There are some very disturbing things occuring in the market...

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Awgee - agreed.





Learning what to buy is one thing.





Learning when to sell is a completely different lesson altogether.





I'm still trying to learn both ...





Investing is much like golf. Saying, "buy low, sell high" is easy. Doing it is something else.
 
<p>IR - are you still steadfast in your view that the Fed won't cut rates? And that they are actually more likely to <em>raise</em> rates than lower rates?</p>

<p>IMO, it is almost a given that the Fed will lower the Fed Funds rate. The Fed knows that the markets are discounting a rate cut given its discount move, softer policy, and acknowledgement of current problems. If the market were incorrect in their view, I believe the Fed would be dampening expectations. They are not.</p>
 
"are you still steadfast in your view that the Fed won't cut rates? And that they are actually more likely to <em>raise</em> rates than lower rates?"





Yes, although I don't think they will be raising rates this year, but I believe they will raise them before they lower them.





The market's expectation of the discount rate is inferred from the price and yield on the 90 day T-Bill. Most of the time, the market sets the price in anticipation of government action, but not always. With the recent selloff in the equities markets, many people fled to the safety of T-Bills which drove up the price, drove down the yield, and made it look as if they were expecting a rate cut. My point is the participants in the bond market were not behaving rationally, and they were not buying T-Bills in anticipation of a rate cut, they were buying because they were spooked out of the equities market. Therefore, IMO, the current price and yield of the T-Bill is not indicative of the markets expectation of FED action. It may be indicative of their desires, but I don't think it reflects any rational expectation.





Everyone in the market is praying for the FED to lower rates. When they don't, the equities markets will sell off very hard, but I doubt the bond market will change its stance much. The flight to safety will keep bond prices high and yields low.
 
<p>With the bounce in the equities market this week and last, you still had very strong demand at the treasury auction. You wouldn't expect money to be flowing so strongly into treasuries while the market is bouncing strongly. </p>

<p>>>>It may be indicative of their desires, but I don't think it reflects any rational expectation<<<</p>

<p>IMO, it is way to difficult to discern whether someone else is buying on rationale or desire. That is being too cute in that you would be trying to decipher someone else's bias all the while viewing it terms of your own bias as well. Way too difficult. I prefer to stick to price action. </p>

<p>They Fed knows what people are expecting. If they were not going to lower rates, they would damper those expectations. Just like when the Fed was raising rates, or holding rates steady due to inflation, they kept people concerned about inflation and managed those expectations with their policy statements. They may not lower rates as soon as people want, but they will if things (credit market, housing, inflation, etc) stay the course.</p>

<p> </p>
 
<p>This was indeed a box-spread trade. From Steve Smith at RealMoney:</p>

<p><strong>>>>Much has been made of the large and unusual, open interest that has appeared the S&P 500 index options as discussed in this morning's </strong><a href="http://www.thestreet.com/s/bin-laden-options-trades-have-wall-street-whispering/newsanalysis/optionsfutures/10377063.html?puc=_tscfoc&"><strong>article</strong></a><strong> and a range of online articles such as </strong><a href="http://www.homelandsecurityus.com/Options082907"><strong>this</strong></a><strong> that have the conspiracy theorists out in full force. Since it fell into the option domain, I would have been remiss in not reporting about it. </strong></p>

<p><strong>But I'm glad to now be able to confirm that this was not a cloak-and-dagger situation. It was the least glamorous of the scenarios, the box-spread trade, that explains and is the catalyst for the activity. </strong></p>

<p><strong>Dan Perper, a Partner at Peak 6, one of the largest option market makers and proprietary trading firms, told me this morning that his firm was the counterparty to a good portion of the volume and position in question. "This was done as a package in which the box spread was used [as a] means of alternative financing at more attractive interest rates" explained Perper. </strong></p>

<p><strong>Simply put, two parties agree to trade the box at a price that essentially splits the difference between current rates. </strong></p>

<p><strong>For example, the rough numbers would be that given the September 700/1700 box must settle at a value of 1,000 -- it is currently trading around 997 -- that translates into a 5% interest rate. </strong></p>

<p><strong>For the seller it is a way to borrow money at a slight discount to the prevailing rate, and for the buyer, it is a way to lend money at a low rate of return, but it's better than nothing at a time when others are scared and have painted themselves into a box (ha ha) because they have run out available funds. </strong></p>

<p><strong>Currently there are about 63,000 700/1700 boxes open. Perper expects that once the September options expire, you will see similar boxes established in the December series. As to why the September 700 put has over 116,000 contracts open, Perper thinks a good portion of that was created from the prior rollover when April options expired. <<<</strong></p>
 
<p>The Fed didn't ease monetary policy, they did a temp fix to a temp problem. Wishful thinkers have interpreted that as an easing of monetary policy and a hint of things to come, but Ben has been pretty neutral in any communications coming from the Fed. Desperate people are now demanding a rate cut based on their company's need to survive, and others are expecting Ben to be bullied by Wall St. into a cut. I think Ben is more concerned with the system being kept stable than he is with the players being kept happy. His public record, speeches, statements, and letters don't indicate that Ben can be bullied. I would be very surprised, no....shocked, if he cut the rate.</p>
 
<p>Ben will lower, unless he raises, unless he does nothing at all.</p>

<p>My wife says I have a keen grasp of the obvious.</p>
 
<em>"IMO, it is way to difficult to discern whether someone else is buying on rationale or desire."</em>





Ordinarily that is true, but when you see extreme short term moves in any market -- like we did with T-Bills when the market sold off -- it is generally safe to assume people were soiling themselves and not behaving in the most rational and considered manner.





<em>"I prefer to stick to price action. "</em>





Actually, this is why I have speculated it was a panic.





<em>" If they were not going to lower rates, they would damper those expectations. "</em>





What would you like them to do? Nothing in their previous statement mentioned a change from their inflation fighting bias. IMO, the expectation from the market is nothing but wishful thinking.








It is very possible I am wrong. This is all just my opinion based on what I am seeing. I try to be as dispassionate as possible about the markets, but I am not always successful at it.
 
<p>>>>What would you like them to do?<<<</p>

<p>It's not what I'd like him to do. It's what he has and has <em>not</em> done or said so far.</p>

<p>Just like they manage inflation expectations, they have now acknowledged the housing and credit problems and are managing expectations of rate cuts in regards to both.</p>

<p>His most recent speeches have inferred that he will be cutting rates and using all the "tools necessary at the Fed's disposal" should they be warranted. Not that he will, but that he is prepared. </p>

<p>I take that to mean he knows the housing problem could expand into the broader economy at any time, and rate cuts will be forthcoming if that happens. And if the credit market further erodes, he will act again there.</p>

<p>Also, all the talk about the dollar or China if they cut rates has never had much substance. Even inflation. If the housing market is as bad as we think here, then it will greatly affect the broader economy, and that will easily take front and center stage and the Fed will cut in response. No one will care about the dollar or China or inflation when/if the economy gets that bad, right so or not.</p>

<p>I think the biggest "problem" I have with your viewpoint, IR, is that if you believe housing is so absolutely bad, then I don't see how you think the Fed will not lower. It doesn't make sense to me, but I do respect your opinion.</p>

<p> </p>
 
<em>"if you believe housing is so absolutely bad, then I don't see how you think the Fed will not lower."</em>





Basically, I don't think lowering interest rates will help. Housing is going to crash either way, so lowering rates is not going to save the housing market. The issue is an adjustment in risk premiums not in the base rate.





In the current market environment where foriegn banks are raising their rates and the dollar is already falling, <em>any lowing of our rates will hurt our economy more than it will help it.</em> That is my key point. You are proceeding from the assumption that lower interest rates will improve the economy. Most often this is true, but I don't believe this to be the case right now.





The dollar will devalue if rates are lowered. A lower dollar will increase the cost of imports -- which includes both raw materials and finished goods. A lower dollar will be very inflationary.





If Bernanke lowers rates, he is going down the road of failed monetary policy of the late 1970s. If you look back at the failures of monetary policy of the late 1970's you see that the FED would lower rates every time the economy slowed down a bit, and they let inflation get out of control. Each lowering of rates in the late 70s merely delayed and worsed the recession necessary to purge the system of its problems. Finally in the early 80s Paul Volker raised rates to over 20% and stamped out inflation. It was a bitter pill to take, but it was effective.





When you look back at the last round of lower rates in 2001-2003, it did not help the economy. It did spur a borrowing and spending spree which caused a real estate bubble and stimulated the economy through excessive borrowing, but it did nothing to improve production, exports or earnings outside of industries benefiting from borrowed money. The Greenspan policy simply postponed a recession and created the circumstances where it will now be much worse. The parallels between the policies of the late 70s and the policies of Alan Greenspan are notable.





IMO, the only question right now is whether or not Bernanke has the courage of Paul Volker, or if he is going to take us down the road of inflation and delayed recession. I think Bernanke will choose recession to purge the system. It is very possible I am wrong.
 
<p>What will the Fed do? What will the Fed do?</p>

<p>To answer this, one needs to ask what is the Fed's purpose and priority? Is is the health of the economy as the MSM likes to say? Is it to ensure the strength of the dollar as Mr. Paulson and the Fed charter says? Is it the overall welfare of the American public as the mob likes to think? Is it appreciation of the equities market as Cramer so passionately desires?</p>

<p>I think that if you look at history, you will find that the Fed's only purpose, (and when I say only, I mean only), is to propagate the power and enrichment of the largest banks in the international banking community.</p>

<p>So, if you want to guess what the Fed will do, just consider what will be best for the largest banks in the international banking world, and there is your answer.</p>
 
<p>awgee,</p>

<p>>>>Is is the health of the economy as the MSM likes to say.<<<</p>

<p>Not only the MSM, but didn't you say this a month ago as well?</p>

<p>>>>The Feds number one concern is the economy, not the dollar or inflation.<<<</p>
 
You are right. Can I now modify my previous statement to say, "The Feds number one concern is the economy as benefits the banking community." ?
 
<p>It's times like this I am reminded of the movie Ghostbusters:</p>

<p><strong><a href="http://www.imdb.com/name/nm0000195/">Dr. Peter Venkman</a></strong>: This city is headed for a disaster of biblical proportions.


<strong><a href="http://www.imdb.com/name/nm0546868/">Mayor</a></strong>: What do you mean, "biblical"?


<strong><a href="http://www.imdb.com/name/nm0000101/">Dr Ray Stantz</a></strong>: What he means is Old Testament, Mr. Mayor, real wrath-of-God type stuff.


<strong><a href="http://www.imdb.com/name/nm0000195/">Dr. Peter Venkman</a></strong>: Exactly.


<strong><a href="http://www.imdb.com/name/nm0000101/">Dr Ray Stantz</a></strong>: Fire and brimstone coming down from the skies. Rivers and seas boiling.


<strong><a href="http://www.imdb.com/name/nm0000601/">Dr. Egon Spengler</a></strong>: Forty years of darkness. Earthquakes, volcanoes...


<strong><a href="http://www.imdb.com/name/nm0001368/">Winston Zeddemore</a></strong>: The dead rising from the grave.


<strong><a href="http://www.imdb.com/name/nm0000195/">Dr. Peter Venkman</a></strong>: Human sacrifice, dogs and cats living together - mass hysteria</p>
 
<em>"Is it to ensure the strength of the dollar as Mr. Paulson and the Fed charter says? "</em>





This is also one of the main reasons I think the FED will not lower rates.





I watched CNBC some today. It was a full day lobbying effort to try to convince Bernanke to lower rates -- that and to try to convince investors Bernanke will lower rates. I really didn't hear any compelling arguments for lowering rates. In fact, most of the commentators said the economy is doing well despite the decline in housing. None of them could say how a lowering of rates would benefit housing in any significant way.





There was near unanimity on the commenters that the FED will lower rates in September. I remain unconvinced. Bernanke's statement today was very clear in that he was not going to bail out speculators. Bush said the same.





If more information comes in or if Bernanke starts to telegraph a rate cut, I may change my mind.





BTW, does anyone remember how everyone thought Bernanke was <u>not </u>going to raise rates on May 10, 2006 and he did anyway? It began the market correction of 2006. He has shown he will go his own way if he feels it is the right way.
 
<p>IR,</p>

<p>You must have missed Rick Santelli in the morning. He held up a huge inkblot and called this a "Rorschach" speech, meaning that whoever read it would see what they wanted to in it. I think this is going to prove a special feature of Ben's tenure as Fed Chairman.</p>
 
<p>The revised Q2 GDP number is all the reason Ben needs to hold the line on rates. The economy is growing just fine.</p>

<p>In theory.</p>
 
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