Dow drops 300 after Fed cuts rates

AP ^ | 12/11/07

[trumandogz]

Ben Bernanke is an idiot.

[spectre]

This has been a strange news day.

sw

[Russ]

I long for the days when adults worked in the financial markets and they weren’t slaves to computers and programed selling.

[Travis McGee]

The junky only got a disappointingly small “fix,” so he’s having a bad reaction.

[elpadre]

“.. but it is simplistic rather than simple..”

“simplistic,” IMO, is just what those wall street brokers are. I often wonder how many are on the Soro’s payroll??

There absolutely no reason or sense in today’s afternoon action - and it plays havoc with 401k plans that millions of retirees depend on.

[JasonC]

Sorry, that is merely cosmetic as well. There is no volume going through the discount window, and wouldn't be even with a half point cut in that rate - which would have still left it above fed funds.

And while it is true treasury rates are way below fed funds at this point, corporate debt is still above the new rate. Corporates are a full point over treasuries these days. So banks can get positive carry.

As for the volume of credit being provided, it is indirectly very high. The Federal Home Loan Banks have injected nearly $200 billion in fresh credit since August. The money supply, broad, is actually growing at a 16% annual rate (MZM) since the credit "crunch" began, which has completely offset the decline in commercial paper outstanding, and then some.

Even mortgage debt has increased - it stands over 6% higher today than a year ago, despite the blowups.

The market irrationally hoped that the Fed would cut aggressively until Fed Funds caught the T-bill - which if it happened would effectively mean the banks could pick the rate themselves by bidding up treasuries. The Fed is doing the right thing here - focusing on the real economy and not on the panicky bankers on Wall Street.

The real economy is still going fine. Jobs are rising by 100,000 a month, enough to hold the unemployment rate steady at a low 4.7%. Wages are up. Even household wealth is up, despite real estate prices, on new debt and stocks since the summer, plus foreign investment translating well in currency terms, etc.

The Fed has cut rates a full percentage point since the summer. That is rapid reduction any way it is sliced - and they will probably do another quarter point in January. The truth of the matter is, a lot of unsound finance was done and many large finance companies are in trouble. The realistic ones are curing themselves by raising new capital to cover old losses, aggressively marking to market or unloading unwanted assets that did not work out. That is what they should be doing.

There is no need for the Fed or the government to panic and to firehose more funny money at the problem. That doesn't solve things, it papers them over. In case everybody forgot, that is how we got into this mess in the first place. We don't need another round of it. A bankrupt set of financial minds on Wall Street want to bring back the punch bowl - but we will all be better off if they get pink slips for Christmas instead.

They are the crowd that screwed this up...

[JasonC]

What horsefeathers. People still saving do not want prices on the moon forever, they want prices that are sustainable and fair values. Personally, I going to be buying stock for decades - which means I care little for short term swings in price.

[SaxxonWoods]

Thanks for your input. Point taken on Corporate debt. Given what your wrote about Corporate yields, what do you think of Corporate bond funds here? I’m heavy with cash right now (48%), and MMF yields are obviously dropping. I’ve done pretty well with a short-term bond fund, but not sure if that’s the best spot on the curve going forward.

What do you think of the Central Bank(s) deal announced this morning? I haven’t seen any good articles on that yet?

[JasonC]

See post #29 in this thread on FR, for my take on the recent central bank swap announcement -

Fed swap action and managing LIBOR

As for corporates, they are a buy right now sure. The corporate yield curve is nearly flat, with 5% to 5.5% available across the board, for AA securities. I think the right risk level you want to be in is AA to A - the AAAs are too low and the riskier stuff too risky. As for the maturity, that is a bet on rate direction. I think in the short term it is down, based on central bank actions. I wouldn't go all the way to the longest maturities though. One, they probably won't move as much in rate terms, and two, in central bank actions touch off inflation the rate decline could be temporary.

I think the intermediate investment grade corporates look pretty safe - 5 to 10 year maturities and 4 to 6 durations. If corporate rates decline a full percentage point, which is quite possible if you look at what treasuries have already done, those will break a double digit return for the year.

Short, 2 year corporates are a safer bet, in the sense that even higher rates wouldn't hurt much. You'd just hold to maturity can get 5% per year. But they don't have the potential upside of the intermediates, and I think significantly higher rates in the next year are unlikely, at least in the middle of the curve. Instead the Fed will continue to cut until Fed Funds is down near where T-bills are today (3% range).

For the more speculative, LIBOR futures are a way to bet that the money market turmoil will pass. Another way - requires significant bravery - is to buy stock of the financial companies, which are pretty cheap right now. The best time for that is probably still 6 to 12 months off, however.