Will Bernanke bless us with bushels of bucks?
The market has already priced in a 100% chance of a .25% cut in both the Fed Funds rate and the discount rate yet the financials are surprisingly lethargic. The general consensus is that the Fed will drop rates a full point between now and January and that is crushing the dollar, fueling oil to record highs (with gold right on its tail) and boosting the market all the way to 13,671 already, just 100 points below were we were the last time the Fed decided that inflation was the least of our worries.
We have a 2-day meeting next week that starts on Tuesday but we don't get a statement until Wednesday at 2:15. While the last meeting gave us a 330 point gain on the day as the Fed went from being a respected institution to what Barry Rithotz calls "Wall Street's Bitch" in the space of an afternoon, expectations are far different now as investors now expect the Fed to roll over and do tricks on command, whatever monetary credibility Paul Volker and Alan Greenspan built up over the previous 20 years was tossed out the window as the Fed leapt in to save a market, that had run from 11,000 to 14,000 in 12 months, from making a perfectly normal 30% correction.
By depriving us of a consolidation period, the Fed has effectively built a market rally on a very poor foundation, leaving us subject to wild swings up and down that are great for Goldman Sachs (our Treasury Department) but bad for the bottom 99% of the country as they watch the value of their savings and homes go up in smoke while the costs of goods and services skyrocket. As I have often said: "If our government pursues Asian-style Central Banking policies they will subject our markets to Asian-style market swings."
But we're not here to worry about economic policy today – we're here to party like it's January 10th 2000, when the market had just closed above 11,500 for the first time and had just recovered from a huge sell-off the week before and was looking indestructible. Indeed we were in for another week of nice gains before, for no reason in particular, sentiment changed and the party quickly ended, with the market quickly dropping 20% in the next 30 days. If the Fed doesn't do it's money trick on Wednesday, I doubt we'll have 30 days before we're back below 13,000.
For now though – let's party! MSFT had fantastic earnings and the energy sector (as well as half of California) is on fire! Our best bet here, if the market insists on rallying, is to play the momentum on the energy, financial and commodity stocks. It's the financials that stand to benefit most from a major rate cut as they have been buying up the assets of failed lenders at nice discounts so if Paulson and Bernanke can pull this off, we may see another quarter of record-breaking for GS and the other big brokers, as they write-up their assets again.
Speaking of bank fraud, according to the WSJ: "In a series of emails to senior bank executives, a former Royal Bank of Canada trader alleged that some of his colleagues intentionally "mismarked," or improperly valued, plain-vanilla government agency and corporate bonds in a bid to boost profits at the firm's New York-based investment-banking unit. Losses have been intentionally hidden over the last 5 months."
Wall street firms have written down just $25Bn worth of assets to date but I'm starting to see the MSM pick up on my premise that there is probably over $200Bn of assets waiting to be written down – let's be on the lookout for this to be a possible market killer (or, in this bizzaro-market, it may be a great bull case for the Fed to keep dropping rates!). Very few people seem to have caught on to the relationship between low Fed rates, a declining dollar and skyrocketing commodity prices. Those skyrocketing commodities include both US and Hong Kong stocks, as Hong Kongs dollar is pegged to ours. With the dollar down 17% in 24 months, we can attribute 500 Dow points and 2,200 Hang Seng points to simple currency fluctuations.
I mention this as we "celebrate" the Hang Seng breaking 30,000 today, this index was on par with the Dow until about April 2004 (Dow 10,400, HSI 11,200) and has since outgained us by a factor of 10. It's not all about the people, people – although that's what the economic apologists would have you believe. We do have over 300M people in this country, 1/4 the amount that China has and we had a 100-year head start on industrializing our country with a per-capita income of about 20 times the average person in China, YET THEY OUT-GREW US BY 10 TO 1, NOT 4:1!!!
So woo-hoo, go China! It's kind of like being the last horse in the race so, rather than try harder you just stop and root for the leader as the rest of the pack rolls by and kicks mud in your face. At this point we may as well rip up our tickets and go home becuse, as earnings are showing us, the US is finishing way out of the money in the global growth race. It's not just China that's kicking our butts, Nissan's profits fell 27% but had huge growth in the US market – we're old, we're tired, we just don't compete anymore as our corporations have outsourced so much of what we used to do in this country that there's not much left to build a country around.
The Nikkei put in a 221-point gain to match the Hang Seng's 550-point break out (30,405) and the rallies were led, of course, by the energy and financial sectors as the "guaranteed" Fed rate cut. India shot up 472 points as well as almost all of Asia added at least a point. Europe, who does make good that Asians like to buy, is also having a great morning with Volkswagen putting up huge China sales as the European energy sector celebrated BP's $300M wrist slap for manipulating the markets.
We are virtually guaranteed a good open on the Nasdaq as MSFT all by themselves will add $40Bn worth of market cap at the open. This should neatly wash out CFC's $2.27Bn in mortgage losses, especially as the chairman said: "Countrywide stabilized its liquidity, strengthened its capital position, significantly tightened its loan program and underwriting guidelines, and began the process of right-sizing operations for today's lower volume mortgage market." Whatever you do, do not let the fact that RBC has been cooking their books or the fact that Mr. Mozilo is already under SEC investigation stop you from taking his word for it...
So let's get ready to BUYBUYBUY (even as we hedge and hedge) and enjoy the party while it lasts. From 9/14 (Friday) through the 9/18 Fed meeting (Tuesday) through October 1st (Monday), the Dow gained a total of 1,200 points (8%). Now that we're back at the midpoint of that rally, we'll be looking very closely at the 75% mark (13,900) for signs of resistance that, hopefully, will be futile.
