Why You Should Be MAD About the Interest Rate Cut!
Monday, August 20, 2007 | Ben SchottRating:
We knew we were in for another roller coaster week, and the markets certainly didn’t disappoint, did they?
The biggest news was saved for last, with the Fed going into “crisis mode” and cutting the Discount Rate by half a percent in an effort to stabilize financial markets.
My original idea for today’s article revolved around asking you a question: What do you think about the Fed cutting the discount rate?
I asked Dylan Jovine this question last night.
You’d think I would know better by now. Here I had been enjoying a relaxing weekend with my wife and daughter, and I had to go and open Pandora’s Box.
Let’s just say that Dylan can be pretty excitable.
[Director’s Notation – The scene: Schott family living room. The time: Evening, having just put the baby to bed.]
Me: “Blow out the candles, honey, I’m going to be on the phone with Dylan for a while.”
My Wife: (icy stare)
Anyway, Dylan’s stance on the issue was 180 degrees from what almost everybody else has been saying, so I asked him to put it in writing and send it over to me so I could share it with you this morning.
Here’s Dylan’s take ...
What do I think about the FED cutting the discount rate?See what I mean?
I’m so happy you asked.
Since the whole weekend has passed and all of you have probably heard every talking head discuss what it “really means,” I'll spare you the technicalities and get into the meat of the issue.
The truth is that I'm flipping ticked about it. That's right - ticked off, upset, mad as heck-fire. (Editor's Note: "heck-fire" isn't in Dylan's vocabulary. Yes, in case you were wondering, I edited this.)
How can I be upset with an interest rate cut that may have averted a market panic, and which led to a market rebound of over 228 points?
Because I don’t want to help ANY INVESTOR – let alone manic depressive crybaby investors like Jim Cramer – avoid feeling a little pain when the market drops! (To see Jim Cramer act less professional than a second year stockbroker, view the YouTube video here.)
I mean come on folks! This isn’t just about Jim Cramer making money. Wall Street brokers, private equity firms, hedge funds, mortgage brokers and you-name-it have made a fortune for the past 5 years or so. And it’s about time to pay the piper – that’s the way the game is played, ladies and gentlemen.
But the real reason I’m so upset is that Bernanke may just have caused investors like me (and my Fallen Angel Stocks members) to miss out on millions of dollars in profits (and I’m not talking FIGURATIVELY here).
That’s because last Thursday's market action was the first time I began to feel authentic panic in the stock market since September 2001.
When the market re-opened after 9/11 – and I tell you this in the most unashamed way I can muster – I BOUGHT A LOT OF STOCKS AT CHEAP PRICES AND MADE A KILLING IN 2002 and 2003.
I remember it like it was yesterday: American Express (SYM: AXP) selling for $18/share! JP Morgan (SYM: JPM) selling for $22 per share. Shaw Communications (SYM: SJR) dropping from $20 to $6! H & R Block (SYM: HRB) was selling for $8!
It was like a parade right in front of my very eyes! Only in this parade, there weren't any floats, there were ticker symbols – and each one screamed "BUY! BUY! BUY!"
At first, I swear, I thought it was an illusion. Was this what the old timers meant when they used to talk about gaining a level of clarity so powerful that you're able to transcend the noise, the fear and the panic and begin your market operations?
ABSOLUTELY IT WAS!
And that’s the way I began to feel on Thursday! For the first time since 2001, people were so scared that they were RUNNING FOR THE EXITS.
Opportunities like that come across only once or twice in a decade!
In the end, does the Fed’s action mean the market has already seen its floor (and we’ve been “robbed” of our killing here)?
Who knows.
But I’ll tell you: whenever I see men like Jim Cramer, or private equity firms, or Wall Street talking heads cry about the pain of what is really a natural correction ... it makes we want to puke.
Manipulating the market may work for the short-term, but if risk-premiums stay as low as they have, by my word, there will be a day of reckoning for careless investors in the long-term.
And it’s times like that when clear-headed investors have opportunities to double or triple their NET WORTH.
You bet I’ll be first in line.
— Dylan
PS — Dear Cramer: I challenge you to debate me on any of these issues. I know I’ve been tough on you today, but you truly looked like you were deeper in their pockets than you should have been. Step back, my friend, and get some perspective. You’re supposed to be objective and helping individual investors, not acting like some pawn for your Wall Street friends. You should go to the Wizard of Oz and ask for some Self-Respect.
Well, I’m still interested in hearing your take.
It will be hard to match Dylan’s passion, but I really want to know your thoughts.
Are you happy about the rate cut?
Do you think it’s just symbolic, or that it might lift the markets out of their funk for more than a few trading sessions?
Were you happy just to see some green numbers in your portfolio on Friday, regardless of what may come next?
Do you think Jim Cramer will actually respond to Dylan? (Probably not. But how much fun that would be! I dare you to call into his show!)
I have a feeling we’re in for a spirited discussion.
To weigh in, just click here and share your thoughts.
To your continued success,
(Please let us know what you think about Ben Schott's article.)
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Ben Schott
Editor in Chief
The Tycoon Report
Mark Your Economic Calendar: What's ahead for the week of August 20, 2007
Monday, August 20
10:00 - Leading Indicators (for July): Consensus 0.3%
Big Picture: Six monthly declines in 2006 reflect the weaker economy in late 2006 as declines were shown in 4 of the first 6 months of 2007. The 6 month growth is back in decline at -0.7%. Over the last 17 years the index correctly signaled the 1990 and 2001 recessions while providing a false signal during the 1995 soft-landing. The recession alarms go off when the cumulative 6 month decline exceeds -1% amid a string of three or more consecutive monthly declines. No recession warning bells yet and none expected.
Implications: The Leading Indicators report is, for the most part, a compendium of previously announced economic indicators: new orders, jobless claims, money supply, average workweek, building permits, and stock prices. Therefore, the report is extremely predictable and of very little interest to the market. Though this series does have some predictive qualities, it is a common criticism that it has predicted "nine of the last six" recessions.
Thursday, August 23
8:30 - Initial Claims (for 8/18): Consensus NA
Big Picture: Initial claims can be somewhat volatile, but the 4-week average has remained in a lower 300K to 320K range since topping 330K in mid April. Aberrations are watched for clues on the labor market and economy as the recent levels reflect an even tighter labor market. Continued claims are showing more lift than initial claims as the 4-week average nears the year and a half high of early March. Claims provide a nearly real time read on layoffs and the labor market as the low 4.6% unemployment reflects the broader read of layoffs and hiring.
Implications: Initial jobless claims measure the number of filings for state jobless benefits. This report provides a timely, but often misleading, indicator of the direction of the economy, with increases (decreases) in claims potential signaling slowing (accelerating) job growth. On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four week moving average to get a better sense of the underlying trend. It typically takes a sustained move of at least 30K in claims to signal a meaningful change in job growth.
Friday, August 24
8:30 - Durable Orders (for July): Consensus 1.0%
Big Picture: Durable goods order growth has returned, shown by the four gains over the last 5 months. The stall tied to weak capital investment appears to be past, but risk remains given the recent market turmoil. Strong corporate balance sheets, high capacity use and rising exports remain strong underlying factors. The downward effects from autos and housing continues. Inventory downsizing added to the weak growth early in the year but is now past. Recently stronger manufacturing production and the annual high in the June ISM index show signs of improvement which Briefing.com expects to continue.
Implications: The durable orders release measures the dollar volume of orders, shipments, and unfilled orders of durable goods (defined as goods whose intended lifespan is three years or more). Orders are considered a leading indicator of manufacturing activity, and the market often moves on this report despite the volatility and large revisions that make it a less than perfect indicator. These problems can be minimized by looking at the breakdown of orders. The total number is often skewed by huge increases in aircraft and defense orders. An increase based solely on strength in one sector tends to be discounted, while the market is more impressed with broadbased increases in orders.
10:00 - New Home Sales (for July): Consensus 830K
Big Picture: New home sales reached a 7-year low in March and stands just 4K above that in June. The National Assoc of Realtors expects new home sales to trough in Q4, but revisions continue to move lower as the mortgage mess worsens. Prices have been swinging wildly as a -7% yoy decline in April compares to the 10% yoy rise in March. Inventories have fallen off the 8.3-month high in March. Still waiting for signs of improving demand for residential buying to provide a delayed lift to new construction given the large supply of unsold inventories.
Implications: The report indicates the level of new privately owned one-family houses sold and for sale. New home sales usually have a lagged reaction to changing mortgage rates. They also tend to be stronger early in the business cycle when pent-up demand is strong, and they fade later in the cycle as the demand for housing is sated. In addition to home sales, the market monitors the number of homes for sale relative to the current sales pace. As this inventory measure falls (rises), housing starts tend to rise (fall). Finally, the median home price provides an indication of inflation in the housing sector, though only year/year changes provide any meaningful information. The home sales report is quite volatile and subject to huge revisions, making any one month's reading very unreliable. The report rarely prompts a market reaction. The market prefers the existing home sales report, which has a sample data pool four times as large and is released earlier in the month.
Source: www.Briefing.com
