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Tuesday, December 11, 2007

Fed Decisions Ruins The Charts for the Bulls

Fed Lowers Rate by a Quarter Point to 4.25 Percent (Update4): “The Federal Reserve lowered its benchmark interest rate by a quarter-point to 4.25 percent, while signaling officials are open to further cuts if the housing slump and credit squeeze worsen.

Stocks fell and Treasury notes surged after the decision, which some economists said fell short of what's needed to spur lending and avert a recession. The central bank also pared the discount rate by a quarter-point to 4.75 percent, counter to speculation among investors that the Fed would make a deeper reduction.

"Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation,'' the Federal Open Market Committee said in a statement after meeting today in Washington. The change ```should help promote moderate growth over time.''

The Fed dropped language from its previous statement that risks of slower growth and faster inflation were ``roughly'' balanced. The economy is faltering after a third-quarter surge as house prices drop, consumer spending slows and banks tighten lending standards for even their best customers.”

Treasuries Rise Most in Three Years as Fed Rate Cuts Disappoint: “Treasuries rose the most in more than three years on concern that the Federal Reserve's quarter- point reductions in borrowing costs won't be enough to avoid the risk of recession.

The rally pushed yields on two-year notes, more sensitive to expectations of further rate cuts than longer-maturity debt, back below 3 percent. The central bank lowered its target for overnight loans between banks to 4.25 percent and the rate it charges banks for direct loans to 4.75 percent, disheartening investors expecting a bigger reduction in the discount rate.”

U.S. Stocks Fall After Fed Cuts Benchmark Rate by Quarter Point: “U.S. stocks tumbled the most in a month as investors speculated the Federal Reserve's quarter- point interest-rate cut will fail to prevent a recession.

Bank of America Corp. and Citigroup Inc. led all 93 companies in the S&P 500 Financials Index lower, and homebuilder shares fell the most ever after the Fed said the housing slump is getting worse. Washington Mutual Inc., the largest U.S. savings and loan, posted its steepest drop in a month on plans to write down the value of its home-lending unit. Freddie Mac, the second-biggest mortgage-finance company, slid for a third day after forecasting a wider loss than analysts estimated.

The S&P 500 lost 38.31, or 2.5 percent, to 1,477.65. The Dow Jones Industrial Average retreated 294.26, or 2.1 percent, to 13,432.77. The Nasdaq Composite Index decreased 66.6, or 2.5 percent, to 2,652.35. Almost 14 stocks declined for every one that rose on the New York Stock Exchange. Treasuries rallied and the dollar weakened against the euro and yen.

“It should have been more aggressive,'' said Quincy Krosby, who helps manage $330 billion as chief investment strategist at the Hartford in Hartford, Connecticut. “The market's instinctive reaction is that it's too little too late and that the Fed is behind the curve.””

Forget about too little too late. That’s not it at all. Its more that the cuts don’t matter much. They can’t ‘fix’ the situation. The cuts have little affect on what really matters: LIBOR and EURIBOR rates… these cuts won’t inflate risky assets because lenders of all kinds are cutting back on their risk exposures by tightening all their credit standards.


Cris said...

Fine reading of the charts. Following your notes closely put me out of harms way. Any opportunities?


Ben Bittrolff said...

There are always plenty of opportunities. Without giving you individual trades, I can say the following: On broader market strength, scale out of your longs and consider establishing shorts. Whatever you do, avoid buying 'the dips'. With markets less than 10% off their all time highs and a US recession damn near certain, a bottom is one hell of a long way off. These rallies are so sharp and violent precisely because they are 'short covering rallies'.

Manage your risk carefully.


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