Aggressive Rate Cut Spawns Questions - What Does The Fed Do Now?

Well, it seems as if we aren't as excited for 0% interest rates as we thought at close yesterday. It seems as though people have been digesting the thought of the huge rate cut with some serious questions. Why on earth did the Fed do such an aggressive cut? What can they do now to help stimulate the market? Even though there are still many vehicles they can do use to attempt to stimulate the market and cause for more speculative rally days, their strongest weapon is now out of bullets.

The fact that the Fed made the decision to slash the rate to the degree that they did yesterday, tells me that they think some serious problems are ahead. I mean, if the Central Bank feels they need to bottom the discount rate, like I said yesterday, this is their big finale that can hopefully carry us through the very frightening 2009. Really, the only big factor left, is the ability to continue to print money and flood markets with more capital. But Japan and Germany has shown us what can come from doing that. That is why I have loaded up on GDX and GLD. Which if you are looking for a trading account, you can get free monthly trades at Zecco.com
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Well, Chrysler announced today that their assembly plants have been put on hold. Sure, this could be a bluff to try and hurry a bailout decision. In any, case it doesn't look good, especially to foreign nations. Ford also is choosing to shut down most of their North American plants an extra week in January. I just wish we could move on with the bailout, because we are going to experience another reactive day, like yesterday, as soon as something is announced with that. Can we please move on?

None of the short etfs were dramatically better. EEV and FXP were some of the better performing ones as foreign markets continue to show frightening signs. SRS was significantly lower today due to some strong gains in the REIT sector (GGP and Kimco). I mean, remember, it was just yesterday that we just received a historical slash to the rate. For this reason, I held myself from pulling the trigger on more SRS today, although I may hate myself tomorrow. Of course real estate is going to receive a push with the rate at 0%. If it is down more tomorrow, I am just going to have to buy some more. I don't feel like this cut is going to stimulate the market. Those that can get new competitive loans, will most likely take equity out of their house just to put money in their savings account or pay off their credit card debt. It's not going to be money inserted back into the economy. I just feel that when we cool off from this fuzzy high we're on, we have some serious problems to face.

Another problem with yesterday's rate cut is that, like I said, we cannot lean on that anymore. The ability to cut the rate has single handedly been the biggest source for market recovery than anything else. Well, we have maxed that out. No longer can we factor in expectation into the markets when the Fed meets. These are just a few things I feel people came to realize after yesterday's closing.

Sure, we are still very vulnerable for some more rallying. This is a massive rate cut, and with the help of other nations doing the same (probably Japan) and the auto bailout, we may still rally some more. But are bailouts our drying up. I do plan on picking up some more of the longs I discussed yesterday to give me some more hedge, but I still am staying very strong with my short. January is approaching very quickly, and there are a lot of problems which have been pushed to "next year" that will come back to haunt us.

I don't see us going much past 9200. If so, maybe after the holidays, I expect some serious consecutive days of selling. There has been a lot of money made on the long side the past month, and I would like to believe many of these people would be cashing in their chips. Tomorrow will be an interesting day, as a pretty aggressive sell off spurred right before close today. This trend could push through tomorrow and create some more selling on the trading floor. Either way, I am expecting both red and green throughout the day, with a pretty aggressive punch in either direction the last 10 minutes. I have some making up to do on my shorts, but I still feel that we've got a ways to go before we start to get better in our economy. Have a good night and we'll see you tomorrow.

3 comments:

  1. Anonymous Says:

    What do you think about the decay of SRS and FAZ. As the market swings up and down, these inverse ETFs seem to need lower downturns to reach their previous levels. Have you done any research and analysis of how fast these funds are decaying compared to the indexes they track?

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