Tuesday, January 29, 2008

Gaming the FED Decision

It is going to be 50 degrees tomorrow! One of the many reasons that I hate the cold is that the low temperatures force me to bring a lunch with me to work. Cold weather cuts down the amount of walking I do. I spend all day in my building so I like to take a stroll and get something to eat for a while to take a break. Looks like a burrito tomorrow!

Irony in All Its Wonderful Glory
Ran across this story today on an obscure Arizona website:
Illegal Aliens Rear End Homeland Security Vehicle
January 29th, 2008 @ 4:22pm
by Jon Zimney/KTAR Newsroom
Normally, a non-injury rear-end collision wouldn't warrant a news story. But in an ironic twist, this crash involved a van full of illegal immigrants which slammed into an SUV owned by the Department of Homeland Security.
The Arizona Department of Public Safety said the van was heading west Tuesday morning when it was involved in a three-vehicle chain-reaction crash near the Elliot Road off-ramp. Harold Sanders with DPS said, "the 11 illegal immigrants inside the van were turned over to Immigration and Customs Enforcement."
There were no reports of any injuries, despite the fact that the van was overloaded.
"The passengers inside were moving targets for other vehicular danger," Sanders said. "The van was not designed to hold 11 people, that's based on the amount of seat positions."

HAHAHAHA! Gotta love that one! Full link here: http://www.ktar.com/?nid=6&sid=716522

Gaming the FED Decision
Tomorrow brings the FOMC rate decision and the always fun to read accompanying statement. The FED futures market is pricing in about a 70% chance for a 50bps reduction. Ben BernanSpan and company sure must be feeling the heat now. After the hurried 75bps cut last week that was seen as a little panic coming through, the move tomorrow is going to be closely watched. I figured as an exercise I would run through a few scenarios along with the estimated chances for each one. Feel free to discuss in the comments section.

No Rate Cut - Not going to spend much time here. The only possible way the FED does not cut tomorrow is, well, actually I have no idea! Chance=ZERO

25 bps Cut - The Durable Goods number was very strong today. The stock markets (you did not think the FED does not watch those did you?) seem to have resumed a cautious upward bias. The dollar is probing recent weakness. With that kind of a mixed bag, the FED could go with 25bps and not feel too bad. The market would feel very bad however, and thus 25bps is a no go. Chance=5%

50 bps Cut - This is the minimum number expected by the street. BernanSpan loves to make sure nobody but dollar holders and savers are disappointed, so the FED will go at least this much. The question is, is 50bps going to be enough to stave off a hissy fit from the markets. The players are all really hoping for more, and 50bps may be seen as "behind the curve" kind of stuff. If the FED cuts 50bps, I expect the markets to sell off into the close, perhaps pretty largely so. Chance=60%

75 bps Cut - Now this is where things could get interesting. I posted snips from an article last night that had the idea that 75bps or more may send a message to the markets that things are worse than they seem (is that possible?). 75bps after the shot last week would be a 150bps move inside of 12 days. That is really juicing! It is my firm belief that rates will be at 1% by August, September the latest. If BernanSpan goes with 75bps this time, he is really limited in the number of cuts he has left. For this reason I think 75bps is unlikely. While the FED wants rates at 1%, they also want to do it stepwise to give the markets something to look forward to. Chance=30%

100bps or More Cut - What would a mega cut do? Crash the dollar? Send euphoria through the markets, or panic? Would James Cramer declare the FED geniuses? I don't know, and neither does BernanSpan. While the FED's ability to forecast anything is weak at best, the fact that almost anything could happen if a mega cut is done will preclude it from happening. It would be a wild afternoon though! Chance=5%

So my guess is 50bps followed by a selloff in the markets. I would hope for either Zero or 100bps or more. It would be refreshing for the FED to just come out and say "No more cuts, start figuring out what you are going to do now" or "Let's just get to 1% and start from there". Why would I hope for that? Simple. I do not like dog and pony shows. I do not enjoy farce. I hate the silly baby game the FED plays with the toddler stock market of "We will cut a little here, surprise with a cut here, cut a little more here". Just declare your position and be done with it. If lower rates will help the economy, then lower them immediately to the rate you think it will do that. If lower rates will not help (winning idea) then quit screwing around with rates.

While I am on a FED rant, just let me say that I find it to be the ULTIMATE show of conceit and overestimation of the FED's brains to think they can find a rate from 3.5%-1% that will both ignite a faltering economy but keep all the bad stuff about easy money from occurring. Will it be 3%? 2.5%? What about 1.5%? Is there really ANY difference between these number in the scheme of things? If you think 1% of spread is going to embolden banks to gamble on housing again, or that a slight .5% difference on a mortgage that gets passed to the consumer by the banks is going to qualify millions of people for loans you are a true F#ing idiot. I think at this point my major frustration listening to market commentators is that they think 50bps here or there is going to change anything structurally in the credit markets. Time will tell.

Homebuilder Stocks
While I do not like to make specific sector comments, the action in the homebuilders this week has been so funny I cannot help it. The news on New Home Sales was absurdly terrible. Sales way down, inventory up again, and prices falling off a cliff. Somehow the traders got to thinking that the price cuts are going to start to refire demand. Almost all homie stocks are up significantly based on this idea. This is an instance where Mr Market is just plain WRONG. I could go into detail on why the new home market is going to continue to get crushed here, but we have done that plenty of times. Instead the take home point is that it is a common saying that the markets "looks 6 months ahead". Traders may think a bottom is forming based on numbers that they do not understand. All the gains of the past week will be given back in short order. Avoid this sector unless you are doing some nifty day trading!

Have a good night.


Anonymous said...

I saw a reference to this song today that was written in 1918, the next bubble will be spectacular, gold, oil, baseball card not sure but this is very fitting. How long this sub-prime economy of ours can keep doing this is the only question in my mind.

I'm forever blowing bubbles

(John Kenbrovin - Jean Kellette)

I'm forever blowing bubbles,
Pretty bubbles in the air,
They fly so high, nearly reach the sky,
Then like my dreams they fade and die.
Fortune's always hiding,
I've looked everywhere,
I'm forever blowing bubbles,
Pretty bubbles in the air.

I'm dreaming dreams, I'm scheming schemes,
I'm building castles high.
They're born anew, their days are few,
Just like a sweet butterfly.
And as the daylight is dawning,
They come again in the morning!


When shadows creep, when I'm asleep,
To lands of hope I stray!
Then at daybreak, when I awake,
My bluebird flutters away.
Happiness, you seem so near me,
Happiness, come forth and cheer me!


getyourselfconnected said...

I figured the market would sell off big into the close! Amazing stuff. I am going out with some friends from work so proabaly no blog tonight. Have a happy rate cut day!

Anonymous said...

I would recommend picking up a copy of the Wall Street Journal today. 1-31-08


getyourselfconnected said...

Whats in it G?