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Minyan Mailbag

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Hey Mr. Hand, what's wrong with a little pizza on OUR time?

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In a continuing effort to make our community as interactive as possible, I wanted to pass along some thoughts from a highly respected fellow Minyans. This is one of many notes I received in response to this morning's first post and thought you might enjoy it. Remember, please, the views expressed in this letter (or anything read on Minyanville) are offered with educational intentions and NOT intended as advice.


Toddo,

I thought I'd pen a short, quick piece expressing my "gut" opinion on what will happen at the next FOMC meeting on June 25. I think the Fed is only going to cut rates by 25bps. not 50. Here's why:

1) In 9 weeks, the yield on the 30-year has dropped from roughly 5.40% to 4.20% by simply "jawboning" the market. This, thereby produced one of the largest bond market rallies in history in such a short period of time. Also, even if yields were to back up a full point over the next several months (equivalent of 10 handles on the long bond), the housing & lending markets (commercial / retail) would still be in good shape with little harm done.

2) If they cut 50bps. and took the fed funds down to .75%, while the "official" inflation rate is at 1.00%, technically, the Fed, along with every newspaper in the world would claim that the U.S. if now in a "deflationary economy" -- and that is NOT what the Fed wants the headlines to read (i.e. investor psychology).

3) In this same period, the Dow has rallied from 7300 to 9200. Even if the Dow were to sell off 1000-1200 points back down to 8000-8200 on Fed disappointment of only a 25bp cut, the market would become so oversold that all the Pension, Insurance, and Mutual Funds (plus the mom & pops or retail market) would vigorously buy back in, and lift prices back up to 8800-9000 again (mindset: stock bargains). So again, the Fed has indeed bought themselves both "time & price."

Here's my read. The Fed has successfully "orchestrated or manipulated" the market via massive amounts of liquidity injection (both foreign & domestic) into the financial system in order to "buy the market time & price." OK, you say, so where do we go from here ? I think up to June 25th we stay in a range. After June 25th, I think the market goes where it should go (lower) and the Fed steps aside for a couple of months to review the economic data as well as the market action and reaction. I think they'll back off, which will leave the markets to trade on their own (read: no more intervention or jawboning for awhile = at least for a couple of months).

Name withheld upon request

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