Wish List: More Rate Cuts OR Strong Data?
A: You can't have them both! Interesting topic to touch on as we head closer to Friday's all-important jobs report! That report will be a leading indicator for the fed funds futures market to re-price expectations of future moves by the fed! While the stock market rally of the past few weeks has been based on one part by more expected rate cuts, what is it that the markets really want? Do we want stronger data showing a resilient US economy holding on and not as bad as first thought OR do we want weak data that will give the fed more leeway to cut rates in the future? With stocks already pricing in a few more rate cuts, should that data come in stronger than expected we may get a selloff as equities take back future rate cuts!
It's strange to have an environment where weaker economic data will be viewed as a buying opportunity in advance of future fed rate cuts! But then again, there is nothing normal about how stocks move. There is an emotional element at play here, with bad news being absorbed quite well and expectations for an accommodating fed. To understand what I mean, look at how the markets reacted to the news on Citigroup, Netbank, and UBS in the past week:
CITIGROUP ---> Admits a $5.9B loss and write-down due to subprime related mortgage market investments gone bad; stock gained 2% on news
UBS ---> Admits a $3.4B hit to earnings; stock gained 3.2% on news
From USA Today:
Two of the world's biggest banks, Citigroup (C) and UBS (UBS), announced multibillion-dollar third-quarter write-offs Monday. But instead of dampening spirits, the red ink stoked enthusiasm among investors who appear to believe that the meltdown in the subprime mortgage market is over.
The stock of Citigroup, which announced a $5.9 billion write-down, closed at $47.72, up more than 2%. The stock of Zurich-based UBS, which announced a $3.4 billion hit to earnings, gained 3.2% for the day.
NETBANK ---> Internet banker files for bankruptcy as regulators take over accounts. The bank's failure this year was the result of margin compression from an inverted yield curve, fewer mortgage originations, and demands to repurchase delinquent loans, according to a bankruptcy court filing.
Lets go back. When this credit squeeze first hit the media and became a big headline risk to stocks, I wrote a post titled "Should The Fed Step In & Save The Credit Markets?", and dug deep to my past experience trading and following the markets to state very clearly:
LET THE COMPANIES WHO MADE BAD BETS STEP UP TO THE PLATE, PUBLICIZE THEIR LOSSES, TAKE BOOK VALUE & LIQUIDATE BAD HOLDINGS IN ORDER TO WRITE OFF THE LOSSES! ANNOUNCE A RE-STRUCTURING EFFORT AND PUBLICIZE EXACTLY WHAT IS BEING DONE TO FIX THE PROBLEM & BRIEF INVESTORS ON THE FUTURE DIRECTION OF THE COMPANYThis is why the banking and brokerage sectors have cheered the coming out of awful earnings news from Citigroup & UBS. Stock markets obviously feel this credit mess is contained and that the fed is there to help if things get bad. But what if that help is short-lived or limited due to a US economy that is not as weak as expected? It's a great question that will be answered on Friday with the jobs report: STRONG JOBS and there goes the expectations for aggressive rate cuts; WEAK JOBS and that should solidify at least another 1-2 rate cuts by years end. You know my thoughts with longer term inflation out there and the currency, stock, and commodities markets virtually telling the fed to take it easy with more cuts!
By coming out in this manner and letting the current value of their holdings to actually trade and liquidate would allow the financial markets to weed out the bad bets made and the losses to be written off. While it will be painful for the companies and their investors to do this, it will be better for the overall credit mess and it will allow the markets to function more effectively in re-pricing the risk so that we can move past the mysterious problems that we now face. It’s the uncertainty right now that is killing equities.
What would you rather have? STRONG ECONOMY or MORE RATE CUTS?
Posted by gs
Thu Oct 4th, 2007 11:42 AM
I don't understand the thought process of wishing for poor economic data to motivate more rate cuts. Do people forget the lag in the time it takes for us to see the benifits of a rate cut? If we get horrible jobs numbers that means the economy is in a very poor state RIGHT NOW and it would take some time for rate cuts to get us out of the mess.
Therefore it'd be poor jobs number => rate cut => positive stock market reaction => then we realize the poor economic data probably means we're actually in a recession or close to => big downturn. I'd rather just see the economy stabalize right now than have poor data justify more rate cuts. That's just me though.
Posted by Noah
Thu Oct 4th, 2007 11:47 AM
GS - Im with you, but the statement was to try to explain the thought process of the street, which is what I know very well after trading for 6+ years professionaly, and 3+ years on the side now after startig this blog and getting into real estate.
It will be very interesting. to see reaction of street. Thing is, another 1-2 rate cuts are already priced into stocks now, so if data comes out that is refreshing but all but guarantees fewer rate cuts than is priced in, you may see a selloff!
Its important to understand that wall street doesn't act rationally!
Posted by gs
Thu Oct 4th, 2007 11:53 AM
Yeah, I knew what you were getting at and I wasn't disagreeing with you. I guess I was more saying exactly what you said in your last sentence there about not acting rationally. Sometimes I just don't understand it....but who does I guess, right?!
Posted by Noah
Thu Oct 4th, 2007 11:57 AM
ha! I gave up trying to understand WHY stocks have the emotional element, and just accepted it after a while. I focus more now on macro and understanding the longer term effects on stocks, bonds, commodities, etc.
I spent so many years focusing on stock movements, and trends, and how to spot entry/exit points with technicals, order flow, and other emotional elements.
So, trying to understand bigger picture now. Lets see what happens tomorrow to see if stocks act irrationally again!
Posted by Noah
Thu Oct 4th, 2007 10:38 PM
You know, Im upset that more people aren't chiming in here on this topic of discussion! Its a great one and something all of us should pay attention to understand the type of fed we have for future investment strategies,
The new site will be launching soon and it will be designed to be easier for you guys to participate, I hope it works and I hear from all of you that read this stuff!