Fed Cuts 1/4; Growth Risks Remain
I did NOT read the statement yet, and simply heard the statement read on CNBC...my gut reaction, this is a much LESS hawkish statement than I thought would come out. Still a comment about risk to economic growth and to inflation, but certainly nothing that SHIFTS the focus from growth to inflation. Thats my gut reaction. More to come later. It seems a pause is in the works for a while now!
ADD-ON @ 2:33PM - After reading the statement here, I find this statement to be WAY LESS HAWKISH than I originally thought it would be. I see the following statements that are associated with growth concerns:
*Recent information indicates that economic activity remains weak.
*Household and business spending has been subdued and labor markets have softened further.
..and the clearest statement:
*Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
The 'downside risks' phrase was left out. Take it for what its worth, but this statement coming along with the rate cut, makes me think they will pause, with the full intention of ACTING if economic data continues to come in weak. I think many expected a strong stance in the wording against inflation. The fed still expects the slowing economy to help moderate inflation, so they aren't budging yet in taking the offensive against rising commodity prices and pipeline inflation threats. I think:
a) future rate CUTS are still a very real possibility
b) the fed will be data dependent again on the economic data side
c) the fed just doesn't know if the worst has come in yet, but also knows its way too early to abandon the focus on growth concerns
The street got what they were looking for, I just think is a lot less hawkish than some markets were pricing in. I wouldn't expect that strong dollar induced selloff in commodities just yet!
Comments (13)
i know it's off topic, but any luck on the contractor listings? I'm going to need one soon and want to get some referals
Posted by mschlee | April 30, 2008 5:16 PM
Noah,
Just curious, where have you been keeping your short-term cash. With yields so low, wanted to see what other 'relatively' safe options are out there (NYC munis?)
Posted by uwsider | April 30, 2008 5:27 PM
uwsider - you dont want to know! I have 50% of my money in cash, in a 3.25% account. Brutal. The rest is in the market, but out of that 50%, I am trading half of it and starting to buy some longer term big caps.
I was up like 25% on my trades, but got caught with some shorts on this last 5 week runup, so gave back like 10%. Now, Im still holding some shorts (SRS, SKF, EEV, DUG), but I am no longer in GOLD due to rate cut pause and support for dollar it may have. If 2YR falls below 2%, rate cuts will become possible again!
Posted by Noah | May 1, 2008 9:35 AM
Noah,
I'm in the same boat too! It seems like the FEDs plan is to make savings yield SOOOO low that prudent savers are literally forced into risky assets... disgusting! to say the least!
Posted by uwsider | May 1, 2008 11:02 AM
If the real estate bubble was driven by cheap money being pulled from an asset class like stocks to RE, if the money is cheap again and being pulled from RE, where will it go... I argue the asset class that's been beaten up, such as financial's. also there is tremendous amount of pessimism on the Street right now, typically that's when you want to buy. You may or may not be able to generate alpha, but I think you want to be long VFH right now, my two cents. Also, I like your DUG trade, I'm long it as well for decent size in my PA I think the dollar can do nothing but strengthen from here. Long term economics of rising oil prices makes sense, but a bit frothy right now, plus a lot of people are on the long-side of this trade. A major sell-off and you'll see forced sales.
Posted by Dave | May 1, 2008 11:24 AM
Dave - you like the financials right now at these levels? They have moved up like 15% or so in past 5 weeks? I agree with getting in the banks on selloffs, but the brokerages I just wonder how their profits will come in over the next few years as regulation is put forth on the securitization model.
I love DUG, but loved it more under $30 a few days ago. SKF, EEV, SRS are broken at these levels and they worry me a bit. I think the rally may have some more legs before it teeters. Fun trading these stocks though
Posted by Noah | May 1, 2008 11:39 AM
watch the airlines with crude speculators driving price lower now! May be a quick bump at a lag for this heavily shorted group
Posted by Noah | May 1, 2008 11:43 AM
I love sitting with the EUR/Crude/DUG chart up on my bloomberg and seeing it going the way i want (today at least). Fed is done, ECB is more likely to cut then the US and crude... if anything the Fed has to be concerned with inflation. I got in at 30.50 and think this can easily run to 38-40 in short order...
VFH that's a long-term play for me, provides a dividend and I have it in a Roth IRA. Here are the top holdings in it, no fly-by-nights:
Bank of America Corp
JPMorgan Chase & Co
Citigroup Inc
American International
Wells Fargo & Co
Goldman Sachs Group In
US Bancorp
Wachovia Corp
Bank of New York Mello
American Express Co
Can VFH sell-off 10-15% from here, quite possibly, but remember how gloomy it was when BSC went out (it touched 42.08), you can't time a market.... I just think too much bad news is priced in and I am willing to take 15% downside for the dividend and the long-term (5 year) play.
Posted by Dave | May 1, 2008 11:52 AM
btw, this and calculated risk are my two blogs... well metsblog as well.... great work Noah!
Posted by Dave | May 1, 2008 11:57 AM
i disagree..I think the sentiment on street is one of cautious optimism. Optimism that fed removed systemic risk. Optimism that earnings will hang tough. Optimism that credit markets are getting bids. VIX is around 20, down sharply from 35 spike when BSC deal went down.
Shorts covered, and everybody expects a rate pause NOW and ultimately a rate hike signaling that growth is no longer the main concern, inflation is.
HOWEVER, what if economic data comes in bad? What if unemployment rate trickles higher towards 7%? What if we havent yet seen the full damage from credit storm? With street sentiment shifting away from real bad economic data, if it does occur, stocks will quickly selloff gains. So hard to predict, but fun to trade the volatility
Posted by Noah | May 1, 2008 11:58 AM
Thanks DAVE! I love to hear your comments and get in a discussion with you! If I disagree, its to offer an opinion on subject!
Have you read:
http://globaleconomicanalysis.blogspot.com/
http://accruedint.blogspot.com/
http://www.nakedcapitalism.com/
Posted by Noah | May 1, 2008 12:00 PM
I've seen them and definitely check them out from time. I like the real local color that you provide, especially as a co-op owner... I definitely feel you aren't spouting off the usual BS that other brokers would hat tip to you.
Thanks again and hopefully I'll be able to add some good insight in the future.
Posted by Dave | May 1, 2008 12:19 PM
Dave, how funny is this. Look at what Barry Ritholtz published 8 min after I put that comment up about bullish sentiment on street:
http://bigpicture.typepad.com/comments/2008/05/aaii-sentiment.html
"A measure of stock market sentiment out today is at levels similar to last October when the major indices hit record highs."
Talk about timely discussion! Seriously though, optimism is pretty high right now. So, picking a top will be very tough, but generally this is where longs take their profits.
Posted by Noah | May 1, 2008 12:28 PM