Wednesday, September 19, 2007

Rate Cuts and Economic Nirvana

Everyone seems to be weighing in on the Fed decision to cut both the discount and the funds rate by 50 basis points. Here is my take for what its worth. The cut in rates does absolutely nothing, nada, zilch to solve the existing problems that existing before the cuts and still remain after. The problems of mark to market vs mark to fantasy, home foreclosures, mortgage re-sets, housing oversupply, mistrust of credit ratings on all the hybrid debt, over leverage and simple access to funds all remain. You can lower rates all the way to 1% but if the lenders, having been burned absolutely refuse to lend then the rates become nothing but window dressing, like I have repeated countless times......ASK JAPAN !!!


Following the rate cuts all of the above conditions that around previously still exist and could actually be exacerbated by the cuts. This move only delays the inevitable day of reckoning when the paper must be priced. Like the bond investor who buys the 20 yr paper at 97 and watches it drop to 75 and claims he is a long term investor and will hold the paper til maturity. Seems to me one Robert Citron of Orange County fame proclaimed the same strategy. Unfortunately for him and the taxpayers there bankruptcy arrived before maturity.


As I have said previously, stock market players are not exactly the savviest around. Mr. and Mrs. Joe Six pack tend to play the stock market and avoid the debt and currency markets where the shrewdest participants reside. Sorry to rain on the equity parade but that's just the way it is. I am confounded that as the dollar tanks and oil , gold and bond yields rise, yet, in the face of this stocks soar on the rate cut news. Is this inherent strength ? Is it abject stupidity by stock traders? The answer will soon become evident. The one thing I do know is that continually rising oil prices will not be a stock market positive no matter how hard the shills try to spin it and as for the dollar, if a deteriorating currency was the path to economic nirvana, Latin American would rule the world, right next to Zimbabwe, and we would all bow our collective heads in reverence to the IMF.

Random Thoughts.

Do you really believe Lehman's numbers. Do you believe they have accounted for all the off balance sheet "stuff". Is everything marked to market. Is there a market? Just wondered.

The National Assoc. of Home builders index touched 20, a level not seen since 91. So what props the stock market, blind faith and hope?

Bank runs in England prompt the Bank of England to guarantee all deposits and the pound craters.

Seems to me we now live in a world where any and all news is stock market bullish.

  • Bad economic numbers, fed will cut, hence bullish for stocks.
  • Good economic numbers, earnings will rise, hence bullish for stocks.
  • Dollar tanking, exports will rise, hence bullish for stocks.
  • Dollar rising, will attract global capital, hence bullish for stocks.
  • Oil rising, indicative of strong economy, hence bullish for stocks.
  • Oil dropping, like a tax cut, hence bullish for stocks.
  • Low p/e multiples, stocks are cheap, bullish for stocks.
  • High p/e multiples, mean good growth prospects, hence bullish for stocks.

Everything,everywhere at all times is bullish for stocks. It could not be a bubble if this were not so. Remind you of 1929 or 2000 at all ? Good trading to you all.

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