Sunday, December 09, 2007

Fed to Lower Rates on Tuesday

As we look at the coming week, the possibility exists that we will get to see the top of the recent rally. The runup from the lows of a couple weeks ago has now pushed into our target range near 13,750 and we are very alert to a reversal. Friday's trading did little to change the view that the market is now finding a top. The problem now is not that we have a top in place so much as if the next move is the one we have been anticipating for a Long time.

The big news this week will be the reaction to the Fed's move on Tuesday, not the move they make. We should know by now that the Fed will be lowering rates and by how much but the market is a little ahead of itself as it tries to figure out a way to get them to move down 50bps. The latest guess has them lowering the discount rate by 50bps and the funds rate by 25bps. The jobs' report on Friday was strong enough to give participants a pause to consider that 50bps in the funds rate may not be something the Fed can do.

Our position is that the Fed will cut 25bps on Tuesday for a couple of reasons, none of which makes too much sense. At there last FOMC meeting, the news was pretty strong that the cut they were making should be enough to take care of the problem. Now, the credit market isn't behaving the way the Fed would like it to so they probably need to lower again but they don't want to because of the recent prior statements they made. As we see it, they have room to move a great deal given the short rates on the Treasury curve.

Here at the Update, the news is the same. The economy is suffering from the letdown of the housing boom. As the houses go down in value, people have more difficulty financing their lifestyle. There is some optimism being mentioned but for the most part the media is telling the story that the economy is now weaker than they thought. While many thought the housing market and the rest of the world could go in opposite directions, there has been some recent comprehension that the two are going in the same direction.

The investment community is trying to bail itself out of the mortgage problems that it is in. That effort has now gone to the President with a plan to reduce the possibility that the US doesn't have more homeless people. The plan has drawn much criticism from a variety of sources even though the actual plan is not so much a plan to help people with upcoming resets but a plan to get people to pay attention to the politicians again. But, we digress...

The important idea here is that the government has just announced a plan to help the people right around the time where we think the market should be topping. The move over the next few days should tell us what the market intends to do. Then we will see how strong the move down is to see if it's strong enough to make some lower lows. This is the important focus.

FSI: 107.51

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