Double Journey

The fed, as expected, cut the rate 0.75%.  This was slightly less than a lot of people were betting on as the fed funds future rate actually seemed to imply a 1% expectation.

That being said, the market celebrated with a gigantic day with the major indexes up over 3%.  So it’s time to celebrate, pop the champagne, and go running into the market right? The economy is saved! Not so fast.

The feds action definitely helps the banks who got themselves into a mess by taking the easy money and making some bad loans.  The Fed’s actions are squarely to ease the credit crunch which is hammering the financial markets. However, the fed has no control over what the banks do with the easy money.  And by all indications the banks aren’t passing on the money to their customers.

Despite the Fed rate cuts, the cost of mortgages are actually going up.  The
average 30 year fixed mortgage is just under 6%.   This despite the fact that the 10 year note currently stands at 3.5%.  For those that don’t see the significance, this 2.5% difference (referred to as the spreads) is normally only 1.5%.  The spread represents the risk a bank is willing to take and the widening of the spread shows that they aren’t willing to take very much.  Add that to the fact that they are owning willing to lend to those with high credit scores, and you can see how this isn’t helping the average American very much.

So what are the banks doing with the easy money?  There is actually an arbitrage opportunity here since they can borrow the money and invest it in higher yielding government bonds.  Of course, you can’t do this since you can’t borrow from the Fed.  Sucks huh?

But at least the Fed cut isn’t hurting you right?  Saving the banks is a good thing isn’t it?  Sure if you don’t mind higher inflation and a weaker dollar (causing the price of imports and commodities like oil to rise).   If you don’t mind taxpayer dollars being used to bail out billion dollar banks.  If you believe that the way to fix the problems caused by easy money is to throw more easy money than the fed is doing the exact right thing.

Stocks had a better day than I expected.  The Dow was actually up while the Nasdaq came off its lows of the day.  This is probably in reaction to what is perceived to be a sure thing, the Fed cutting the rate very deeply.  Most are predicting a 0.75% cut.  Some even believe the Fed will cut as much as 1%.

But it is my belief that this is too little too late.  I really don’t think it matters what the Fed does at this point.  The Fed Funds rate is a blunt instrument and the economy is way to far in its downward trajectory for something like this to rescue things.

While I think the market will continue to go down, it is about the time you need to create a shopping list and start thinking hard about the companies you want to own 5 or 10 years from now.  My shopping list needs to be updated but I still think its a good list.  Actually, if you take a look at the list, all my stocks are doing well comparatively to where the market was at the time.  Some of them are doing great like Potash.

Talk about the bottom falling out. Today, it was announced that JP Morgan Chase will acquire Bear Stearns for $2 a share. This is seemingly a bargain basement price because Bear closed Friday at $30. It traded as high as $170 a little over a year ago. You couple this with the unusual move by the Fed to cut a key interest rate on Sunday, and you have some very serious developments.

This portends very bad news for the markets tomorrow. While the market has been down this year, their always seems to be a rally that quickly follows it. This tends to demonstrate indecision on the markets part as people keep looking for the bottom.

What these two events demonstrates is that, despite all the doom and gloom surrounding the market these days, the problems facing the markets are even more serious than previously thought. JP Morgan would not be able to Buy Bear Stearns at such a low price if things were not dire for that company. The Fed would not step in on a SUNDAY if they didn’t think something really bad was about to happen on Monday.

So what to do? I still am going to do nothing because I’ve been setting up for this eventuality for a while. I will have some stocks that get beaten up, I’ll probably even lose a lot of money in the next few days, but I’m not one to panic even if I think the market could easily go down another 10-15% if not more.

For those without the same stomach that I have, get out while you can. As some of my readers have commented, it has been an up and down ride, but it’s about to go straight down for a while.

The Dow had an up 400 day, mostly on the news that the Fed was going to inject $200 billion of liquidity into the market.   This gave hope to many investors that the worse might be behind us and that it was time to get back into the market.

I kept my money on the sidelines.  I’m not sure how this Fed action at all solves the fundamental problems that caused the market to tank in the last few months.  We are heading into a period where we need to pay for the excesses of the last few years.  We can delay it, and that is what the Fed seems to be trying to accomplish, but in the end, someone is going to have to pay up.

The market reacted to relatively weak news, and this stimulated others to jump in not to miss the boat.  But when the smoke clears people are going to realize that the fundamentals just aren’t there.

Take this opportunity to get rid of any stocks that you have been wanting to get rid of for a while.  Days like this don’t come by too often and you have to take advantage of them when you can.

Will you please stop with the rate cutting? You already made the mistake of cutting rates, and you are going to do it again?  You can’t save the economy now.  You can’t make housing prices go back up.  There is only so much the fed can actually do.  Cutting rates is not the panacea you are making it out to be.

For years, the Fed provided cheap money.  That cheap money caused the problems you are now seeing.  And the solution is to throw more cheap money at it.  It’s like paying off your credit card with more credit cards.  It just won’t work.  Let the economy feel some pain and lets move on.

I learned from Ben Bernanke. He was the head of the Economics department while I was at Princeton University. I in many ways should come to the same logical economic conclusion that he does. But for the life of me, I can’t understand what the heck he is doing these days.

Today, in case you missed it, the Fed cut the fed funds rate another 50 basis points. This along with the emergency 75 basis point cut they just did, means the rate has plummeted 125 basis points over the last week. Most of this is being done to avert a recession. Of course that implies we are not already in one.

The fed is being reactionary here. Plain and simple. They are seeing the turmoil in the stock market, and they are trying to do something about it. Why, is beyond me. This problem was created by too much easy money. The Fed dropped the fed funds rate to 1.0% several years ago. This caused a flood of cheap money to enter the market. This in turn made it very easy to get loans. This then lead to housing prices going through the roof because money was so easy to come by. Of course, the music stopped playing, and the chairs were pulled out.

To now fix this problem, the Fed proposes to do the same thing all over again? How is that going to help the situation? It isn’t. All it does is delay the inevitable. Debt must be repaid. You can continue to get more and more of it, but some day the bill comes due. It reminds me of people who use credit cards to pay off the other credit cards, compounding the problem, just trying to avoid the day they will eventually declare bankruptcy.

Almost time to re-enter the market. The market opened sharply down and recovered after the Fed announced a 3/4 point rate cut.  One quick comment on that.  Not sure what type of house that my former professor is running.  I would prefer to see the fed leading the way rather than reacting to every little thing (OK a 500 point drop isn’t little) that happens.

I still think that the market is flat to down over the next few weeks if not month.  But it is impossible to pick the bottom of a market.  If you can take the long term pain, you should start thinking about putting your money back into the market.  Financial stocks are going to be the first to recover, but they might still be pretty scary here.  I still like my MO and I really want to by Home Depot, but I’m holding off for now.  Bottoms take a long time to form.  In 2000, it took months before we actually reached bottom even though there were several sharp drops.

There is still weakness however.  Apple is touching the 130’s in after hour trading.  They had a good quarter, but their outlook was grim.  That is going to be the theme for a lot of companies.  Good earnings, grim outlooks.  Thank god I passed on it at 195.  Tech is going to be a hard place to be.