A fed rate cut of 75 bps before the market even opened!!!!!! Was it not just last week that the fed, the gov't, the treasury secretary were telling us that we are on a solid foundation with no real reason to worry. My heavens. Do I think they needed to respond to what was going on overseas, yes, but I have to imagine that this kind of aggressive action is almost unprecedented. Of course the market is going to say thanks, but I think it is another short term 'boost in the arm" that the market reacted so negtively to in the first place. To say they, we, are in between a rock and a hard place is an understatement. We all need to take a keep breath and think about this. Why were the markets trading off in the first place? Those reasons have not gone away. How does a fed rate cut really, really solve the problem? There only had one type of gun at their disposal, and argueably one bullet, and they just shot it.
The US markets should trade off today to catch up with the overseas market. The action by the fed, and what is likely to be some coordinated support of some other behind the scenes action to hold up the equity market, is still likely to be a short term fix. Could this be a buying opportunity, yes it could, but I would argue it would be a short term one. As an ex trader I am so tempted to get in the game, but I still fundamentally believe the US economy is in trouble. I am not an equity analyst, an equity trader, nor an investment guru. My claim to fame is that I generally have a lot of common sense and I talk to a lot of people that are very, very smart. I did a bit of a survey and my 'smart' friends still feel that if the market rallies back, this will be a dead cat bounce.
Spots of value? Sure, but not sure where. ML? ( yes and over Citi) Bond Insurers? GE? GOLD? Strong tech cos? maybe... consumer discretionary, homebuilders, non-transparent financials where you don't know what the heck they are doing? I don't think so. Japan? I thought so last year so why not now. India? no way. China? no way.... the BRICS have come so so so so far, and I think they should give a lot of that back. ( see comment from yesterday)
Today, yesterday, the past week or so is truly historic and complicated. Looking back on history is not going to help us that much. So much has changed. So much.
A few of the highlights
- US Consumer had never been so leveraged ( i think)
- a prolonged period of low interest rates (domestically and globally), combined with strong global growth
- a significant credit crunch, the effects of which are just beginning to unfold
- record write-downs at US financial institutions
- lack of confidence in both bond insurers and rating agencies
- China and India becoming global powerhouses
- the power of Global sovereign funds
- housing prices that were at historic highs, and falling at historic velocity. ( plus the ability to borrow easily against that value - Homes as checking accounts)
- the emergence over the past few years of financial instruments that are impossible to understand. ( HOUSE of CARDS)
- proliferation of hedge funds and other trading and investment businesses that are only in the business to make money off money
-agricultural price inflation
-commodity price inflation
- a feeling that the gov't really did not do it's job in overseeing the whole thing ( "lack of adult supervision")
Has any of that gone away with a 75 bp rate cut?
Now of course there are a lot of positives, but that is not what the market is thinking about right now. For the market to stage a sustainable rally it has to believe that a lot of these problems will be solved by a fed rate cut and other, short term fixes. Sorry, I just do not see it.