Tuesday, December 11, 2007

Fed -25, Dow -294

When does -25 = -294? That would be on December 11, 2007 when the Fed ldropped the funds rate by 25bps and the Dow followed that with a drop of its own of 294 points. What caused the drop, was it that the Fed decided not to lower rates by 50bps?

Our answer to that is yes, the Fed might have disappointed investors with its shallow reduction in the funds rate, but their statement was pretty dismal compared to the last one, too.

Here is the meat of their statement:

"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

"Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

"Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."

The initial shock of not getting 50bps was bad enough but for the Fed to say that economic growth was slowing And inflation could still be a problem was just too much for the stock market. As you look at a chart for the day, you can see a virtual cliff the market fell off right when the announcement was made.

You may be asking the important questions about how the Update might be thinking this evening. The past week or so we have been saying the 13,750 range was an important place for the Dow and should be near the peak in this rally phase. Well, the top of the range on Tuesday was Dow 13,777 just 27 points higher than our target.

Our impression is that this break Could be the break we are looking for but further downside pressure needs to present itself. Right now the market is ready to drop and it shouldn't find a bottom for a while. If it does find a bottom, it will be something we should notice and will bring it to your attention.

So much to talk about so little time...come back tomorrow for the Wednesday Update. Overnight US futures are strong and could lead to some buying in the morning but will it last?

FSI: 104.53

CM--thanks for the note on BofA. Another enhanced money fund is broken much like GE's move back in November (check the November 15th post "GE Breaks the Buck" in the archives to the left).

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