Tuesday, January 22, 2008

Fed Panics

Top Line: The stock market didn't open the trading day with a bell, as in the opening bell; it opened with a cut, as in interest rates. Of course, you already know this fact but do you also know that the market doesn't turn on a dime like the Fed? The stock market is in a bear market and we don't think there is much that will stop it, least of all the Fed, even with all their efforts.

The Fed has cut rates in front of a stock market decline that it will be unable to stop. The Fed has a meeting next week and they couldn't wait until then to make a move. Why? Well, you know that a week can make a difference when it comes to lowering interest rates--for who? That would be the banks. Ok, the actual wording in their statement was more like, we don't want to let investors' fears of a recession become self-fulfilling, according to the WSJ.

Tuesday morning also brought us Bank of America's earnings statement of 5 cents a share. This represents an actual profit unlike several banks in the wake of the mortgage defaults over the past several months. Along with their earnings came a promise that, unlike when Citigroup promised not to cut its dividend and then did, the BofA would not cut its dividend. This news accompanied the strong statements from the Fed in the morning and gave the bank a panic start of down nearly 10% but by the end of the day was up 4%. So, while the Dow industrials didn't actually erase the full 500 point open, the bank stocks and housing stocks were up about 3% apiece.

We thought we would be reporting more negative news about prices but then there is always the Fed trying to stop big declines. We wonder what they'll do next time. We are reading that the market is fully expecting another half point cut from them next week at the conclusion of the FOMC meeting. That would take the rate down to 3% and down 2.25% from last year's high rate of 5.25%. Even we would be surprised by that, not so surprised by Tuesday morning's action but another cut in a week would definitely surprise us.

That is not to say that the Fed doesn't have room to move down, they do. (We look at the short term Treasury rates down around 2%.) It just seems so reckless to have the Fed panicking and making moves like that. The Fed has been doing huge things in the credit markets with their TAF funding. The banks have been gobbling up money from the Fed providing liquidity to continue lending.

The Fed is in the business of creating an opportunity for people to borrow more money and less reason to keep money in those tired old savings vehicles where you won't be earning much interest. They want everyone to borrow and spend to keep the party going. Just think, the cure is the same as the disease, only more.

With more and more people getting behind on their mortgages and other debt payments, not to mention their phone bills (AT&T disconnecting phones and cable internet for non-payment), how is it that they can continue borrowing? They sure would like to spend but it's that pesky debt servicing that gets in the way.

As we examine the after hours market, one thing stands out, AAPL. Yes, Apple Computer has sliced up some disappointing news for investors. Their guidance was taken as negative and has caused a little selloff in the overnight market. AAPL itself is down over 10% this evening and has dragged the likes of GOOG down with it as well as the US futures. Maybe the Fed should go buy an Apple, you know what they say, an AAPL a day...

Really, what is the Fed going to do if the market just keeps dropping? Well, we'll soon find out. You probably have seen this article but we wanted to keep it here for records. We don't agree with his dollar comments but with most everything else. Here is an excerpt: "The fact that the Federal Reserve Board announced an emergency cut of 0.75 percent in short-term rates shows that the Fed thinks the problem is a market panic rather than economic fundamentals. Normally, the Fed would have waited until mid-day next Tuesday - the second day of its scheduled two-day meeting - to announce a rate cut. Announcing an out-of-schedule cut today before the stock market opened shows that its motivation is to calm the markets rather than to reinvigorate the U.S. economy."

There could well have been a selling climax today but a 450 point rally in the Dow following the rate cut may have satisfied the need for a correction. (When we say correction, this is an up move in a down market.) And, with AAPL's news able to push the markets down so easily this evening, it is possible that we could go down from here.

In any event, the market is not done going down. As we mentioned in our last post, it may seem like the worst is over but you shouldn't believe it. Fed rate cuts are not bullish even though some traders think it means more money going into the market. The market is now dealing wth quite the opposite with money Leaving.

FSI: 88.23 (without the AAPL news)


Anonymous said...

where does all the money go if everyone is selling?

Glenn said...

Good question. Please find answer in the Wednesday post.