Is That All There Is, Is That All There Is, ...

The Fed on October 31, 2007, unanimously agreed to lower the Discount rate by 25 basis points to 4.5% from 4.75% (the rate charged between overnight bank-to-bank for lending). At the same meeting, a decision was made to reduce the Fed Funds rate to to 4.5% from 4.75% - although there was one dissenting vote, the Fed's general comments strongly discouraged expectations of another cut at the next meeting on December 11, 2007. We had several immediate reactions -- none of which were particularly favorably, with the one exception of the Peggy Lee's haunting. "Is That All There Is? Is That All There Is? And the Fed made is perfectly clear, yes, that's all there is (...sorry Peggy, unlike your song, no one keep dancing or brook out the booze -- well maybe a few people did).

After out little journey down memory lane with Peggy Lee, our next reaction was that the Fed had pandered to the markets, an action which it is fundamentally opposed to and would painstakingly resist in the future. Next, Chairman Ben Bernanke was facing a stock stock market that had widely anticipated a rate cut, on the morning of the Fed's action's Fed watches were forecasting a 90% reduction -- not to have taken taken down would have had an unimaginable adverse effect. Despite Bernanke's and the other member's struggling with the rippling effect of  tumbling home prices and correlated effect on the financial markets and general economic. The next major macro predicament facing the Fed is surging oil and other commodity prices, such as gold which has reached $817 an ounce, dangling at a 27-year-high,  combined with an ever weakening dollar.  To further complicate matters, inflationary threats merely underscore the combined above tensions. Nevertheless, the Fed recognized the negative effect no action would have but was not shy about it future intension. The October 31st reduction was "an accommodation" rather than a "sincere adjustment" -- and that future rate adjustments in the next few meetings should be scaled back to zero.

The excerpts from the Fed's October 31st meeting are very telling since despite its "official" stated policy, there is a tendency for an unofficial behavioral policy which becomes apparent over the course of time and tends to drive "official" actions. We are still in that development stage with Ben Bernanke. Our reading behinds the words (...or "between the commas"), is that this Fed does not believe the Fed should or perhaps can deal with the multitude of differing problems currently facing the nation. In our view Ben Bernanke appears to shaping up to a pure monetarist and according so no compelling reason to use rate cuts to stimulate, for example, the faltering housing crisis. Financial physics, however, would seems to dictate, that the lower mortgage payment burden can be made for homeowners, the less the lower probability for troubled loans and mortgagee lenders which in a considerably better position to work through problems with their borrowers. It seem that dealing with the broad effects of the credit crisis would have a greatly benefit effect on the economy -- and the best best to achieve this goal, to place cheap money in the hand of consumers.    

In the interim the stock market has move up and move down -- that what market do. The troubling aspect of this market, is that is cannot pass the same question we asked of ever company and market, specifically: What is going to market this market go up. We have no answer. Had the been inclined to lower the Fed Funds rates, we would have found that a major incentive. But we feel, that the ripple effect of the credit crisis will have a pervasive effect on the the economy for many quarter and in many sectors -- we think recession has a better that even chance unless and until monetary policy market money extremely cheap. Next year should market for interesting headlines when politics and policy will need to find the greater good (... that is for themselves). We do not very a healthy economy or stock market when technology and precious metals are become attractive investments. 

The Risk Premium Differential Is Illustrating A Resistant Market

The risk differential indices for the week ended November 9, 2007 have confirmed a trend in place since since early October -- namely  to display a market that cannot demonstrate a sustainable bullish trend at this point .   Risk premiums all ended higher: 

• The Industrial Risk Premium end 6.31% versus 6.20%

• The Utility Risk Premiums 5.72 % compared to 5.55%

• The Transportation premium, the perennial exception rose to 7.06%  from 6.77%.

This market is showing no signs of "wanting" to rally. Favorably third quarter earning reports merely sustain a price increases for days suggesting that the financial community has little confidence in future earnings power.  The market is apparently sending it message, but the administration does not appear to be on the receiving end.  n

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