Tue 11 Mar 2008
The Fed has proven yet again that they know how to time a market to either (a) make the most impact, or (b) improve their perception of market savior.
Allow me to explain… it should be obvious to anyone with a pulse that the S&P and the Dow Industrials broke down to new 52 week lows (on a closing basis) on Friday last week and Monday this week. If the market were to break down further, the Fed would potentially be allowing a systemic crisis to unfold… which is (as their logic continues) worse than a little inflation (which they “know” how to deal with). So, as the market is at risk, pull out all the stops and give the stock markets a little juice!
As to my cynical view (option “b” above), the stock markets were also very oversold, and basically at the bottom of their downtrending channels. As a matter of typical trading, the S&P and Dow were due for a bounce, or at least some sideways action for a few days. What did the Fed accomplish with this cynical view? As many people have recently questioned the impact of the Fed, they make themselves out to look like the savior of the markets, taking credit for the bounce that was high likely even without their action. At least, the mainstream media is quick to credit them… and the Fed knows that it is better to have the popular opinion on their side than blaming them for not acting.
Now the bad news… the one day zinger (up 3.7% on S&P, up 3.55% on Dow, and up 4.1% on the Nasdaq) has only reversed the losses from the last three trading days. While the equity markets may benefit from an additional bounce from here, it is worth noting that this is the 3rd or 4th time (I’ve lost count) that the Fed has resorted to “bailout” measures and used market timing to maximize their effect…? only to face panic again within a few months time.
What is the net effect?? An orderly decline, and giving banks time to earn revenue to dig themselves out of the holes in which they inconveniently find themselves.