The Fed is in a Box

Well, apparently Tuesday wasn’t the day the stock market decided to go down so how about Wednesday? The market has been assuming the Fed will lower rates on Tuesday next week no matter what the Fed heads are saying. The bulls seem to be trading with abandon on days like Tuesday. The pattern we see is still the same even though the market always seems to want to trade higher.

Thanks for the comment, Erick. Your thoughts lined up nicely with what our post topic is this evening, the Fed’s box. As a start, Mr. Bernanke let us know on Tuesday that the global trade imbalances need to be ah…balanced in order to stabilize the world economy. According to a CNN Money article the trade imbalance occurs when countries like the US buy more internationally than they sell or like China sell more than they buy. Oh, really, this is fascinating stuff…

Of course, this leads us into our thought process this evening. We have been a proponent of a turnaround in the dollar over the past couple of months. The True Contrarian, at the link to the left, suggests that the US dollar has fallen to its natural “bottom” and should now bounce. This is in conjunction with his thoughts on gold and silver going in the opposite direction for a short time.

When Mr. Bernanke started to discuss the need to reduce trade imbalances, all we could think about was the US trade deficit. The one way to help fix this deficit is to weaken the dollar. This would encourage foreigners to purchase our goods and services while at the same time making it more difficult to purchase foreign goods with US dollars. In theory this should work but as you know the trade deficit has seemed to gradually expand further and further just like our waistline. Of course, our solution is to buy bigger belts and pants rather than go on a diet, somewhat similar to the US hunger for foreign goods. We just keep buying no matter what the cost since we want it and we will have it. Just how old are we???

The point here is that the Fed can lower interest rates and this should directly affect the value of the dollar in the negative direction. When Mr. Bernanke actually said that we need to work on fixing trade imbalances and we focused on the US trade Deficit, we thought he was signaling that he was willing to lower rates in order to do that. It seems that the Fed Chairman is about ready to trash the dollar. Could this actually be??? We certainly hope he is not rationalizing the rate cut with global trade balancing efforts. Please.

There are reasons for the Fed to lower rates due to the credit disaster that is happening all around us but there is one reason Not to lower rates and that is the US stock market is ever so close to a top. If a large rate cut is instituted, the Fed could actually be pouring gas on this fire and certainly at the wrong time. The Fed heads know that a rate cut will bring even more speculation into the stock market and we don’t really think they want to do that. All of us know that any rate cut is not a long term stock market enhancer but is sure is for the short run.

There you have it; the Fed is in a box. They seem like they have to lower rates next week but now they are trying to rationalize it with global trade balance even though they don’t want to raise rates because it will make the stock market go up. They want to save those types of bullets when they really need them, like when the market is really going down.
The market action was pretty much nonstop up on Tuesday and we can only take comfort in the fact that the volume was pretty anemic. Well, there was a stock that was down today and that was CFC (Countrywide Financial) and on heavy volume. CFC was the volume leader for stocks on the NYSE with only the Russell 2000 iShares trading more volume. CFC closed at 16.88 down a couple of percent on the day. That 18 price seems to be getting further away every day but B of A is not worried, or are they? And, the guy on the bus, who had bought some CFC calls probably the 20’s is not very happy today either.