Rate Cut Thursday – Central Banks Gone Wild!

The BOE slashed their benchmark interest rate by one AND one half percent, to 3% (that's a 33% slashing) as the central bank noted "marked deterioration in the outlook for economic activity at home and abroad."

"Economists" as usual were off by a mile with 15 of 20 polled expecting a half-point cut at most.  We were expecting a full-point cut so we're only twice as smart 15 "economists" this time.  The other 5 economists did expect a full point cut but NO ONE expected a 1.5% cut BECUASE IT'S MADNESS!  The BOE is reacting to economic figures that are reflecting a liquidity crisis they have already moved to solve in other ways – ways that take more than a month to solve.  This is like putting out your house fire with 14 fire trucks and then calling in one of those helicopters that dumps 100,000 gallons of water all at once – you problem quickly switches from fire damage to water damage (see the clever liquidity metaphor). 

"Today's data from the U.K. and the euro zone heightens fears over the potential length and depth of what now seem to be certain recessions," said Howard Archer, an economist at Global Insight. "Clearly, these already heavily suffering economies took a substantial turn for the worse in October as the financial crisis impacted," he added.  The ECB was more restrained in it's cut, dropping "just" half a point to 3.25% and that put a quick lid on the rally that came as the BOE had announced their whopping cut about 30 minutes earlier. 

Now we will see how the US markets hold up after our own Fed rally and the pre-election rally that Ellen Brown puts squarely on the actions of the fabled Plunge Protection Team while also making a very good case for why the government is actively suppressing the price of gold to make inflation SEEM under control (and we are still very big on GLD leaps as inflation/disaster protection):

So the theory is that the administration unleashed the PPT ahead of the election, hoping a 20% run in the markets would make us feel everything was good again and vote in McCain and the Republican incumbents.  Once that didn't work out, effectively you have sour grapes as they pull all the money back as fast as it went in.  In effect, no one thought the market got 20% better in 6 sessions and now it remains to be seen at what level we find real buyers. 

"With Paulson’s new $700 billion credit card, the PPT obviously has access to much more money than in 2004 – enough money, no doubt, to buy large blocks of some key stocks. Those purchases, in turn, would trigger the program traders’ computers, which follow like robots according to pre-set formulae. Although thousands of stocks are publicly traded, only 30 stocks compose the Dow, making this trend-setting index fairly easy to manipulate.  While the Dow is being propped up by the PPT through massive buying, the gold market is held down by massive short selling, since gold is considered a key indicator of inflation. If the gold price were to soar, the Fed would have to increase interest rates to tighten the money supply, collapsing the housing bubble and forcing the government to raise inflation-adjusted payments for Social Security."

That's how we can watch in amazement as stocks soar and gold dives despite all the scary earnings and guidance that should be keeping stocks down and despite all the liquidity being tossed around that should be devaluing currencies against precious metals.  You can't look at oil, oil is the second most abundant liquid on earth and never should have been $80 in the first place, let alone $140 so currency moves have nothing to do with it and US demand was down ANOTHER 2.3% in October alone.  That's one country using 437,000 less barrels per day in one month – no wonder the 1.5M OPEC cut isn't considered near enough to offset the massive demand destruction…

We have Q3 productivity numbers at 8:30 and I'm thinking that "economists," who are expecting just a 0.7% gain for October are a little shy as clearly we are quickly learning to make due with less oil and less steel and less coal etc – isn't that one of the measures of productivity.  We are also making due with less workers and we also get the very scary Initial Claims report for the last week of October, expected to come in at a near depression-level 475,000 jobs lost in a week.  Tomorrow we get the big number on Non-Farm Payrolls and they are widely expected to be down 200,000 in October with a 6.3% unemployment rate, up 50% in just 12 months.  We'll also see Wholesale Inventories, a first look at what we can expect for holiday sales.

Asia didn't need to see the data to have a big pullback this morning, as expected they reacted to our pullback and the Hang Seng registered a violent drop of 7% while the Nikkei fell 6.5%, back under 8,900 but I called that in yesterday morning's post and, of course, our old, reliable FXPs are going like gangbusters this morning.  My 10:35 comment in member chat yesterday that "FXP looks really bottomy" at $75 may have been the understatement of the week!  We waited until 12:31 to make a new play on the $80s at $10.50 when they confirmed a break up at $79 but I chickened out and called for taking the 30%+ day-trade gain off the table at the close as a bird in the hand is often worth two in the bush in this crazy market.

TM slashed guidance more than the BOE slashed rates and that got Asia off on the wrong foot this morning and Europe had no particular bad news but is mirroring the US drop as they are down about 4% ahead of our open.  DT, who are cheap at $14, reported a rise in profits and affirmed guidance but investors are in no mood to buy anything.  That won't stop us, of course as you can buy the stock for $14.50 and sell the Dec $15 calls for $1.10 along with selling the Dec $15 puts for $1.45 which puts you in the stock for net $11.95, with a 25% profit if called away at $15 on Dec 19th or having another round of the stock put to you at an average of $13.48 if the stock is below $15 on that date.  DT spiked as low as $12.40 twice last month but recovered both times and, with affirmed guidance and an 8% dividend, we don't mind holding that one a while…

We are still in bottom fishing mode and are still 50/50 despite yesterday's drop until we see our 40% lines violated.  Productivity was, in fact up 1.1% and Jobless Claims were in-line at 481,000 for the week but Unit Labor Costs rose to 3.6%, which means employers are running out of ways to cut workers and are paying to retain the good ones.  That's not a bad thing, more productive, better-paid workers are good for the economy and provide a base for an engine of growth going forward.  What we need next is productive job creation for disenfranchised workers and I trust our new President to provide that through some sort of New, New Deal policy in his first 100 days. 

I continue to maintain that the $3Tn pumped into the $50Tn global economy WILL have an effect at some point and now the Swiss National Bank and Czech National Bank have joined the rate cutting party as well.  Jerry Seigel has a nice article on how global valuations are pushing historic lows and my call last week that the Nikkei was trading below book at 7,500 was right on the money so I do not expect us to make new lows on a pullback so let's keep an eye out for bargains as some stocks will insist on testing them anyway.

We may have a long, drawn-out bottom but we can generate a good income stream by choosing well-hedged positions in dividend-paying stocks as well as selling option contracts against our long-term holdings.  Until we get more of a recovery, that will be our plan – we're not bullish so much as bottomish.  The October Retail Sales numbers look terrible and that sector will drag us down for the day, other than WMT, of course, who posted the gains we expected.