Lets start off with the FOMC statement from this afternoon:
Release Date: March 18, 2008
For immediate release
The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.
Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.
Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.
Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.
In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.
The market had been pumped and primed for a rate cut of up to 100 basis points. And 100 basis points was what many talking heads were saying would be forthcoming. And the price did reflect the anticipation of a big rate cut as the market had run up before the announcement at 2:15pm today. It was asked why if the market was expecting a full 100 basis points that it did not sell off into the close on getting only 75 basis points. The answer is very simple, while there are many who are thriving on rate cuts there are also many who recognize the inflation problem and were somewhat relieved that we did NOT get a 100 basis point cut. But, 75 or 100 really makes no difference at this point. Inflationary pressures are continuing to mount; forcing more companies to contract profit margins, reduce employees as lower sales mount on consumer spending cutbacks, and lets not forget the housing market which is not getting any better.
This afternoon Lisa made a post to our board here in which she said she was highly disappointed in the Fed’s actions. I agree with her completely, although the market had been pumped up to expect a big rate cut we were really hoping they would cut far less than they did. We look out into the future and see a very damaged economy and a country with a deficit that goes beyond anything we have ever seen before. The Governments’ actions have all been for the "here and now" effect. And for the most part they have not been very successful at that either.
There were reports today that the US dollar soared on the rate cut news, in that it was not as big of a cut as expected. Let us put this in a proper perspective please. The word ’soar’ means "To climb swiftly or powerfully"
Want to see what the media was calling a ’soaring dollar’? Look below:
When the US dollar begins to break out of this many year down trend, then tell me it soars. Not when it makes a very small bump in the road.
I have looked over today’s charts, intra day and others. Volume levels on the major indices did not show us any confirmation of the price advance. When compared to other dates when a rate cut was announced (i.e. January 22, 2008) today’s volume was actually lower. Additionally, the short interest in the market remains at record proportions. Today’s FOMC decision and the movements in the markets were not enough to shake loose much of the high amount of shorts. Of course there were some short covering today. Remember everyone has different time periods to which they are trading. A quick swing trader who may have held a short for a day or two would have covered today, longer term position traders (such as our position) appear to be sticking with their positions for now. Believe me on this one, if we were to see a huge rally that convinced shorts that a bottom was in you would have seen volume levels so high today that would make your computer freeze up and crash. So in short (no pun intended), volume did not affirm the price advancement today. Over the next few days we must watch volume to see how it behaves vs price movements. For that will give us more insight into the future actions. Remember that this Thursday is options expiration day (Friday is a market holiday).
Resistance levels on the major indices are plenty. We have significant resistance levels to which still must be broken (and hold) for the market to begin any hope of a recovery. Contrary to the media and the big 400 point gain on the Dow it is STILL a bear market. And until proven otherwise it remains a bear.
We remain focused on the big picture of the economics and use the charts as our roadmap. Speaking of charts, I have had some requests for individual chart requests… I promise I will get to those chart requests shortly.
A look at today’s charts:
(10 year Dow Jones Industrials - weekly chart)
(Dow Jones Industrials - daily chart)
(S&P 500 - daily chart)
(Volatility Chart vs S&P 500)
On this volatility chart what is important to keep watching is the volatility and if it stays within the ascending triangle. A continued rise in volatility signals more sell offs coming.
NOTE: Clicking on any of the charts above will take you to a recent chart as it updates during the trading day.
Some other notable events tonight:
(US) ACCORDING TO THE WSJ, FANNIE MAE AND FREDDIE MAC ARE EXPECTED TO PURSUE PREFERRED SHARE OFFERINGS
- The new capital would allow the GSEs to increase their purchases of mortgages.
- (reminder from 3/11) FNM: Heard on the Street notes that Fannie Mae and Freddie Mac may have to raise large amounts of additional capital; WSJ notes that to put the market’s balance sheet fears to rest, both firms each may have to issue in excess of $10B of new stock this year; At Freddie this would double the amount of common shares outstanding, while it would increase by half the amount of stock outstanding at Fannie
Related to the news above: There is also news of an announcement tomorrow at 9am by the regulator of the GSE’s. It is expected that the news may be an announcement that they are raising the limits of mortgages these companies can take on. In other words, Fannie and Freddie are being turned into a toxic waste site for all bad mortgages.
(US) FINANCIALS: CARLYLE CAPITAL LIMITED IN COMPULSORY LIQUIDATION
- On the 17th March 2008, before the Royal Court of Guernsey, an order was granted placing CCC into compulsory liquidation under section 94(a) of the Companies (Guernsey) Laws 1994 as amended pursuant to a special resolution of members. Mr Alan Roberts and Mr Neil Mather, both of Begbies Traynor, were appointed joint liquidators of CCC and duly sworn into office on that day.
- Under Guernsey law, the Liquidators are now responsible for realising the assets and establishing the liabilities of CCC and are legally empowered to act on its behalf in those connections. All powers of the directors to act on behalf of CCC, except as may be expressly permitted by the Liquidators from time to time, have now ceased and CCC has ceased to undertake business.
S&P CUTS 123 RATINGS ON 23 US CDOS OF ABS; $26.945B AFFECTED
Because our short position on the Dow Jones Industrials was initiated at 12750, we are still in a profit… even with today’s rally. 12750 is a key technical level and we will close the trade if the market reaches that point for breakeven (no loss). We are not convinced that the bottom is in. Too many indicators still point to trouble.
Please take a read tonight of my two friends and their perspective of today’s events:
and
See you in the morning
