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“A Whiff of Panic . . .”

Welcome NYT readers:  The What's Online column linked to the wrong commentary -- the post Dan was referencing was this one: So Much for the Decoupling . . .   

There were several other issues with the Times piece, and our response to the column is here: The Bulls, The Bears, & the Media.

~~~

The Fed slashes rates 75 bps – and another 75 bps are implied for next weeks meeting. There is a none-too-faint whiff of panic about today's actions.

What does this mean for investors. Quite a number of things – none of which are particularly good over the long term:

1) Why Cut today? What was the motivation for today’s cut? Would waiting 7 days have done anything. other than allowing some of the excesses to get wrung out of the system?

2) Equity Market Dysfunction? Is it that the equity markets are not working properly? Likely not. Are rates too high? I doubt that's the reason for any of our economic woes. Then what is it – are lowered equity prices a problem?

Globally, equity markets have been in the process of “Repricing Risk” – why is the Fed disrupting that? Further, there is now a recognition that S&P500 earnings were priced way too high – especially in the event of a European and Asian slow down. That lowered “E” in the P/E adjustment is also under way.

3) TANSTAAFL:  The free lunch crowd (a/k/a Long & Wrong) has been chanting for Fed cuts. However, these are not with0out consequences, as Inflation remains a pernicious threat.

Here’s a question: What goes to $5 a gallon first – Milk or Gasoline? How about $6?

4) How Independent is the Fed? The Fed is supposed to be an independent entity, whose mission is a) price stability (inflation) and b) maximizing employment (growth).

However, today’s action reveals an apparent third obligatory goal – protecting investors and market prices. I had no idea that back-stopping speculators and hedge funds was part of their mandate...

5) Capitulation? The Market gapped 400 points, and is now climbing higher (off 300 as I type this). My second biggest concern is that the Fed merely delayed the inevitable. This market saving cut prevented a thorough, 5% wash out. In other words, all the Fed did was prevent a healthy capitulation.

6) Pushing on a String?  My biggest fear is that we close down 500 points anyway. That would be the worst of all worlds: A compromised, political Fed, working on behalf of speculators, to the detriment of ordinary taxpayers, is proven to be a paper tiger. That scenario would but the “F” in Fugly.

7) Decoupling US Equities from Global Slowdown? Other markets were down much more than the US. But that makes sense, seeing as they have been a whole lot more than the US over the past 5 years . . .

This was a shot of penicillin to a cancer patient.

Tuesday, January 22, 2008 | 10:01 AM | Permalink | Comments (117) | TrackBack (2)
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Comments

I'll take door number 4 Barry....
Until we get that or it is allowed to occur we are just marking time and will drift lower over time instead of completing the washout of crap that is sorely needed.

A 5% drop would have shortened the recovery time. The stupid people at the Fed are continuing to trade the perception of short-term gains for another term of four years-at least for them.

Disgusting

Ciao
MS

Posted by: michael schumacher | Jan 22, 2008 10:09:00 AM

The Fed's political agenda seems more obvious now. I vote for gas to hit $5.

Posted by: BustaMove | Jan 22, 2008 10:10:56 AM

Milk

Posted by: Eric Davis | Jan 22, 2008 10:11:53 AM

you know Barry, I agree and posted on this as well today on urbandigs. The fed blew it. They are ivy leaguers and dont understand trading psychology or the markets.

WE NEED TO GET WRECKED! Let it happen. Let it re price and adjust to this new world of risk and bear market. Flush the system. They used alot of their arsenal and it saved us a whopping 100 pts on DOW?

Awful. They should have let the destruction occur, and if they had to cut, do it later in the day or at the meeting. Obviously they did it today to jolt confidence as it takes 8-12 months for the rate cut to funnel through economic system.

They blew the confidence part. The should have waiting until at least mid day after the carnage occurred.

Posted by: UrbanDigs | Jan 22, 2008 10:14:07 AM

Geez, beer is going to be cheaper than milk or gasoline before this is over.

Posted by: Chester White | Jan 22, 2008 10:16:16 AM

Will Rogers was once asked how he made money in the stock market. "you buy good stocks and when they go up, sell them. If they don't go up, don't buy them!"

I echo your comments about the Fed...Yet another unspoken mandate is to quell panics. I guess an orderly melt down is less scary. Mr. Market will go to where it will go.

Posted by: Ross | Jan 22, 2008 10:16:24 AM

This is what they mean about fighting the fed. Unfortunately the little dogs are what is going to pay for this.

I'm glad this enabled me to sell my monthly covered calls for more cash flow than what I expected to sell them for only a few hours ago. I'm sad for the families who will be ground to hamburger when this inflation blast hits the streets. They will be ground up not for my trading's sake but for the sake of those much bigger than me in the markets who decided once again to show uncle ben who is bosssssssssss

[begin sarcasm]I think really the only solution to this is for the fed to print up some dollars and buy dollars with them. That way the dollar can retain its value [end sarcasm]

Posted by: DavidB | Jan 22, 2008 10:16:49 AM

milk......

Oil will drop off a cliff as we move closer to the election. Remember Goldman Sachs little trick of tweaking the GSCI that caused a panic selloff in wholesale gas-August '06 (this is highlighted on any oil chart as the only time since 2002 that oil has actually lost money over a three month period).

oil's had it's run. No way gas gets more expensive unless Iran gets invaded.

Milk is already more expensive,per gallon, than oil.

Ciao
MS

Posted by: michael schumacher | Jan 22, 2008 10:17:19 AM

And you question the PPT's existence.

Posted by: crack | Jan 22, 2008 10:19:39 AM

Barry,

You're right on the money, as usual. Frantically, trying to delay the invevitable usually only exacerbates the problems. Let the invisible hand do its thing.

Posted by: Ross Thompson | Jan 22, 2008 10:20:34 AM

1) Motivation is political but not quite as sinister as implied. It's more to provide a perception for the masses that someone is watching. Fortunately, (or not) the masses don't stop to think through the implications very well - i.e. this should confirm recession. Unfortunately, this reality will sink into the brains of those more thoughtful in the next week or so.

2) Milk is at $4.49/gallon already for the store-brand. If you buy the fancy-pants Borden stuff it's already well over $5.

This is a depressing day for so many reasons and the market probably won't even get a proper capitulation!

Just remember though, in the US as in no other country, we get the government we deserve. I would also add that we get the government that reflects the general population.

Posted by: Lord_Huggington | Jan 22, 2008 10:21:27 AM

Michael,

high prices and runaway inflation(including gas) is what they want isn't it? I thought this was all about a regime change? Nothing changes deck chairs on the titanic faster than a good ol' inflationary slap in the face

Posted by: DavidB | Jan 22, 2008 10:23:12 AM

I have a question about the inflation story and I'm not asking this to be argumentative. I seriously don't get the argument. We are experiencing deflation on a $20 trillion asset class (real estate) and deflation in the equity market as well. Historically, inflation peaks after the economy troughs, so it seems reasonable to think that prices fall after the economy (i.e. demand) slows. So what's the right answer, inflation or deflation?

Don't get me wrong, I think the only long run solution for the U.S. economy is to delever and increase savings. Last time I checked, that usually requires higher rates, not lower.

Posted by: Mike | Jan 22, 2008 10:24:11 AM

you call it repricing of risk. That is market-techno-babble. A simpler explanation could be that the Funds are repositioning their global portfolios. The took advantage of MLK holiday (when the US market was closed)...they pulled money out of the foreign markets and now they are preparing to bring it home to US Stocks!

Posted by: mike e. | Jan 22, 2008 10:25:38 AM

LH: the government DOES NOT reflect the general population. since 1968, 1980, Clinton (NAFTA), Republicans taking the House 1994, parabolic speculation 1995, Bush 2000 the government has tended to represent a narrower and narrower slice of the population: CEOs, hedge funds, Fortune 500, the wealthy. it's BECAUSE there is no longer a thoughtful opposition or any questioning of laissez-faire capitalism that we can go to the sorts of extremes we've seen in the financials. it's when everyone is leaning one way that the boat tips over.

Posted by: scorpio | Jan 22, 2008 10:26:39 AM

This week-early but not unexpected cut was used to calm the rest of the world. That's the disgusting part of it: we (the US) now not only have to play cop to the rest of the world, but economic arbiter as well.

Posted by: waiting_ | Jan 22, 2008 10:27:03 AM

Funny story--for the first time in years, I actually had CNBC on in my home office. My wife, a brilliant woman but not particularly interested in finance, listened for a while as she was doing other things.

Then she turns to me and asks: "How is this any different than Jerry Springer?"

So so true LOL

Posted by: Jay Weinstein | Jan 22, 2008 10:27:26 AM

Milk is already more expensive,per gallon, than oil.

My propane bill (for my oven and water heating) from Suburban Propane last week was $5 a gallon.

Posted by: Walker | Jan 22, 2008 10:29:19 AM

"A simpler explanation could be that the Funds are repositioning their global portfolios. The took advantage of MLK holiday (when the US market was closed)...they pulled money out of the foreign markets and now they are preparing to bring it home to US Stocks!"

Why couldn't they do that any other day?

They could just be getting their money out and sitting on it.

Posted by: rjrj | Jan 22, 2008 10:30:44 AM

Motivation is political but not quite as sinister as implied. It's more to provide a perception for the masses that someone is watching.

But this is really risky. As Barry mentioned, if the Fed's actions don't inspire the proper level of confidence, then people will realize it is no longer in control of events & panic, panic, PANIC!!

Looks like a dead elephant bounce in the markets--a bit of a rebound from earlier, but still a net loss.

Posted by: Mr. Flibble | Jan 22, 2008 10:30:52 AM

What about another explanation for Bernanke's move. He is trying to bail out the banking system. Cutting rates will allow them to improve margins on their traditional lending activities and if their medium-term profitabily is perceived to have improved, attracting fresh equity to recapitalise them will be easier, thereby helping stabilise the banking system. I strongly suspect bernanke is more worried about the financial system than by the economy as a whole...

Posted by: david | Jan 22, 2008 10:31:18 AM

Another big risk that hasn't been given much air.....anecdotally, a lot of people have used home equity withdrawals (generally those w/prime credit) to fund their small businesses.

Slowing economy = non-repayment of home equity = another drag on housing? Another double whammy waiting in the wings?

FWIW, looking for a rebound and then a genuine washout.

Posted by: internet-anon | Jan 22, 2008 10:31:38 AM

Fear? What fear? The dow is only down 150 points.

Posted by: Suge Knight | Jan 22, 2008 10:31:50 AM

For a contrarian take. Bernanke is trying to keep the market from falling abruptly (or too much) because that is the last thing keeping the economy up (through boomers retirement cash). Since house prices are down (and going lower), he can ill-afford to have the markets tank too much or we will be in for a real deflationary recession (a deep one). And, inflation is not an issue (recession takes care of oil, and unless Bernanke can end ethanol policy there is nothing he can do about food).

Posted by: Andrew | Jan 22, 2008 10:32:10 AM

Funny. I noticed last night my gallon of milk was over $5.
Damn. I guess people will have to walk to the corner and buy it instead of driving.

Posted by: New Yorker | Jan 22, 2008 10:32:19 AM

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