Dow_oil_nazzAfter all of the criticizing I do about misleading headlines, it was a rare pleasure to read one that perfectly summed up both the article and the subject it was addressing: A Snub for the Fed’s Gift. Sayeth the WSJ: "The Federal Reserve sprinkled cheaper dollars on the economy, but it
wasn’t enough for investors looking for stronger economic growth and an
end to the mortgage crisis."

Despite yesterday’s fed fund and discount rate cuts, the market threw a hissy fit, with the Dow taking a ~300 point dip.

"The markets are simply disappointed," was the money quote in the piece.

Let’s briefly examine that: Some people seem to think the Fed’s mandate is to backstop speculators; others expect the Fed to overturn the Business Cycle and avoid recessions at all costs. Still others believe the Fed’s role is to help which ever party is currently esconced in power to get re-elected.

Their job is none-of-the-above. The Fed exists to insure maximum employment, price stability and moderate long term rates. By that standard, employment has not been so bad over the past few years — not as good as reported, but not terrible either. And Inflation has been elevated — Crude Oil is once again over $90 — to the point where it cannot be ignored.

There are many explanations for the different reaction to the Fed’s actions. My favorite is that when the Fed cuts rates while the market is oversold, we get a rally. When the Fed cuts when we are overbought — e.g., when a 2 week, 1,000 point Dow rally fully reflects anticipated rate cuts — we get a Sell-the-news reaction.

Hence, yesterday’s whackage . . .


courtesy of WSJ


A Snub for the Fed’s Gift
Stock Investors Say Thanks a Lot, But Is That All? Dow Falls 294.26
WSJ, December 12, 2007; Page C1

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What's been said:

Discussions found on the web:
  1. Eric Davis commented on Dec 12

    The Fed does make a great fall guy.

  2. RichardN commented on Dec 12

    In this context I believe it is spelled “ensure”. If you wish to correct it, it’s also in the previous entry.

  3. ken h commented on Dec 12

    “We’ll show you Ben!!!” “Your going to get in trouble!!”

    What a joke. WS thinks that the world revolves around them, and it doesn’t. Sorry about that, maybe Ben does give a shit about J6P.

  4. Oz commented on Dec 12

    Warning: world may actual revolve around Wall Street.

  5. Neal commented on Dec 12

    So the lesson for the Fed is is to always hint at a rate cut but never deliver, that way the market can only go up.

    However, I think that the investment banks have positioned themselves to profit from a down market and that will be the trend from this point.

    Happy talk cannot fight reality to a standstill for much longer.

  6. justin commented on Dec 12

    Simply put: Things are really fucked Up and the FED is pissing into the wind. Pardon my french…

  7. Eclectic commented on Dec 12

    Oh Geez!… First ‘dohickey’ and now ‘hissy fit.’

    Are you actually my mother?

  8. The Financial Philosopher commented on Dec 12

    …but is all of this really more important than Led Zeppelin’s glorious return yesterday?

  9. Eric Davis commented on Dec 12

    Is the market really under the impression that the fed is going to come out this morning and say “oops we goofed, Typo… we meant .50”?

    or are they just trying to create a rumor?

    and is CNBC enabling the bullshit Wall street Rumor mill, all based on things we already knew?

  10. Stuart commented on Dec 12

    Oh wonderful. Now rumors of additional measures by the Fed. What’s next, little notes passed out, morse code, tea leaves. For a central bank with supposedly intelligent people, their communication efforts would fail public admin 101.

    The Fed’s credibility followed the markets down.

    P.S. I’d wish Steve Liesman would stop applying for a job at the Fed on air.

  11. bob commented on Dec 12

    BR, will your snappy headlines on the market be as exciting this morning as they were yesterday afternoon?

    BR: Yes

  12. Mort Glickman commented on Dec 12

    Am I the only one that thinks that these bankers really have no clue what they are doing. They make a big mess and then they have to come in and try to fix it.

  13. RichardN commented on Dec 12

    They do know what they’re doing. The effects are: The cake shrinks but some people still get a bigger slice.

  14. michael schumacher commented on Dec 12

    What was I saying about the next piece of wildly optimistic news?…well I guess rumors work too.



  15. rob commented on Dec 12

    So with this new plan is bernacke wall street’s bitch again?

  16. michael schumacher commented on Dec 12

    So instead of pushing $575 billion to the banks YTD we need to involve the other CB’s in this mess…don’t they have enough problems of their own to deal with?

    This is the stick save from yesterday…


  17. michael schumacher commented on Dec 12

    So much for reality…..

    Yesterday’s loss erased in less than 5 minutes…

    Total and Utter bullshit that these people (banks) refuse to take a loss.

    bailed out again…..


  18. Philippe commented on Dec 12

    Banks have been good boys and almost do not conceal truth any more, see the last sequence of events

    Société Générale took onshore 4 billion USD SIV
    UBS wrote off 10 billion USD
    Bank of America took over SIV on balance sheet

    And no more cash payment for the geniuses who are performing off line
    Lehman Brothers Holdings Inc. awarded Chief Executive Officer Richard Fuld $35 million in stock for 2007 after the largest U.S. underwriter of mortgage bonds reported lower losses than its competitors from the collapse of the subprime home-loan market.

    Bank Total Derivatives-Related Credit Exposure:

    JP Morgan $386.7 BILLION
    Bank of America $291.4 BILLION
    Citigroup $98.1 BILLION
    Wachovia $44.9 BILLION
    HSBC $58.4 BILLION

    Credit Exposure As % Of Total Capital:

    JP Morgan 386.6%
    Bank of America 291.6%
    Citigroup 98.5%
    Wachovia 88.9%
    HSBC 388.3%

  19. Eclectic commented on Dec 12

    If you’ll think about it a moment, this new facility announcement has the practical psychological effect of being additive to yesterday’s Discount Rate cut.

    Moreover, it’s a psychological signal that the Fed will likely work to ‘effect’ an even lower DR.

    Thus, the DR has been for all practical purposes dramatically reduced from yesterday’s tome, even though the nominal rate was cut 25 basis points.

    It’s not the rate… It’s the intent of the Fed. They are easing, and they will adjust it somewhat exponentially according to the evolution of any crisis.

  20. KP commented on Dec 12

    When you only have 425bps left and you are only on month ~12 of the 5? year war, is it not wise to conserve ammunition?

    The FRB is just as apprehensive about what’s over the next hill as we all are…maybe even more so.

  21. michael schumacher commented on Dec 12


    I totally agree with you however why have the discount rate….lower it and still no one uses it because they have to report out that they did. This way…they can still hide where the money came from.

    The real issue is that it’s not as easily leveraged so if the market wants say $100 b the Fed has to provide (and account for ) that amount….not that it matters one damn bit thought….


  22. Vermont Trader.. commented on Dec 12

    This is an extremely unstable situation… Anyone who thinks about it realizes there is no new liquidity, just repos.

    This is exactly the sort of situation where we could see a crash…

    I doubled down on my shorts right after the open this morning. I’m all in…

  23. bob commented on Dec 12

    Vermont Trader, history tells us the best time to own equities is when the Fed is easing and adding liquidity.

    Is there a chance the economic challenges are already priced into equities and that the incremental “new” news are the actions the central banks are taking to restore growth? If so, would the next move in the market be higher, not lower?

    Your thoughts?

    BR: You mean like from 2000 – 02?

  24. Mike Nomad commented on Dec 12

    *Warning: Most of you reading the following will consider it to be troll/flame material.*


    While I share in your… distaste for yesterday’s market behaviour v. Fed Announcement, I can’t, er, buy your definition of what the Fed is supposed to be doing.

    The Federal Reserve is a non-government organization made up of private banks, hired by the US Federal Government to manage said government’s debt.

    I dig how you usually cut through all the market BS, and get behind what the numbers _really_ mean. However, pulling up short and not holding people responsible for a Failed Monetary Policy Backed By Lies has me a little sad. I don’t know if this is The Big One or not, but when (if?) we dig our selves out of the rubble, post Sub-prime Atonement, I think the USD is going to be a way different looking animal.

    I’m sure you are trying not to have your site go into Howard Beale Mode, jeopardizing the rest of the operation etc. Maybe there is a better way to address the rest of the system’s rot without coming off like a crank. I know I usually fail.



  25. Eric Davis commented on Dec 12

    well I’m going back to day trades, this is absolutely untradable, can’t be long, can’t be short…..


    The bears may feed yet….

    when I get a chance to look at it., I’m betting the fed move is smart… I’m a little …. Angry about the timing, i’m starting to fall in with the uncle ben is manipulating the market crowd.

    They do have to realize an un-tradeable market is a bear market.

  26. mhm commented on Dec 12

    “…there is no new liquidity, just repos.”

    Actually, the system repos *are* now being extensively used to increase liquidity (not add new money). That only because the banks/institutions are not lending between themselves.

    The term “liquidity crisis” is an after effect of the real “confidence crisis”. You don’t lend if you don’t have confidence you’ll receive if back, even if it is an overnight repo.

    We should run a poll “Which is the first big bank to fail?”. No bail out.

  27. michael schumacher commented on Dec 12

    That is FRESH PILES of cash used at will by the banks/brokers.

    Today’s installment of over subscribe the repo. is worth ……..$27.75 billion

    For those who do not know what this does…it has the affect of taking near worthless assets (all those damn bank loans) and allows the banks/brokers to exchange them for piles of cash that is thrown at the market in ANY form they see fit.

    That is the real damage that is done by repo.s This is the way that the Fed inflates assets without being responsible for the outcome. As long as the participants return said money with the premiums attached by the correct date……all is well. Usually they can get more money to do the same thing as Benny Boy should just name these permanent operations as there has been nothing temporary about what it’s doing.

    Any argument to the contrary is usually expressed in the form of a book definition provided by the Fed’ s own web-site.

    We do not live in a theoretical world……

    Over $600 billion (and counting) YTD and we all wonder how the market gets pushed up 800 pts in 8 days.

  28. zero529 commented on Dec 12

    MS: “why have the discount rate….lower it and still no one uses it because they have to report out that they did.”

    This is clearly an overlooked point of vulnerability in our national security policies — we are aiding al Qaeda by giving them a direct view of the damage they cause to our country. There is no longer any valid reason to require banks to report visits to the discount window, just as there is no longer any valid reason to report M3. Oh, and the weakening dollar is good for our booming manufacturing industries. Move along, people.

  29. Camille commented on Dec 12


    With regards to repos, (and I apologize for my lack of understanding here) are you saying that there is essentially no public record anywhere of the quality of the collateral used for the loan? Am I understanding your statement correctly?


  30. Kurt Milne commented on Dec 12

    Does the press understnd reversion to the mean? “My favorite is that when the Fed cuts rates while the market is oversold, we get a rally. When the Fed cuts when we are overbought — e.g., when a 2 week, 1,000 point Dow rally fully reflects anticipated rate cuts — we get a Sell-the-news reaction.”

    When stocks are oversold – and my dog farts – we get a rally. When we are overbought – and my baby cries – we get a selloff.

    Everyone loves to identify casual logic with authority – but there may not be any…

  31. michael schumacher commented on Dec 12

    yes that is what I am saying…..

    They are not allowing us to see what it is they are taking in. Only basic statements like “high quality assets that can be liquidated easily” or words to that affect.

    If they were so liquid then why have to turn them in??

    It’s the same stance the banks have about L3 assets……

    The Fed better stop playing backstop to the markets and make these stupid banks use the REAL discount window regardless of what message they think it sends. The only message that I see coming form the banks is “help us…..but it has to be on our terms”


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