reason for the current Fed to repeat it.

Anonymous said...

The Fed official said on condition of anonymity that today's announcement wasn't a reaction to the slump in stocks yesterday. The agreement was reached with central banks abroad last week and was announced today at a time when markets were open in Europe and the U.S., he said.

That didn't take long.