Fed Cuts 3/4 Points: Capitulation Still Looks Likely
A: The ivy leaguers at the fed just don't understand the tradable markets! In response to a global selloff, and a sharp down futures day for our markets, the fed decided to open their arsenal and cut the fed funds rate by 75 basis points. As of right now, some 25 minutes after the cut, there is NO improvement in the futures. The fed just wasted their ammo in this clear panic move.
According to Yahoo Finance:
The Fed decision was taken during an emergency telephone conference with Fed officials on Monday night. Those discussions occurred after global financial markets had plunged Monday as investors grew more concerned about the possibility that the United States, the world's largest economy, could be headed into a recession.I discussed capitulation late November, as that is a trading term given to a market that is facing fear, panic, emotional selling all at the same time. Anyone not familiar with this term should now know what it means after we had a day to digest the coming carnage. Back in November, I said we need a DOW day -450, and NAZ -80 or so. Looks like we will get this and more today.In a brief statement, the Fed said it had decided to cut the federal funds rate "in view of a weakening of the economic outlook and increasing downside risks to growth."
The central bank said that the strains in short-term funding markets have eased a bit, but "broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."
Here is the problem! WE NEED CAPITULATION! WE NEED TO GET DESTROYED! We need to flush out the system and get this stock market adjusted to the new world and to this young bear market. Let the adjustment happen! The fed made their move before the markets opened and now it had ZERO effect on futures after an initial jolt.
Instead, the fed should have let the markets open, let the carnage take place and then pull out the rate cut mid day! It still would have happened on the same day! You see, this rate cut was meant as a two pronged attack:
1) inject some confidence to the markets
2) to add stimulus to a weakening economy and to cushion the blow further from any future downturn as financial conditions globally deteriorate
They totally blew #1! The second reason takes 8-12 months to have any effect as fed rate cuts take time to funnel through the economic system. If they simply waited until mid day after the capitulation happened on its own, it would have had more of an effect. But, they just dont understand the psychology of the tradable markets.
This cut could easily be interpreted as a panic move and is a clear sign that we are in some serious distress! Expect more rate cuts in the future and pray that they have an effect to lower the severity of the expected recession to come. I'll continue to discuss the macro problems we are facing that is causing all this pain on urbandigs, in the hopes that we can understand why we are in this mess and how things may play out down the road.
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Comments (20)
I also feel the FED just lost the last bit of credibility with this move..this confirms that the FED is the markets bitch..
Going to take a closer look at gold, however if theres a world-wide recession .. However I'm still not so sure about gold since everything may be de-flating world-wide
One thing for sure though, if its a world-wide thing, you can kiss the foreign buyers in Manhattan good-bye.. If they are not doing well in their own country, they going to less likley 'speculate' in USA
Posted by uwsider | January 22, 2008 9:17 AM
I share your feelings on Gold..Its just in carnage times like these everything gets hit, as Im sure there will be liquidations to meet margin calls and gold will be sold at many hedge funds and such.
But, Im going to hang in there with gold I think. I think portoflios need to be hedged with short exposure to financials/emerging markets and bonds. Its ugly out there. We are in very confusing terrain, and still we dont know how bad it could get with this complete debt problem and the securities derived from these debts and dispersed globally. This will go down in the books after its over and done.
Posted by Noah | January 22, 2008 9:22 AM
Guys,
If one thing has proven itself time and time again is...DON'T FIGHT THE FED....we've all heard this before..it's like in the Matrix when no one can beat an "agent" except of course Neo :)
Posted by Steve | January 22, 2008 9:25 AM
Steve - sorry to say this, but you are very wrong if you have a shorter term strategy! The fed is cutting because shit is real bad right now! If you took that strategy on the first 3 fed cuts, you would be getting wrecked! You want to buy stocks when the fed starts raising rates and inflation is major conern, not economic weakness.
READ THIS: http://www.urbandigs.com/2007/03/why_lower_rates.html
Posted by Noah | January 22, 2008 9:32 AM
short covering rally?
Posted by Noah | January 22, 2008 9:48 AM
Noah, no need to apologize when money is involved. I happen to disagree, I don't see capitulation because I don't see an asset bubble. I see a fairly normal bear market correction of 20%-25%. There is no excess for capitulation. The S&P P/E is trading at historical norms. The only excess that needs to be chopped off are the banks with artificialy created inflated stock values due to subprime business..whew take a breath. Anyhow we'll see...place your bets!
Posted by Anonymous | January 22, 2008 10:02 AM
from above
Posted by Steve | January 22, 2008 10:03 AM
good to hear..love discussing this stuff..One thing I will say is that fed rate cut did save us a few hundred points. I just think they should have let it happen first, then cut.
I happen to think we are seeing asset deflation and that concerns me
Posted by Noah | January 22, 2008 10:04 AM
I want to add one more thing: NO INTL CENTRAL BANKS CUT!
Im sure they are coming, but I still think the fed blew the timing of this move big time
Posted by Noah | January 22, 2008 10:16 AM
I don't think the fed is dumb. To cut before a market downturn would itself incite a panic. To cut rates without data points though "knowing" would also be speculative. At least with a market bloodbath, there is something to back up a cut.
"Ummm yeah we're going to cut because my buddies at Citi say its pretty bad out there... Umm yeah."
C'mon people.
- Another Ivy Leaguer
Posted by spaceboy | January 22, 2008 11:15 AM
not dumb..I just think we needed to get wrecked, like the INTL markets and we didnt see any central banks cut there after 2 days of 5% declines..
We need to flush out system, and then cut. The cut was expected, just timing of it that I think was wrong. Whatever..Nice rally right now..hopefully it holds
Posted by Noah | January 22, 2008 11:22 AM
Noah, I am with you, uwsider and Barry Ritholz (among others). Todays' Fed action, while expected by me last night, makes no sense and sends several terrible messages IMO (e.g., we are panicked, contrary to our mandate,our job is to bail out Wall St./investors, not ensure price stability and employment levels). As you say, a repricing is necessary and has now been further delayed.
Posted by Colgin | January 22, 2008 11:38 AM
This market bath is nowhere near 1987! It's not a panic (mostly because stocks weren't that expensive to start with and the public wasn't playing in a big way). Bernanke flinched and wasted ammo...which will be needed as the economy digests the future de-leveraging. I think the market rolls some more after this bounce, because the rate cuts will take a long time to work and there will be many more days of bad economic news to come. The stock market isn't the problem its the consumer and some bank balance sheets, which will take a long time to repair, especially with rising un-employment. It took more than a year and a half of rate cuts after dot com/911 for stocks to bottom, which is why I am a slow patient scale buyer of value stocks, with cash I raised in the Spring. No reason to plunge in here in a big way.
Posted by jeff | January 22, 2008 11:53 AM
I want to personally thank the Federal Reserve Board for punishing those of us responsible enough to be saving our money in order to save the idiots who squandered their money on risky loans they couldn't afford.
Nothing encourages responsible economic behavior like punishing responsible people to save irresponsible people from the consequences of their own mismanagement.
Posted by anon | January 22, 2008 1:41 PM
to "anon January 22, 2008 1:41 PM"
I have the same feeling as you (being punished).. however, watching this unfold it is clear that the credit market is in serious trouble.
For example, if AmBac goes under, it would be a disaster.. I think we are way past solving the problem by bailing out the IO ARM fools. It looks like things are so bad in the credit market that doing nothing would destroy the banking system..
The only thing I hope for is no other loan than "20% down, 3 x income" are ever made again..
at this time, there is no place to "safely" park my money without it being stolen by inflation.. OUTRAGEOUS!
Posted by uwsider | January 22, 2008 3:13 PM
uwsider, I generally agree wholeheartedly. However, when the ashes settle I am going to be looking to go into a condo at 10% down, 1.25 x income, no debt. We have superb credit, and I'm happy to undergo the scrutiny involved in obtaining mortgage insurance. I have done this mortgage three times in the past (1990, 1995 and 2001, all at 1.25-2.25 x income) well before this mess, and never with a piggyback heloc. I could do 20%, but ironically that would involve a year or so of saving additional cash and increasing revolving credit debt, or tapping into cash advance limits. Which is fiscally more responsible? The answers aren't always so cut and dried.
Posted by Brenda | January 22, 2008 3:51 PM
Brenda - what you're planning on doing is exactly the problem. You would be buying a property just on the margins of affordability.
Why would you do that? That's exactly the problem that folks are running into now. It leaves you NO margin for error.
I don't wish you any hard luck, but if you run into financial difficulties, can't refi, or the value declines thereby wiping out your equity, are you prepared to take the hit? I hope you wouldn't look to taxpayers or the Fed to bail you out.
Posted by anon | January 22, 2008 4:45 PM
Hmmm...8 months, eh...right in time for an election, coincidence? Hmmm..last time fed cut aggressively (13 times in a row)..just before an election..coincidence?
I wrote in my blog today that the tail(markets) is wagging the dog (fed) here. Yes, it was a chickenshit move. However, i think it was an overdue move. One way to lessen the sub-prime mess is to get rates so low that the cost of holding a mortgage goes down through refinancing. Second, although not all of the rate cuts will be reflected in mortgage rates, the banks need all of the help that they can get. The last thing we need at this point is to have to bailout banks. The fed should stay aggressive and keep lowering rates. At 3.5% the fed has plenty of bullets left.
Posted by andrew | January 22, 2008 5:35 PM
P.S. Worst economic plan of the century...Bush/Clinton plan to "freeze rates for 5 years"...haven't these people read Ayn Rand?
Posted by andrew | January 22, 2008 5:46 PM
anon, how can you say that I'll buy just on the margins of affordability? You don't know our income situation (or the severance package that is guaranteed in the event of job loss). And I never indicated that I didn't have reserves to rely upon. I do, I inherited a stretch IRA that I would absolutely prefer not to break for a down payment (tax reasons), but that could be used if necessary during hard times.
At 1.25 x income I'd say that I'll be well within the affordability margins. Our income will be roughly 80 times monthly housing expenses. At 3 x income, even with 20% down, money can get very tight very quickly, even without any hard times. Even 20% down recently, in many markets, hasn't or won't cover depreciation. I fully intend to buy for the long haul, and since I'll get a fixed-rate mortgage I doubt the Feds would even consider my plight if something were to go wrong. Nor would I expect them to.
Posted by Brenda | January 22, 2008 6:29 PM