posted on Sep, 13 2007 @ 12:46 PM
Why is the market rebounding? Easy
The market is rebounding because investors are already discounting the fact that the FED will cut rates on Tuesday next week. In fact they have
priced into the market a 70% chance that the FEDs cut by 50 basis points of .5%.
This is mostly due the beating they took over the last month, and the liquidity crisis. its very hard to explain this one wiht a good spin though.
The liquidity crisis was a direct result of what most on Wall Street considered "free money". After 9-11 Greenspan and the FED saved the economy.
They did it by lowering the FED funds rate. This provided TONS and TONS of liquidity. This is normally a very inflationary thing to do, but the FED
was not fighting inflation after the attacks. Secondly, the Bush tax cuts were a huge boon to the economy (say what you want about them, they
worked). All this liquidity that poured intot he market is why the FED has been on an outright war against inflation, it was them that caused it.
The problem with the FED fighting the war on inflation they are looking at the wrong economic indicators. All the information they were basing their
decisions on were about where has the markets been, most of the 6 motnhs old. The current crisis is a crisis that changes daily and the FED has been
fighting the wrong war.
The most concvincing arguement about this was the last FED meeting. Wall Street was already calling for .25 rate cut, and they probably needed it. A
rate cut at that time of that amount would have done a lot of good for the markets. The FED instead stayed pat, not a problem. But their statement
was what scared the hell out of me. In their statement they never mentioned anything about the ONGOING liqiuidity crisis, or the sub prime mortgage
debacle. Instead they concentrated on inflation and felt that was still the most importanat factor they faced in preserving our economy.
By time they realized what was going on, it was too late. They missed their opportunity. The vote was unanimous, so none of the Fed guys can say
they thought different. Because of the statement they made, when things hit the fan, they could not step up and cut rates, it would have shown
complete incompetence (which the statement had already done anyway). Instead they lowered the discount rate. A nice jesture, but not good enough.
Well next Tuesday will be interesting, time for the FED to eat crow. I, personally don't think they will. At most they will cut .25 points. They
will still talk about inflation, but they will mention the liquidity crisis. Out of all the things the FED has in their arsenal to protect the
Economy, lowering the discount rate is by far the most inflationary. The FED directly pumps money into the system.
About the markets, if the FED does not cut 50 basis points the markets will sell off. If they do not cut rates at all.....then look out below. I
actually feel the markets still needs what we call a day of capitulation..
Everyone finally sells and puts an end to selling pressure. Tis been up, up and away far too long and we need that corection to keep things going.
My targets a re a bit scary, but thats what we need to clean out the system. I no longer trade, or work on Wall Street, so this is not a
recommendation or anything, just an opinion. I think we need to see 12,250 on the DOW and 1325 on the S&P 500. When we tick those marks, watcha nice
bottoming out phase....then the correction to upside can proceed.
Just like with anything in economics. The markets are all about supply and demand. Too much stock out there, markets go down. Too many people own
stock right now that are not prepared for hared times. When they panic and sell.....be the smart buy and buy from them. When the markets go up,
shorts are squeezed. this is often very painful because they are FORCED to cover at any price.
Your lesson for the day is now over.
Buy low...sell high!