Is it all about the interest rate cut?
In the past 2 days, the market has gone up 4%. Is this a turnaround because the market was oversold? Or is this just another sucker rally?
I hold subscribe to my theory that stocks rise beginning the last month of the quarter (December). So that creates an underlying desire to get back into equities.
But the trigger in this case was 3 things:
1. Critical 12,700 level
2. Citigroup got funding
3. Hopes that the Fed will cut rates in 2 weeks
While I am not driven by the technicals, the 12,700 mark was an important one psychologically. That was a 10% drop from the recent high, which is substantial. The market hit it and rebounded. That's a positive sign for now.
Citigroup's cash injection came from Abu Dhabi. Which is interestingbecause, back inthe 90s Citigroup was in a similar dilemna and it got a major cash infusion from Saudi Arabia. In any case, as I suggested a few posts back, foreigners are going to come piling back into the US market. For some we look cheap. For others, like China, we have critical technology.
So the Citigroup investment was a positive signal that money is out there and will come into the market. And that's what matters in the short term. In the long term, it's not a good sign that a major company is on the ropes so quickly. It was just August when Citi said they were fine and had no exposure to subprime loans.
Then we have the interest rate cut expectations. The Fed has room to make the cut. Certainly the past 2 quarters have shown strong GDP growth:
Q1 0.6%
Q2 3.9%
Q3 3.8%
Much of that growth was driven by exports and by increases in spending on inventories and durable goods. In other words - a weak dollar bumped up manufacturing. Over the next week or so, we will get better visibility to jobs, housing and manufacturing. And inflation. The market seems to be shrugging off the non-stop negative news about housing. Instead it focuses on whether soft inflation will allow for more rate cuts.
Putting on the Fed hat, this is what I would see:
1. Extreme distress in the credit markets requiring increasingly fsat attention
2. The last rate cut brought stability until more bad news came out regarding housing and financial institutions
3. Rate cuts must not drive inflation - current indicators are that inflation concerns exist.
Inflation is an area of conflict. Minutes from th elast Fed meeting and comments more recently suggest that inflation is not to be taken for granted and that Fed cuts may not happen if inflation looks set to increase.
At 3.5%, inflation is higher than last year's 2.6%.
ftp://ftp.bls.gov/pub/news.release/History/cpi.11152007.news
However, much of this comes from the early part of the year. The last 5 months have seen very low CPI.
And the Fed likes to strip out food and energy, which makes the CPI 2.2% for the last 12 months. Nevermind how absurd it is to strip out food and energy, which are plainly in a major inflationary mode. The Fed's decisions will be influenced by the adjusted CPI and it is trending low.
In other words: the Fed has room to cut.
An interesting point: the GDP surged while inflation dropped. I don't know why.
Back to the subject at hand: where is th emarket going.
In the short term, rate cuts will generate excitement and bump it up but let's be realistic. We are heading into a recession and the market never does well in a recession. The trend is Bearish with spots of Bullishness.
Factor in the fact that only afraction of th ehousing bubble bad news is out and we need to be careful. Are retailers really doing well? Are cars really selling? The economy is run by consumption and that is slowing down.
There are two ways to go.
1. Join the herd but carefully. The market wants to be excited and want sthe Fed to cut in a few weeks. That could be a 2 week run-up. You could profit by jumping in and selling quickly.
There is to much money sitting on the sidelines and it is burning a hole in some pockets. Folks want to play in the market. Europeans, Arabs and Chinese see a market that is down 10% on top of a dollar drop of 12% over the last year. Looks pretty cheap.
2. Wait for bad news. You won't have to wait long. The market will dive again.
I hold subscribe to my theory that stocks rise beginning the last month of the quarter (December). So that creates an underlying desire to get back into equities.
But the trigger in this case was 3 things:
1. Critical 12,700 level
2. Citigroup got funding
3. Hopes that the Fed will cut rates in 2 weeks
While I am not driven by the technicals, the 12,700 mark was an important one psychologically. That was a 10% drop from the recent high, which is substantial. The market hit it and rebounded. That's a positive sign for now.
Citigroup's cash injection came from Abu Dhabi. Which is interestingbecause, back inthe 90s Citigroup was in a similar dilemna and it got a major cash infusion from Saudi Arabia. In any case, as I suggested a few posts back, foreigners are going to come piling back into the US market. For some we look cheap. For others, like China, we have critical technology.
So the Citigroup investment was a positive signal that money is out there and will come into the market. And that's what matters in the short term. In the long term, it's not a good sign that a major company is on the ropes so quickly. It was just August when Citi said they were fine and had no exposure to subprime loans.
Then we have the interest rate cut expectations. The Fed has room to make the cut. Certainly the past 2 quarters have shown strong GDP growth:
Q1 0.6%
Q2 3.9%
Q3 3.8%
Much of that growth was driven by exports and by increases in spending on inventories and durable goods. In other words - a weak dollar bumped up manufacturing. Over the next week or so, we will get better visibility to jobs, housing and manufacturing. And inflation. The market seems to be shrugging off the non-stop negative news about housing. Instead it focuses on whether soft inflation will allow for more rate cuts.
Putting on the Fed hat, this is what I would see:
1. Extreme distress in the credit markets requiring increasingly fsat attention
2. The last rate cut brought stability until more bad news came out regarding housing and financial institutions
3. Rate cuts must not drive inflation - current indicators are that inflation concerns exist.
Inflation is an area of conflict. Minutes from th elast Fed meeting and comments more recently suggest that inflation is not to be taken for granted and that Fed cuts may not happen if inflation looks set to increase.
At 3.5%, inflation is higher than last year's 2.6%.
ftp://ftp.bls.gov/pub/news.release/History/cpi.11152007.news
However, much of this comes from the early part of the year. The last 5 months have seen very low CPI.
And the Fed likes to strip out food and energy, which makes the CPI 2.2% for the last 12 months. Nevermind how absurd it is to strip out food and energy, which are plainly in a major inflationary mode. The Fed's decisions will be influenced by the adjusted CPI and it is trending low.
In other words: the Fed has room to cut.
An interesting point: the GDP surged while inflation dropped. I don't know why.
Back to the subject at hand: where is th emarket going.
In the short term, rate cuts will generate excitement and bump it up but let's be realistic. We are heading into a recession and the market never does well in a recession. The trend is Bearish with spots of Bullishness.
Factor in the fact that only afraction of th ehousing bubble bad news is out and we need to be careful. Are retailers really doing well? Are cars really selling? The economy is run by consumption and that is slowing down.
There are two ways to go.
1. Join the herd but carefully. The market wants to be excited and want sthe Fed to cut in a few weeks. That could be a 2 week run-up. You could profit by jumping in and selling quickly.
There is to much money sitting on the sidelines and it is burning a hole in some pockets. Folks want to play in the market. Europeans, Arabs and Chinese see a market that is down 10% on top of a dollar drop of 12% over the last year. Looks pretty cheap.
2. Wait for bad news. You won't have to wait long. The market will dive again.
posted by Andrew at
4:07 AM
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home