Wednesday, December 12, 2007

The Quarter Point Cut

I was expecting half a point. I truly was but the US Fed decided to cut only a quarter and the markets, they of course plunged, free-falling in reaction to this news. The Dow ended up losing 294 points. ( Free fall after Fed cut )

And blogger
Kirk had compiled 10 quotable quotes on his latest posting: Thoughts On The Fed

  • "Thinking as a trader, the most counter-intuitive outcome here would be a resumption of the Santa rally and run into year end. It's just become my favored scenario, because it seems so outlandish after the Fed news." - Alan Farley

    "The assumption this afternoon is surely going to be that if the market falls so much on a day the Fed cut rates, then that has to be a bad sign going forward. I see the logic there, but logic usually doesn't have much place in the stock market. Going back to 1971, I checked for any time that the S&P dropped 1% or more on a day the Fed cut. There were only five instances that popped up, and the S&P formed at least a short-term low within two days four of those times. The best bet was had by waiting for an additional 1% - 2% of downside, then buying and holding for a few days or 2% - 5% upside." - Jason Goepfert

    "Aside from the declines seen on the FOMC day on the first trading day following 9/11, this is the worst decline on a Fed day since 1990. We went back and found all FOMC days in which the S&P 500 fell by more than 1% to see how the market has performed going forward. The results are positive for tomorrow and the next week, but negative from now to the next Fed meeting on January 30th." - Bespoke

    "I'll leave the berating of the Fed to others and will spend my energy trying to deal with this market. Things look very poor going forward. The technical conditions support further downside, and the Fed was really the only good positive catalyst we had going for us. Without that, we have some end-of-the-year seasonality that may help, but that is not a sure thing by any means." - Rev Shark

    "Fed members are probably amazed at the market reaction, believing that they not only did what seemed right on a policy basis but something close to market expectations. Wordsmiths need to come up with synonymous phrases for "behind the curve." I am sick of it already!" - Jeff Miller

    "With only a quarter-point cut, we will no longer be able to forestall the bankruptcies. Banks are holding on for dear life, homebuilders the same. But their lifeline just got choked and far fewer will live because of this. Lots of times people talk about stock traders being complacent. Lots of times you hear about bullish money managers that are way too excited about stocks. But I have never heard a statement from a more bullish group of people in my life. They genuinely think that inflation remains a big problem. I am aghast." - Jim Cramer

    "The Fed blew it once again. They are still behind the curve. Expect the bears to enjoy the fruits of the Fed's whiff as the A.I.R. pauses. They should just let me make monetary policy. Like 2000, 2004, and 2006 when I had major disagreements with their policy, I expect they will come around too little too late." - Robert Marcin

    "What is just breathtaking to me is that the Fed sees balanced risks between inflation and growth. I understand that the Fed is destined to be behind the curve (because it relies on past data to dictate policy that takes time to flow through the economy), but these guys are so behind the curve that they are getting lapped." - Dan Fitzpatrick

    "Dollars to donuts, perhaps literally, the FOMC couldn't cut fitty without invoking the wrath of foreign holders of dollar denominated assets. As it is, we're in a pretty pinch." - Todd Harrison

    "Boom Boom almost did the right thing. Had it spared us the pandering 1/4 point begged for by financial speculators, he would have finally shown the kind of stones that will be needed to guide us out of the current mess. Equities do not like it one bit, as well they shouldn't; the wimpy move is likely to worsen the credit environment and the financial markets as a whole could be in for a year-end pasting. So why do I suggest the Fed did the almost right thing? Because one cannot devalue its way out of a gigantic pile of debt. Companies, many companies, need to fail, go away forever, and allow those who have a business existing to once again prosper not on the back of borrowed money, but on the strength of real demand, rather than demand generated by a need to circulate make belief money. Had the Fed figured this out in 2001, by 2003 we would likely have forgotten the then recession. Instead it decided to try to fool everyone into believing that we could borrow our way into a permanent plateau of prosperity." - Fil Zucchi

And over at FinancialSense, market commentator, Frank Barbera, has penned a brilliant The End of Denial posting.

  • So it is today. The US is entering a very difficult period, and investors need to be attuned to priority Number One—don’t lose valuable capital. This means being very attentive to potential risks, and looking always at both sides of the equation, and when initiating a trade, knowing in advance how much risk you plan to take, and precisely where you draw your line in the sand in order to get out. In rising markets, where the trend is strongly higher, it is easy to make money and everyone is a genius. In down markets, that algorithm is inverted, as down markets are designed to separate investors from capital, with the bottom of the downside cycle yielding the uncontrolled panic phone call to the trading desk -- “Get me out NOW!” This is the scene of despondency, desperation and capitulation which attends panic sell offs in down markets. In the chart below, we trace the human emotional side of the cycle for you, with this author’s opinion that right now, Denial marks the current stage for this cycle.

    Why Denial? Simply because despite the collapse of untold businesses, and the virtual shut down of key credit markets, markets have tried to look past the problems on the hope that the Fed or Powers that be would come riding to the rescue. Today’s market was significant, and all investors should take careful note. Today, was the first day that the stock market publicly questioned the Fed, in its own way saying, ‘things are really bad, so what are you going to do about it?” That is a sign of situational awareness, and that is a sign that we are moving from avoiding the recognition of the problem to confronting and peering toward the problem. Looking at the problem, the market sees fear, the next step in the down market, and for that reason, today represents a big psychological downshift for the stock market. Just how big, we cannot know, but the days ahead will tell the tale. It is been my experience in a now nearly 27 year career watching stock prices that the ‘persistency of selling’ is the key ingredient to watch over the next 5 to 10 days. Can the market bounce, can it sustain a bounce, how long can it sustain a bounce, or does it continue to crater all the way back to the November 26th lows?

And here is the Fed's statement posted at CNN: Read the Fed's statement

How now Brown Cow?

Is it really all gloom and doom with just a quarter point cut?