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Stock Market Summary for February 20th 2008

The US markets ended the day higher because of the rising ‘Fed Funds Futures’ which now have the FOMC cutting rates by another 50 basis points at their March 18th meeting. The bad economic news today, coupled with some talk from Federal Reserve Bill Poole in which he said that rates may have to go lower got the market on a "rate cut high".

The fact that inflation data continues to worsen was of little impact on the mind of the market masses today, the only thing that mattered was the markets brain got a serotonin boost from the thought of more rate cuts.

Rate cuts by the Federal Reserve will only go so far in controlling the credit crisis, and it is a crisis. Today we learned that several auctions for securities and bond funds which have ‘auction rate preferred shares’ (ARPS) failed at auction to get bidders. When banks and other financial institutions are unable to auction off various holdings it shows just how bad this "stuff" has become. The failure to receive bids at auction for securities or other packaged investment vehicles/holdings will just lead to additional write downs from those institutions for they have to take the loss eventually.

Today’s economic data was not good. The only reason the market reacted the way it did was on the increased chances of another 50 point cut in the rates next month. But this is not going to solve the problems and the economy is continuing to decline. Inflation is getting out of control and the Federal Reserve knows this. Are they stupid enough to keep cutting rates and watering the seeds of inflation? Maybe they are because it would seem they are only concerned about giving the markets their "rate cut fix" and not worry about the long term implications of their actions.

We are still holding onto our short trade (ETF symbol: DXD) on the Dow Jones Industrials. This trade is still a profit for us and we are continuing to hold until further notice.  Lisa provided some of the details earlier on the FOMC minutes from their last meeting. They have lowered yet again their forecast of the US economy. Last October the Federal Reserve had the projected the GDP to be 1.8% to 2.5%. At that same time I said on this site that the GDP will be 1.0% to 1.5%. Today the Federal Reserve revised their projections and now claim that the economy will decline even further and they now project the GDP to be 1.3% to 2.0%. They are getting closer to my projections all the time :).

I also projected that the unemployment rate would rise to 5.5%, and today they raised their projections of unemployment to now go to 5.2% to 5.3%. I’m not trying to toot my own horn here on my projections being accurate. Instead, what I want to point out is that we have been examining all of the economic data for many months now, analyzing the trends, and taking into account all of the business indicators. And we were able to see long ago that the economy was going to contract much further than the Government was admitting. And with each passing month the Government seems to be slowly changing their tune to match what is really happening. Are their economists that blind? Or is it because the Federal Reserve/Government wants to let out the bad news in dribs and drabs? I think it is becoming quite clear that it is because they want to break the bad news to the markets slowly over time. So much for transparency in our Government and the financial system. It is not only the Federal Reserve that is guilty of ‘playing’ with the markets by changing their forecasts constantly in dribs and drabs. Corporate America does the same thing. Let the bad news out in tiny pieces so as not to shock anyone into knowing how bad things are.

Shown below is the latest Federal Reserve Forecast: (click on image to see full screen)

 

 

 

 

 

 

  (Data source: Moody’s Economy.com)

The Federal Reserve continues to use words like "inflation expectations remain anchored". How they can keep saying this as the costs of everyday items continues rise is ridiculous. The CPI data today continues to show a rising trend of inflation. The chart below is the CPI data as of today. Do you see an anchor in there anywhere? I don’t.

 

 

 

 

 

 

 

 

 

Consumer Price Index, top line number. (Data source: Moody’s Economy.com)