Tuesday, January 22, 2008

The FED Cuts the Cheese in a Panic - Also Known as "Gambling and Losing"

I am a creature of habit. I tend to have a pattern that I like to stick to. I did not know my body was the same way! The wife and I slept at her Mom's house Sunday night. The bed was very soft. Very soft. The bed we have at home is very firm. I slept well last night, but when I woke up this morning my back was extremely angry at me. One night in a foreign bed and my back was throwing a fit! One more thing they never tell you (or you do not listen to) when you are in your early 20's: Your body will not always be the pillar of strength it is! Live and learn.

Punish Savers and Force Speculation
I just caught the beginning of Jim Cramer's show "Mad Money" before starting this post. Cramer was all smiles after the big rate cut. He opened the show with a mile wide smile and made the statement that with the FED now cutting rates like madmen, anyone in cash is now forced to do something with their money. He was almost orgasmic with the idea that low rates of return in basic savings accounts will force people to put money, you guessed it, into the floundering stock market. I find it a perfect commentary on the basic problem facing this economy that a system that forces holders of cash to speculate in order to preserve capital is seen as a positive. Want to sit tight and save a few bucks? You can't! Inflation will eat it all up, so go buy some Google stock already! Sick and sad but it is what it is.

The FED Cuts the Cheese in a Panic - Also Known as "Gambling and Losing"
From Wikipedia on Flatulence:
"Nerve endings in the rectum usually enable individuals to distinguish between flatus and feces, although loose stool can confuse the individual, occasionally resulting in accidental defecation also known as "wet farts", "sharting", "varting", "gambling and losing", "Leaky Pete" or "following through"

In last nights post I commented on the truly ugly futures market as well as the global stock meltdown. Tuesday certainly looked like it could be the day that a reality truck ran over the market and then backed up a few times to make sure the point was made. I offered that a meltdown may well be averted if the FED panicked and cut rates aggressively before the market open. Well what do you know, from Yahoo Finance:
AP
Stocks Dive, Then Rebound After Fed Cut
Tuesday January 22, 6:23 pm ET By Madlen Read, AP Business Writer
Stocks Drop, Then Rebound, After Rate Cut -- but Long-Term Recovery Could Be More Difficult
NEW YORK (AP) -- The opening bell hadn't even sounded on Wall Street when the Federal Reserve announced an emergency interest-rate cut. The Dow Jones industrial average fell 465 points -- including 300 in the first minute -- then rebounded to finish down a more bearable 128.
Before trading began, the Federal Reserve moved to slash its benchmark federal funds rate by 0.75 percentage points, to 3.5 percent. It was the widest cut since 1990, the beginning of what the Fed says is a comparable period in the way it handled the rate.
The Fed cut the discount rate, the interest rate the Fed charges banks directly, to 4 percent, also a three-quarter-point cut.
Many traders had anticipated a rate cut, but it was unusual for the Fed to make the call between regularly scheduled meetings of its policy-making Open Markets Committee.
The next meeting is a week away, and even then, most traders were expecting a cut of only a half-point.

The global markets were a mess. The futures here were a mess. The FOMC meeting was a impossible week away. What could the FED do? Panic of course! In an effort to prevent a market route, the FED cut interest rates and in effect cut the cheese in a nervous maneuver. The wiki entry noted above can attest to the fact that sometimes you can get a little surprise when you cut things in a panic!

What does this rate cut mean for the outlook going forward? Both allot and a little. Here are some of my observations:
  • If the FED cut rates at 7am, that means they were up at night watching the global markets and watching the futures here. If the FED is monitoring things on such a massive scale, what does that tell you about their thoughts about the economic fragility of the US?
  • The FED deemed waiting 1 week too long a time span to delay an emergency cut. How come when inflation is running rampant they can patiently sit back and wait for "inflation to moderate in the coming quarters" but when Wall Street is getting smacked 1 week is too long a haul?
  • With rates at 3.5% now, there really is not too much further to go down. It is still JANUARY.
  • The FED has no choice now but to cut again next week. The markets will see to that.
  • 30 year fixed rates have been within 1% of 6-7% for 3 years. Cutting rates would only help the ARM mortgage market, which is exactly what caused all the problems to begin with. Now with lending standards tight, the rate cuts will do nothing to stop foreclosures rising.

The FED is in full panic mode. The US government is in panic mode. The efforts to prop up the stock market are a direct attempt to stop the average person from entering panic mode. Will it work? Dunno. I expect another 75bps cut next week, and that will leave rates at 2.75% heading into February. Again, not leaving much room to make moves going forward. I have a new poll up along this line, please vote!

Why doesn't the FED just drop rates to 1% or even 0% and be done with it? Why the charade of "emergency" cuts followed by regular meeting cuts? I have no idea. If you have an idea, please leave it in the comments section!

My overall take on the action today was that the FED was able to stave off a stock market run, but that trick is getting old. The markets still closed solidly negative, which is pretty rare in an era of "The FED will save us" kind of thinking. It would not surprise me at all to learn the PPT was buying solidly all morning to stop a collapse. When they stopped buying however, nobody else stepped up to keep it going. Not a good sign. The rest of the week will bear (pun intended) watching as speculation about the NEXT cut takes over the market. I hope BernanSpan and company have fresh undies going forward. Wild times.

Have a good night.

7 comments:

Anonymous said...

BernanSpan is a rank amateur. Had he cut last week, 50 basis points would have done the trick. Now it's 75 points and at least 50 next week. Is he smoking crack?

I remember when Greenspan did an emergency 25 point rate cut in 2002. I got wacked on my short call positions, as the market exploded up. Now, an amazing 75, f_kin basis points and we lose 140 points on the DOW. We are in deep dodo.

Yes, cut interest rates to zero, and the stooge in the White House can cut taxes to zero at the same time. And why stop at $150 billion stimulus package?

If the country is going bankrupt, we might as well do it in style.

Anonymous said...

"when you are in your early 20's: Your body will not always be the pillar of strength it is!"

When your in your 20's you also think you will live forever and bad things only happen to the other guy.

"If the country is going bankrupt, we might as well do it in style."

If our forgein creditors who are buying US treasury bonds thought we were going bankrupt why would they our anyone else for that mater be buying them at these pitifully low rates?

"Why doesn't the FED just drop rates to 1% or even 0% and be done with it?"

Because the FED follows the bond market they do not lead as per this from Greenspan:

On September 17, a commentator on CNBC asked, “Did you keep the interest rates too low for too long in 2002-2003?” Greenspan immediately responded, “The market did.” Rates were not “too low” or the period “too long,” either, because the market, not the Fed, made the decision on the level and the time, and the market is never wrong; it is what it is. If investors in trillions of dollars worth of U.S. Treasury debt worldwide had demanded higher interest, they would have gotten it, period.

Kevin

Anonymous said...

Kevin,

My comment of bankruptcy was said tongue in cheek, and following the rant from our blogger, who pulled my chain.

You are absolutely right that the Fed follows the bond market. To get a handle follow the 3 month and 2 year.

The problem was foreign central banks who were doing the buying for merchantile purposes, or a perverse kind of vendor financing. This distorted the "free market", which IMHO isn't free at all.

First, where do you put your money with low interest rates and a tanking stock market. You go to the preceived safety of US bonds. But what is also in play is the preception that if the Fed continues to lower rates, bonds will rise giving you a capital gain. The momentum players are chasing bonds as a no risk play: the "Bernake put".

Capital markets flow. Just because something is going up doesn't make it fundementally sound; just because something is going down doesn't make it fundamentally bad.

The point is the US has been bankrupt for years and only confidence in the game is keeping it going. With lower rates trying to push banks to lend and create more debt, which can never be repaid, will only aggravate underlying confidence.

The mitigating factor is much of the developed economies are doing the same thing, only at a slower rate

watchtower said...

I believe that the "sharts are hitting the fan".

Anonymous said...

Great post as usual. Bought gold and silver again the other day. Yeah I am that serious about metals being solid through unstable times.

My interview went well and hopefully I get a call soon for the second round.

G

Anonymous said...

First, where do you put your money with low interest rates and a tanking stock market.

I bought PFE 5.5% div pre-earnings anouncment which they beat today 1/23, they have a ton of cash and little debt.
Kicked ass trading XOM which also today they have a lot of cash and little debt but it's just a trade as their dividends suck.

Kevin
Fallling bond are also a response to fear which is deflationary.

Anonymous said...

Kevin,

Pfizer is a good defense play in a bear market. Back in 2000 - 2002 PFE was my play and I did well with it.

The risk is Lipitor will expirer and national health care talk. However, in a down market pharm is realatively safe. Just be aware of the risk and play accordingly.

You can increase your yield by selling cover calls to collect the premium. Time them to fall in months AFTER the dividen date. As a conservative investment you can pick up quite a bit of change this way.