This morning, I’ll be guest hosting Morning Call on CNBC, from 11:00am to 12 noon.
On today’s agenda:
– The unholy trinity: Slowing Economy, Credit Crunch, Financial woes
– Yesterday’s emergency FED cut, and today’s opening drop, leads us to ask: Is the Fed a Paper Tiger?
– Recession: How deep and long? When to increase US Equity exposure?
The Dow is down 236 at the open, helping to answer the question we posed yesterday — was the surprise cut a waste of ammo?
How dare you crtiicise our beloved, Rushmore-deserving president and his appointees at a time of Occupation.
Dow currently is only down about 30 points. Kind of hypnotic watching the tug of war.
I did like someone’s crack about attending Bush’s financial literacy classes. These presumably would be the follow up to those fantastic seminars he ran on Effective foreign policy management and Avoiding unnecessary and costly wars in 21st Century.
Sorry, but the question of ‘when to increase equity exposure’ was already answered this morning by Mark Haines. Let’s suppose we’re going to have a 30% bear market decline, he said. Well, we’re already halfway there, with a 15% decline. So it makes no sense to sell now; it’s too late. All you can do is prepare your buy list.
At CNBC, ‘now’ is ALWAYS the right time to buy shares. Don’t wait till it’s too late! The Bubble III train is leaving the station.
I believe that many of you suffer from “confirmation bias”. You think the market’s recent sell off has confirmed your negative view and that you have been proven right. Don’t get too excited till you cover.
I am negative on the US economy’s prospects this year but I also see the markets sowing the seeds of their own recovery.
Lower interest rates WILL help financials and it WILL help housing at the margin. LIBOR has dropped a lot. I believe the cycle of a falling $ and rising crude prices has been broken.
Think back to the action last year. How many times did we see the market sell off to support and then come roaring back? Why do you think that its going to roll over and die for you now?
~~~
BR: You raise a valid point about confirmation bias.
However, the markets have now sliced thru the prior support — the August lows, the Feb/March lows — the SPX has retraced back to the summer of 2006.
Buying the dip works — until it doesn’t.
Keep fighting the Fed guys..
How long do you think people will keep their money in bonds and savings accts earning less than 2%? Companies are still swimming in cash, and even if P/Es go down, P/Bs look better and better.
Even though I’m fully invested, I still hope the market will go lower, so that I can get even better bargains.
~~~
: I hasten to point out that MOST of the time, fighting the Fed is a losing strategy. Except in 2001 — the Jan 3, 2001 cut set the stage for a short term rally to over 2800 on the Nasdaq — and for much lower rates. However, the Nasdaq ended up going down to 1100.
Be careful about rules of thumb. Is the present situation the usual response — or the exception?
>>Think back to the action last year. How many times did we see the market sell off to support and then come roaring back? >>
You also failed to mention that it came roaring back on the back of over $700 Billion in well placed repo’s and “auctions”.
Forgot that “little” part of it
Wonder why it ‘aint “roaring back now”?
Bet you do..
Ciao
MS
How are you going to get better bargains if you are fully invested? Only people NOT fully invested can take advantage of bargains. I’ve never heard anyone fully invested say they want the market to go lower.
My goodness these CNBC commentators are painful.
“How are you going to get better bargains if you are fully invested?”
He’s gonna leverage up with Uncle Ben’s instant 1% margin financing. Yeehaw! Bring on the Bubble!
MS – Well the DOW came roaring back yesterday from down 500 and well off the lows today so I guess its only happened twice in the last two days and its only 11:20.
Could anyone help me understand – if the Fed continues to lower rates, will it also bring down 30 year mortgage rates? What’s the correlation and is there a public info domain I can look to? Thanks alot.
Apples and Oranges…
How much help did the Dow get yesterday????
A rate cut not done in over 25 years and it still ended lower.
Today?? You are right it is only 11:40am and we are probing new lows of the day…with Apple ,Goog and Amzn leading the way.
hope you sold it quick.
Ciao
MS
so, we are within 11% of where the dow was when gwb took office 7 years ago. what are the odds that he will leave office with the dow below where he started? is that his much coveted legacy: better than Hoover?
VTrader – It came “roaring back” yesterday after your buddy Ben jumped into the FedCopter for an emergency ride through the skies.
And speaking of biases, selective memory is a terrible bias.
I think the ECB and BOE no all to well what the issue is here, not interest rates but the fact WE ain’t lending to anyone who cannot give some strong guarantees anymore. except of course if the interest rates go up, one of the UK mortgage companies did that today for new borrowers. how many points will you pay me for a loan?
Rick Santelli is the greatest (well, at least for CNBC)! Where’s the Ritholtz/Santelli ticket for Prez/VP?
Fearless Leader skipped out of financial literacy class. To attend e-nun-see-a-shun class. Which is where he learned to pronounce nukular.
Maria,
I’m no expert but mortgage rates for conforming loans are loosely based on 10Y Treasury yeilds and now LIBOR, in this environment of declining RE values there will likely be a disconnect from this theme due to risk aversion on the part of banks, a result of uncertainty of the value of the collateral moving foreward. Banks will likely be unwilling for instance here in CA to lend 600K on a 1500 sq ft home, at simply a marginal couple of points or so above 10Y yeilds in light of the fact that in an unsecured loan circumstance an underwater home owner may just simply walk. Then the bank is not only responsable to recover the princiole but also liable for maintenance on the property during this exercise. Result spiral of plummeting sales and declining values.
A road to how the rate cuts might work is to look how well they worked for the stock market in 2001. 1/5/2001 was the 1st quarter point cut, and the S&P was at 1320 the week before.
We all know how well that worked out. The discount rate was 6% and they didn’t stop easing until they dropped the discount rate to .75%.
The stock market bottomed in the 768 area, one year and 10 months after the 1st rate cut. Hopefully, history will not repeat itself, but anything can happen as we are in worse shape than we were in 2001.
Captain Jack this morn says Corps are flush with cash – what are they waiting for – deals
who doesnt have the cash – government funds and individuals
why do you pump their accounts when you shareholders get so little shareholder equity withdrawl compaired to the corp top?
As I like to point out, over the past 8 years, Fed rate cuts are BAD for stocks, not good as jds points out.
And Fed rate hikes were good for stocks–2003-2006 were great years [yes I know a lot of the gains were phony]
So why does this myth persist?
On a more cynical note
Yes were in worse shape and we don’t even have buildings collapsing with planes falling from the skies on which to place the blame again…..yet.
I disagree that we are in worse shape than we were in 2001.
1. P/E’s are lower.
2. Companies are more healthy–didn’t over invest as in 2001.
3. Growth is not only based on IT like in 2001.
Some major differences, imo. I think we are in a short but heavy recession.
Maria coincidentally Mike “Mish” Shedlock, just posted on his blog a topic which addresses your question in greater detail.
http://globaleconomicanalysis.blogspot.com/2008/01/select-few-are-helped-by-rate-drop.html
Bye Bye Bear Hello Bull. Just flipped sides. Sold EEV and bough EEM DRI and GRMN. Also set to place 25% bond money back into 401k SPY.
Why? Fed released people were pulling retirement money out of the market and it would collapse. They will continue lowering rate until it’s back in and people settle down.
Once that happens they can move the rate around again.
P/E’s are a reflection of forward earnings estimates, in an economy where GDP is based on consumption (70%), with credit strapped consumers how does the consumption engine continue. Consumer debt burdens would seem to the indicater of health here, followed by the impact of default on said debt.
I think you find after this quarters earnings P/E multiples increasing on lower share prices, just an observation.
Stormrunner said,
“I’m no expert but mortgage rates for conforming loans are loosely based on 10Y Treasury yeilds and now LIBOR, in this environment of declining RE values there will likely be a disconnect from this theme due to risk aversion on the part of banks, a result of uncertainty of the value of the collateral moving foreward.”
Thanks. What if the Fed were to head to 2%? Do you think that would affect the 10Y Treasury yields, thus affecting a 30 year fixed? Thanks again.
Maria,
Here’s a chart showing the relationship between fed funds and l.t. mortgage rates.
Dropping interest rates to near 0% every 5 years while inflation rages isn’t a smart idea.
Indeed, it is suicidal. I call this ‘fertilizing the weeds.’ The wrong things are going up. Stocks go up but more ominously, our trade deficit shoots up.
Japan today is the only place celebrating the rate cuts here. They intend to flood us with more Toyotas.
When those buying treasuries realize that ultimately it’s going to be the National debt that picks up the tab for bailing out all the systemic bad debt, well, that’ll be the epitome of the prisoner’s dilemma for sure. At that point, adios dollar. The panic that must be setting in, in some circles now upon realization that interest rates will not “fix” years of gorging on debt… They shot their bullets and the beast keeps coming. Almost feel sort for Ben, Hank et al… almost. Debt monetization Tsunami coming fast
“What if the Fed were to head to 2%? Do you think that would affect the 10Y Treasury yields, thus affecting a 30 year fixed? Thanks again.”
Nobody knows for sure. But if the Fed Funds rate is cut too aggressively, fears of inflation can develop.
Here’s a different reference point for you. The low yield of the 10-year T-note was 3.09% in June 2003. Today’s low yield was 3.30%; pretty close. Yields may go lower, but this could be almost as good as it gets for low yields, unless there’s a flat-out crash.
Unfortunately, despite low yields on Treasury notes, mortgages will not be as easily available as they were in June 2003. That is because of credit fears, tighter lending standards, damaged secondary markets for mortgage securities, and the fact that housing prices are falling now, rather than rising as they were in 2003. It will take time for lower mortgage rates to turn the housing market around.
Maria,
I think you find the link informative.
Yes FFR cuts should eventually bleed into the 10Y but how long this takes is anyones quess. I believe this would be the reverse of the “Greenspan Conundrum”, he kept racheting rates higher with no effect at raising the low mortgage loan rates. At some point this is predicated on affordability. If housing prices have escalated due to loose lending, loan volumes would drop off if the banks raised their rates. This would have cut into their commissions hence the radical new products liar loans, NINJA and such.
Jim Haygood – “Nobody knows for sure. But if the Fed Funds rate is cut too aggressively, fears of inflation can develop”
I’d add that it isn’t just fears of US inflation that count in this respect. Inflation elsewhere, notably in China and the Persian Gulf, is a really important factor now.
Estragon/tarragon, thank you!
The following 1980-1990 chart (just found) shows a correlation between Fed rates and the 30 year fixed, though the author disagrees. My point being that additional aggressive cuts might be an additional attempt to put a bottom in housing by the Plungers illusory or not? Thanks.
http://curiouscat.com/invest/mortgagerates1980-1999.cfm
Elaine.
Indeed they are apparently juming for joy in Hong Kong too with the HSI up over 10% today. Europe- not so much.
Over here- good god I am glad I don’t own any MOTorola- down almost 23% (for the day)at the moment! Apple coming back down to earth (hard) too.
Stormrunner – “Yes FFR cuts should eventually bleed into the 10Y”.
Not necessarily. If the fed goes too far too fast, they may well spook the 10yr in the other direction. With the 10yr rate increasingly set in Beijing, this risk shouldn’t be dismissed lightly.
Best board yet. So….., some traders and others look at the spread between the Fed funds rate and the 2-year yield and scream, “tighten the spread!!, take it to 0.25% points of each other!!!”, Ben & Co. bend over, smile, and presto, it’s done. Lending practices stay tight, credit worsens, 30 year fixed mortgages may go down, but it’s all too late, cuz the game has already been played out? Thanks to all for your comments!!
Estragon as I indicated by the “conundrum” (this was the conundrum correct?) reference -eventually indicating an unknown possibly significant lag. Likely significant enough to allow housing to drop back into a 3-4 factor of median household income. For those that bought at the top this is a recipe for disaster, but a needed adjustment. There’s only two things that can happen here in normalization though occuring simultaneously will happen at different rate, wages increase – re depreciates.
Maria,
I generally agree with the conclusion reached in your link – that fed funds aren’t a particularly good leading indicator of fixed rate mortgages.
My reasoning as to why this is so may be interesting though:
Mortgage prices, like other prices, tend to follow “normal” rules along a price/demand curve, but this curve can and does reverse at times. Ordinarily, as the price of a widget increases, the quantity demanded decreases. If, however, there’s an expectation that prices will continue to rise, a self-reinforcing hording and speculation curve develops. In a word, reflexivity.
Estragon – “With the 10yr rate increasingly set in Beijing, this risk shouldn’t be dismissed lightly.”
The 10Yr rate has come down from 4.21% last month to 3.44% yesterday and falling today. Are you saying monetary policy in Beijing could reverse this by, say, dumping dollars? Or maybe they serve ‘french fries’ in the Olympic Village?
Stormrunner – “There’s only two things that can happen here”
I largely agree, in that those are the most likely outcomes (wages up and/or prices down).
There are other outcomes though. One, for example, is that households permanently allocate a larger share of income to housing. Britain is a precedent for that.
Maria,
They don’t need to dump dollars. All they’d need to do is just stop buying so many to have an impact on prices.
Hey Barry,
Goood to see you on TV. Bad to see you get attacked by Liesman and Dylan-I-can-out-shout-anyone-Rathair. That show is just a farce and it has surpassed the term Bubblevision. I believe the people with bleeding 401Ks who turn to them ( Booya) for advice, are getting killed. They should be required to have a meter running like the national debt, saying how many 401Ks they have blown up. Maybe a motto pasted on the screen saying something like ” Not understanding anything for a long time ” or “Shilling for the Brokers for 20 years.
French fries as a nod to theTrichet’s pronouncements earlier. Estragon and Stormrunner – good stuff, thank you.
Estragon,
>>households permanently allocate a larger share of income to housing.
Given that I live in CA my vision is skewed somewhat but as for the seventh largest world economy, CA, this has already happened and the participants are largely insolvent no matter what 60-70% of their income is designated for housing and with consumables inflation these percentages become even more impossable to maintain. The only option are default our parting the house out to additional renters. this is unlikely to be remedied except by default till housing reaches historical norms.
The median income must be able to service the debt of the median property. Conforming loans kept a lid on rampant RE appreciation till the financial wizards took the helm and crashed the ship.
Barry you did a great job on CNBC. In fact, I actually turned the volume on so I could hear what you had to say.
Thanks for all your hard work.
BR I missed morning call. Are you putting the video on your blog. Or is there something on CNBC?
Ritholtz and Santelli the good guys go get the TV people who have never traded shit!!!
Good job Barry!
Sometimes, I think that asides from you, Rick Santelli, and Herb Greenberg, everyone else that appears on CNBC is insane! Or maybe doing drugs during commerical breaks, perhaps?
Wheres the Bottom?
Fed to the Rescue
Last Call
Enough about money, the important thing is Is Maria getting fat?