Friday, August 17, 2007

Fed Cuts

Obviously lots going on this morning with the 50 beep rate cut. I remember St. Louis fed governor Bill Poole saying 'it would have to be a calamity to invoke a 50pt cut' I guess we have a calamity on hand with a market down 10%. This should be your wake up call as to what it is really like out there. The FOMC(fed open mkt committee) must see something awful to pull out the stops like that. This is panic by the FED, in poker terms this is a major tell. I also take issue with market pundits calling any downside movement in markets panic and irrational yet everything to the upside is very sane and rational. This is not a Jack and the Beanstalk fairy tale.

I still believe rallies are to be sold here. This is going to be nothing more than a bear market rally. They are violent and painful to the over-extended. You will see big gains wiped away quickly but the tape still says down.

If you look at daily charts of the major indices and stocks you will see a lot of hammer or hanging man candle formations. These are the opposite of the shooting star. The look like at sledgehammer or a T. These often indicate reversals and again the longer the time frame the more meaningful.

Remember what the facts are. Have they changed? Has the housing debacle rectified itself overnight? Countrywide tapped 11 billion in credit lines. You don't tap these because you want to but rather because you are desperate and have too. This is a very negative sign so don't fall for the hook. This rally is a gift for you to lighten up if you had not already done so. It is an opportunity to go short if you are aggressive and have the stomach for it.

Remember if the fundamentals change we need to change as not doing so would be foolishness of the first order. Housing is responsible for 40-45% of job creation in the economy and the housing debacle WILL crush job growth. Housing represents 10% of GDP. Banks do not lend to build factories or for capital equipment anymore they are mortgage and derivative lenders. You want a crystal ball of what is unfolding you MUST look to Japan. The real estate/stock bubble in the late 90's is evidence of what happens when the banking system falls into a corner. Remember the Emperor's Gardens which is approximately 1.5 acres was valued(not worth) equal to the state of California. No amount of rate cuts (0.5%-1.0% rates) will help. The system must be purged of bad loans. Like a dead body it will rot if left unattended and disease and pollute the whole place. The Nikkei was 40,000 back then and is now sitting at16,150. 17 YEARS LATER !

Now take into account how little we save and compare that with the fact that the Japanese are professional savers(especially compared to us). Remember they own more of our treasury debt than the Chinese!

Housing appreciation has been THE driver of this economy. Remember home equity withdrawals accounted for 30% and 16% of new car purchases in California and Florida respectively. The avalanche of adjustable rate mortgages coming due is dead ahead. A leveling off of home appreciation would be enough to undercut this economy but a decline of some magnitude is the body blow. Remember it takes a lot of buying to put a market up (any market), it takes a mere lack of buying to put a market down.

Good trading to you all.

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