Wednesday, April 30, 2008

The Fed made a big mistake/Market Rally Fades on cut

What a roller coaster today. In my opinion, the Fed made a major blunder today. The .25 cut was understandable because it was already baked in the cake. Here is the news on the rate cut.

What was disappointing to me was the statement. Traders were looking for a cut followed by a firm statement from the Fed that they would pause here because inflation was a concern. When they didn't get any tough talk defending the dollar, the DOW went from being up 160 points to down 12 for the day.

What you heard instead from the Fed was they saw some weakness in inflation in the CPI, and they are predicting that inflation concerns will lighten as the economy weakens based on less demand for goods. Why are they looking at the CPI!! This does not include food and energy, and this is where the inflation is!!!

If anything, my bet is that the next move by the Fed will be further cuts because the economy keeps weakening. The dollar weakened significantly after the news of the cuts and the weak wishy washy statement from the Fed.

Ladies and gentleman we are in a real bad position. My guess is the data on the economy was so bad that they decided to come out with a tame statement knowing they have 2 months until there next meeting which gives them some time.

So going forward we will have a crumbling economy combined with soaring inflation. If the Fed is betting that inflation will be contained with 2% interest rates then they are making a huge mistake. The dollar is just going to continue to slide.

Oil and food will then continue to move higher. If inflation wasn't contained at 2-1/4% rates then how will it be contained at 2%? Betting that lower demand will tame inflation is a stupid bet. How can you think in this way when you have massive emerging economies with new middle classes numbering in the billions gobbling up commodities?

There are now food riots based on our weak dollar. Whats going to happen to these poor people as we continue to cut rates?

I hope they realize these risks. IMO the economy is so bad, they are willing to risk the inflation to save the economy. This is a big mistake. The consumer is in no shape to handle much more inflation.

The dumbest thing of all is the fact that cutting rates is not addressing the problem!!!
The bond market and Libor set mortgage rates. Rates have hardly dropped since the Fed started cutting. The only thing these cuts are doing is propping up dead insolvent banks and fueling inflation.

The pigmen need help because they got blinded by greed, and the Fed is giving it to them on a silver platter at the expense of the middle class who is stuck with higher prices on everything.

How dead are the banks and Wall St.?

Take a look at what some of the biggest names on Wall St. had to say in a poll realeased by Reuters:

A few quotes:

"On Wall Street, however, the road back to health will take much longer.
"It is the Great Depression on Wall Street. It sure isn't on Main Street," Ken Griffin, chief executive of hedge fund Citadel Investment Group, said during a panel at the Milken Institute Global Conference in Beverly Hills, California.

According to Griffin and other top U.S. investors at the conference, the credit and housing crises that led to hundreds of billions of dollars in losses for Wall Street firms will take those investment banks years to claw back from.

"Until you see Wall Street put on their party hats again and get on the tables and start dancing is going to be years," said Ken Moelis, a former UBS banker who now runs his own investment firm, Moelis & Company.

"It will be a long time for Wall Street to come back to where it was." Leon Black, billionaire investor and founding partner of hedge fund Apollo Advisors, said the banking system has been "broken" since last summer and has fostered a credit crisis "the likes of which I've never seen in the 30 years I've been in the business."

My Take:

Well there you have it. The best and the brightest are calling for a Wall St. depression. Leon Black said its the worst he has ever seen in 30 years. Think about that. That means its worse than 1987, or the 1980-82 period where interest rates ended up in double digits.

Expect housing to go right down the tubes with Wall St. They were tied together like husband and wife during this bubble, and they will go down in flames together as well.

I think history will show that the Fed made a mistake today as they continued on the path of rate cutting that the Fed has been famous for over the last 20 years. What is different this time is inflation, and insolvent banks who refuse to lend in order to get the party started again.

Like the billionaires explained above, its going to take years to fix this. There will be no catalysts for stocks for a long time. Tomorrow, the unemployment report comes out followed by the manufacturing data. Expect these to look horrible.

With the Fed hopefully done cutting, and Wall St. on its knees, expect stocks to start trading on the news and fundamentals versus hope. Expect the news to get worse by the month and investors will come to realize that there will be no second half recovery in 2008.

The easy money party is over and now its time to clean up the mess. Its going to be a long summer for the market.

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