The Back Alley Archives

let's run thru the scenarios shall we?

interest rates are manipulated for several reasons...let's focus on manipulating interest rates to stimulate or suppress the economy for this scenario....so, we lower interest rates to invigorate the economy and we raise them to quell it.

now then, we all know from what we've read that subprime mortgage related issues have sullied the economy...the fed needs to lower rates in order to avoid recession (so say we're recessed already but that's for another discussion)....question is, how much should the fed lower in order to help the economy get back on track? some tidbits - the market has priced in an 88% chance of a 100 basis point ease (100 basis points = 1 full percentage point) and has priced in a 12% chance of only easing 75bps...interestingly enough, this morning, we had a 14% chance for a cut of 125bps which has now gone away considering the encouraging news that were released this morning namely a higher than expected housing starts numbers, a rather alarming higher than expected core-PPI number (producer price index = inflation guage), comforting LEH and GS earnings reports and a 'strong-like-bull' dow index.

so i ask :

1) how do you think the dow will react (or your stocks for that matter) if the fed eases 100bps as the market is predicting?
2) how do you think the dow will react (or your stocks for that matter) if the fed eases a paltry 75 or 50bps?
3) how do you think the dow will react (or your stocks for that matter) if the fed eases a gigundo 125bps as some market participants had suggested prior to this mornings trading day?
4) how do you think the dow will react (or your stocks for that matter) if the fed does nothing?


curious what we've learned.

1) Not much movement from the DOW if the Fed does what the market expects as the market has already built in 100bps.

2) DOW take a sharp hit as the markets are expecting 100bps and less of that would be a surprise and the market doesn't like surprises. 50 bps would really drive it down IMO.

3) I'm not certain what would happen here. The market doesn't like surprises and thus it could go down a little because they weren't expecting it but then go up since it would be such a stimulus move by the FED.

4) DOW down big time.

I honestly think they have already moved enough. Now, they need to let the previous cuts do the work. I am very much in the minority though.

1) Not much movement from the DOW if the Fed does what the market expects as the market has already built in 100bps.

2) DOW take a sharp hit as the markets are expecting 100bps and less of that would be a surprise and the market doesn't like surprises. 50 bps would really drive it down IMO.

3) I'm not certain what would happen here. The market doesn't like surprises and thus it could go down a little because they weren't expecting it but then go up since it would be such a stimulus move by the FED.

4) DOW down big time.

granted, I'm guessing, but I would differ from you, a little.

I would think that if the Fed decides not to make any further cuts, that while it may be a short term hit, it would rally soon enough and eventually rise as it would be a sign that the economy is not worsening at a minimum, whereas if the cut was 125bps that it would be a quick rise in the DOW followed by a sharp turn for the worse.

todd - point 4)

if the fed does nothing, doesn't that signal (as TT has stated) that the economy is on schedule....that the cuts prior are working.....that inflation is an issue....and that there is no rush to ease....basically, if there was no move - it would mean that the economy is improving correct?

now here's the interesting thought...if the economy is improving (as evidenced by the non move today), wouldn't that mean that the banks and the financial institutions that were heavily affected by the sub prime mortgage events (ie bear stearns, lehman, goldman sachs, etc) - shouldn't they be improving then as a result? if you follow and that is the case, shouldn't the dow RALLY instead of TANK?

just a thought.

I didn't think about it in that way. Both IHate and Rad make great points. Rep for both of you!

1) Not much movement from the DOW if the Fed does what the market expects as the market has already built in 100bps.

2) DOW take a sharp hit as the markets are expecting 100bps and less of that would be a surprise and the market doesn't like surprises. 50 bps would really drive it down IMO.

3) I'm not certain what would happen here. The market doesn't like surprises and thus it could go down a little because they weren't expecting it but then go up since it would be such a stimulus move by the FED.

4) DOW down big time.

granted, I'm guessing, but I would differ from you, a little.

I would think that if the Fed decides not to make any further cuts, that while it may be a short term hit, it would rally soon enough and eventually rise as it would be a sign that the economy is not worsening at a minimum, whereas if the cut was 125bps that it would be a quick rise in the DOW followed by a sharp turn for the worse.

you got it hater...conversely...a 125 bp move or 225 bp move (something NO ONE is surely expecting) would indicate that the fed knows or sees things uglier than they already are causing them to react in a way in which they'd want to 'head-stuff-at-the-pass'...a 125 or greater move would indicate ugly times ahead, fed wanting to react, and dow would TANK as everyone is exuberant for no apparent reason.

I didn't think about it in that way. Both IHate and Rad make great points. Rep for both of you!

hey - we're ALL learning...remember, of the millions of market participants that do this for a living, i'd venture to say that the majority knows DICK....half are right and half are wrong....that my friend is what makes the market.

^^The market dictates that. If everyone acted the same way then you don't need the market. You need Bears and Bulls like you need Democrats and Republicans. Each side is needed to keep the other side honest.

Last week, there was zero expectation of a 1% cut. This week, we've already gotten a 25 pt trim, but the market is demanding an additional 1%. If the Fed DOES go one point, they're leaving themselves with very little room to maneuver in my opinion and I'll tell you why I think they should maybe keep some powder dry:

The current cuts have been in reaction to the problems in the residential real estate market. Yesterday, the FDIC posted some strong advisory language about their requirements on holdings backed by commericial real estate. In a typical cycle, the CRE market follows residential RE in an echo. I think we're about to see problems in CRE. Those could be followed by problems with securitized credit card and consumer debt.

Just a thought.

Supreme Court sides with the District of Columbia then anyone with shorts on Smith and Wesson or Ruger, etc are winnars!

75 points

^^They cut just to cut.^^

Futures market is already pricing in an additional 50 point cut. So that would be on top of the 100 basis points this week and the huge cuts Bernanke made earlier in the year.

Watch to see if the pattern holds true as it has so far this year--every time the Fed has cut, the stock market goes up in anticipation, then everyone realizes that the cuts haven't magically fixed the problems out there, and the stock market tanks again.

Futures market is already pricing in an additional 50 point cut. So that would be on top of the 100 basis points this week and the huge cuts Bernanke made earlier in the year.

Watch to see if the pattern holds true as it has so far this year--every time the Fed has cut, the stock market goes up in anticipation, then everyone realizes that the cuts haven't magically fixed the problems out there, and the stock market tanks again.

That is because people want instant gratification. Almost every single expert on this subject has said a move by the Fed takes 6-18 to come to fruition. The first rate cut by Helicopter Ben was around 6 months ago. Nobody wants to wait though. The thoughts on stabalizing inflation in the next few quarters were welcomed.

Investor Confidence reaches an All-time low for third straight day:

http://www.rasmussenreports.com/public_ ... umer_index

i'd rather not deal with the daily fluctuations of a consumer confidence report...i think a monthly indicator would be more valuable (and they do btw)...next reading is 3/25th at 10AM...expecting an index of 74.7....last month was 75.0 http://www.conference-board.org/

i'd rather not deal with the daily fluctuations of a consumer confidence report...i think a monthly indicator would be more valuable (and they do btw)...next reading is 3/25th at 10AM...expecting an index of 74.7....last month was 75.0 http://www.conference-board.org/

Boy were you wrong.

NEW YORK - Consumer confidence sank to a five-year low in March as tight credit markets, rising prices and worsening job prospects deepened worries that the economy has fallen into recession.

The Conference Board, a business-backed research group, said Tuesday that its Consumer Confidence Index plunged to 64.5[/size] in March from a revised 76.4 in February. The March reading was far below the 73.0 expected by analysts surveyed by Thomson/IFR.

Meanwhile, a widely watched index of U.S. home prices fell 11.4 percent in January, its steepest drop since data for the indicator was first collected in 1987. The decline reported Tuesday in the Standard & Poor's/Case-Shiller index means prices have been growing more slowly or dropping for 19 consecutive months.

The weak readings depressed share prices on Wall Street. The Dow Jones industrial average dropped 74.37, or 0.6 percent, to 12,473.91 in morning trading. The Standard & Poor's 500 index and the Nasdaq composite index also fell.

The Consumer Confidence Index has been weakening since July, and is watched because lower consumer confidence tends to result in lower consumer buying, which is a drag on the economy.

Lynn Franco, director of the Conference Board's research center, said the latest index reading was the lowest since 61.4 in March 2003, just ahead of the U.S. invasion of Iraq.

wish i were....the lowest level of confidence since the nixon years

consumers account for the majority of the economy...that said, lack of confidence in ones ability to retain ones 'wealth' or livelyhood means tightening of belts, less spending, which equals no growth...couple that with diminishing property values and declining stock portfolios and you've got a recipe for DISASTER.

Looks like your everyday joe is stepping in to take advantage:

NEW YORK, March 26 (Reuters) - U.S. mortgage applications jumped by nearly 50 percent last week as home loan rates fell after the Federal Reserve cut interest rates and took steps to restore bond market confidence, an industry trade group said on Wednesday.

An 82 percent surge in refinancing applications overshadowed a 10.6 percent rise in home purchase loan requests, lifting total applications from the previous week, when home loan demand sank to the lowest since late December.

The Mortgage Bankers Association's overall mortgage applications index jumped 48.1 percent to a seasonally adjusted 965.9 in the week ended March 21, its highest since early February.

No link.