3SOF

Something is horribly wrong with the equity market when stocks rise and fall with such power based on a 1/4 point interest rate change.  The American economy and perhaps the world economy is too credit driven and not sustainable, in my humble opinion.

just speculation and profit taking...turn off your pc and turn on again next week, you will see nothing is changed

My concerns are not short term, as I am not a short term trader.  I am just making a general point that the world's market too credit driven.  One can make the argument that 50% of the market cap is fake--based on nothing more than credit that will never be paid back.

fyi:
STOCKS TUMBLE ON FED MOVE -- FINANCIALS LEAD DECLINE -- BONDS RISE ON
FLIGHT TO SAFETYFED CUTS TWO RATES BY A QUARTER POINT
... The market was more than a little disappointed by the two modest rate cuts by the
Fed and its accompanying statement. It lowered both the Fed fund and discount rates by a quarter of a point. Apparently, the market was hoping for more. The Fed's statement also showed a continuing concern about inflation. Judging from today's heavy selling, market
participants appear to be of the belief that the Fed has fallen behind the curve and is underestimating the threat to the economy from subprime and housing problems. At least that's the message the markets sent today. Stock fell heavily while bond prices rose sharply in a flight to safety. All market sectors and industry groups fell. The hardest hit were financials, homebuilders, and retailers all of whom are directly impacted by interest rates. Small caps and transports also fell sharply. Just yesterday I warned that lack of upside confirmation by those three groups threatened the viability of any yearend rally.

MARKET INDEXES FALL IN HEAVY TRADING
... Today's combination of falling prices and rising volume was decidedly negative. One of
readers expressed concern this week about the lack of upside volume in stock index ETFs during the recent rebound. The Dow Diamonds, the S&P 500 SPDRs and the Nasdaq 100 Power Shares have shown a marked decline in trading activity over the last month. Notice how the green volume bars (up volume) have been getting smaller and smaller as prices have advanced. That's a sign that the rally is on weak technical footing. To make matters worse, today's selloff of more than 2% came on noticeably heavy volume. All three indexes fell back below their 50-day averages, while the S&P 500 SPDR is threatening its 200-day line. Unless the Fed does something more dramatic before its next meeting, prospects for a continuing rally appear greatly diminished after today's heavy selling. Stay defensive.

Stocks Tumble Broadly On Fed's Interest Rate Cut
BY JONAH KERI

INVESTOR'S BUSINESS DAILY

Posted 12/11/2007

Stocks tumbled Tuesday, as the Fed's latest interest rate cut disappointed the market.

The Nasdaq dropped 2.4%. The NYSE composite skidded 2.6%, the S&P 500 2.5%, the Dow industrials 2.1%. Small caps fell hardest, as the S&P 600 dived 3%.

Volume surged across the board, picking up steam right after the Fed's news. Trading rose 19% on the Nasdaq and 27% on the NYSE compared with Monday's levels.


Heading into the session, futures traders had fully priced in the odds of a quarter-point rate cut. Many investors expected a half-point move.

The central bank opted for the quarter-point snip. Meanwhile, the market saw no encouraging signs in the Fed's remarks.

"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending," Fed officials noted.

The 1-2 punch of the more conservative rate cut and no strong signal of further easings turned stocks' early gains into big losses.

In the first five minutes after the announcement, the Nasdaq plunged about 1%. It kept falling from there, closing near its intraday lows.

The session marked the Nasdaq's second round of distribution since the market followed through on a new rally Nov. 28. Tuesday was the biggest one-day price decline for the Nasdaq since a 2.7% drop Nov. 7. Other major indexes also saw their largest drops since the early part of November.

Several leading stocks slid in heavy volume. The IBD 100 swooned 3.3%.

Bucyrus International (BUCY) touched an all-time high early in the day then reversed, closing down 7.72 to 88.66 on nearly twice its normal trade. However, the mining equipment maker held above its 50-day moving average.

Russian mobile phone service provider VimpelCom (VIP) shed 3.58 to 37.08 on double its average volume. It also remained above its 50-day after a brisk recent run-up.

When the market followed through late last month, we noted the need to wade into the market gradually, without overextending yourself too quickly.

That kind of prudence remains the best course of action two weeks later. Buy only the best stocks as they pass optimal buy points.

When you buy, start with a half-position, then look to fill out the rest if the stock shows strength. Avoid buying on margin until the market delivers more signs of strength, with more top stocks breaking out of sound bases.

If you've already jumped into the market and hit a snag, follow a set of sound sell rules. Sell any stock that falls 7% or 8% from your buy point.

Treasury prices surged on the rate cut. The yield on the benchmark 10-year note slid to 3.97% from 4.16% Monday.

I cant help but feeling that its good they only cut by 1/4 percent, because regardless of their conservative language today, it means they still have that other 1/4 point to cut next meeting, its like keeping an ace up your sleeve. 

For example, what would the markets do if they cut 1/2 point today, but not at all next meeting?  Its one thing to expect a half point rate cut and only get a quarter, but much worse IMO to expect a quarter point cut and get BUPKIS, ZILCH, ZERO, NADA!!!!

Exactly. That's way FED cut only 1/4 point instead of 1/2 point.
They will have in this way some more room and align with the current European prime rate that is at 4%.

I "love" these sell-offs because even if shake our portfolio, they wash out from the markets the weak hands and propose great entry prices for our stocks.

Pre market today is already pointing higher, so just a storm for nothing :-)

good morning!

looking at the SPX chart in the short term it looks like it will loose about another 1% today then it will set in a temporary base in which to rally. the fast stochastic has t come back down. after that comes the seasonal Christmas rally.

"Capitulation?! you know the one we didn't get during the 10% correction" was the comment of a short term trader in another forum.
hmm.

My take is the FED cut interest rates by just a quarter of a percentage point, instead of the half a point many hoped for, because the FED is looking ahead, not through the review mirror.

The FED already cut interest rates a full percentage point and they currently stand at 4.25%. This is less than what rates were in the 1990-91 recession we've talked earlier on this thread:



Perhaps, if the US economy enters a cyclical recession and I think it will, the FED lowers rates another half a point during the course of 2008 and that's it.

I've already shown you what the stock market did while the 1990-91 recession was still ongoing:



It just took off, as the long term Bull Market continued.

I believe the outcome will be similar this time. The causes for this recession are cyclical and normal. Home builders and banks got greedy, had very fat profits while the party went on, but now they're paying the price of being reckless and greedy. They lent money to people they shouldn't have and now have these huge write downs in assets to make. And they are making them, they're feeling the pain and paying the price. The economy is functioning well.

In the meantime the World economy is growing and united like never before. We have the emergence of economic powerhouses where before nothing relevant in economic terms existed. The BRIC countries will, in my opinion and within a decade, bring 3 billion new consumers with purchasing power to the world market. People often downplay the inequalities the World has. People in these countries are 20 times poorer than the average American, if they rise to be just 10 times poorer, that's a double. And if they rise to be just 5 times poorer, that's a quadruple.

I've heard yesterday on CNBC that now more than half of the S&P 500 companies' revenues come from outside of the United States. More than half. So the S&P 500 is now more dependent on the World economy than the US economy.

The 1 million or 2 million Americans defaulting on their home payments or credit card payments is nothing compared to the World economy strength and what that means for the stock market's future.

I've a 700 pages book here called "The Wealth and Poverty of Nations" which explains why countries got richer or poorer throughout the centuries and I can assure you we're living an unprecedented time. Never in its history the World has been so open and everybody is using the same economic model (finally), the model that made the US what it is today. Capitalism is at work throughout the whole World now (with a few small exceptions) and it should work elsewhere the same way it worked in the US.

I think investors have plenty of reasons to be optimistic for the next decade. Sometime down the line everybody will rush in to buy shares and will drive valuations to stratospheric and unsustainable levels and then the S&P 500 will have a 50% hair cut, just like it happened in the 2000-2003 period.

My take is the S&P 500 will reach 6,000 points sometime between now and 2018 and then it will fall back down to 3,000 points The march towards 2,000 points will be the slowest, then it will take 5 years or more to move from 2,000 to 4,000. The final 2,000 points, especially the final 1,000, will be made rather quickly, as the usual speculative bubble at the top progresses and then it blows out.

We're not at the top now, the market is in a prolonged trading range before it makes a bullish breakout to new all time highs. Be bearish or a weak hand and risk missing your way to a small fortune, depending on your initial capital.

I'll just hold on to my holdings throughout the storm and I expect to be paid handsomely for my patience. Anyway, the Main Portfolio is up 22% this year, I wish all years were like this, but I expect better results going forward, as the general market will probably help the stockpicker's job.

This was out about an hour ago:

Fed alliance to fight credit crunch

Bernanke is very imaginative. If you needed a catalyst to take this market to new all time highs, you got one.

Morgan Stanley issues full US recession alert

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 2:17am GMT 13/12/2007

Morgan Stanley has issued a full recession alert for the US economy, warning of a sharp slowdown in business investment and a "perfect storm" for consumers as the housing slump spreads.
   
In a report "Recession Coming" released today, the bank's US team said the credit crunch had started to inflict serious damage on US companies.

"Slipping sales and tightening credit are pushing companies into liquidation mode, especially in motor vehicles," it said.

"Three-month dollar Libor spreads have jumped by 60 to 80 basis points over the last month. High yield spreads have widened even more significantly. The absolute cost of borrowing is higher than in June."

"As delinquencies and defaults soar, lenders are tightening credit for commercial, credit card and auto lending, as well as for all mortgage borrowers," said the report, written by the bank's chief US economist Dick Berner. He said the foreclosure rate on residential mortgages had reached a 19-year high of 5.59pc in the third quarter while the glut of unsold properties would lead to a 40pc crash in housing construction.

"We think overall housing starts will run below one million units in each of the next two years -- a level not seen in the history of the modern data since 1959," he said.

Although the US job market has apparently held up well, an average monthly fall of 138,000 in the number of self-employed workers over the last quarter suggests it may now be buckling. "Consumers face what could be a perfect storm," said Mr Berner.
   
Bank of America closes fund

The partial freeze on subprime mortgage rates announced last week by US treasury secretary Hank Paulson may help cushion the blow for some banks, but it could equally backfire by adding a "risk premium" that drives even more lenders out of the mortgage market.

Like Goldman Sachs, and Lehman Brothers, the bank no longer believes Asia and Europe will come to the rescue as America slows.

It has slashed its 2008 growth forecast for Japan from 1.9pc to 0.9pc, and warned that credit stress will weigh heavily on the eurozone.

Mr Berner said US demand is likely to contract by 1pc each quarter for the first nine months of 2008, but the picture could be far worse if the Federal Reserve fails to slash rates fast enough. It is betting on a quarter point cut this week, with three more cuts by the middle of next year. "We expect the Fed to insure against the worst outcome," he said.

Morgan Stanley is the first major Wall Street bank to warn that it is may now be too late to stop a recession, though most have shifted to an ultra-cautious stance in recent weeks.
The bank at first treated the August crunch as a "mid-cycle correction", much like the financial storm after Russia's default in 1998. But the collapse of the US commercial paper market has now continued for seventeen weeks, suggesting a "fundamental deleveraging of the banking system."

Mr Berner - known at Morgan Stanley as the "resident bull"- is one of the most closely watched analysts on Wall Street. While he began to turn bearish last April as the credit markets turned nasty, the latest report is written in tones that may is rattle the fast-diminishing band of optimists.

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2007/12/11/cnusa111.xml

QuoteMr Berner - known at Morgan Stanley as the "resident bull"- is one of the most closely watched analysts on Wall Street. While he began to turn bearish last April as the credit markets turned nasty, the latest report is written in tones that may is rattle the fast-diminishing band of optimists.

Do you know why Richard Berner is known as the "resident bull"? Because he was a bull on the US economy throughout the 2000-2003 period, while the S&P 500 lost 50% of its value. And he was right, the US economy had its mildest recession ever after September 11, 2001.

Now he's prepared to be a pessimist on the US economy while the long term bull market in stocks is ongoing. My take is he'll be right again, the US economy will have a recession, and the S&P 500 will be up 20% - 30% twelve months from now.

Most economists are forecasting an economic recession in 2008 and the S&P 500 is just 4% shy of a new all time high. This should tell us something ... follow the money, not the talk.

nice chart quotation imho

Greenspan: Odds Rising for a Recession
Thursday December 13, 7:00 pm ET
By Jeannine Aversa, AP Economics Writer 
Greenspan: Odds of a Recessions Are Rising, Economic Growth Is Getting Close to 'Stall Speed'


WASHINGTON (AP) -- Former Federal Reserve Chairman Alan Greenspan says the odds the U.S. will fall into a recession are "clearly rising" and he believes economic growth is "getting close to stall speed."
ADVERTISEMENT





Greenspan, who ran the central bank for 18 1/2 years, until early 2006, offered his views on the economy in an interview on NPR News' Morning Edition that will air on Friday. Excerpts of the interview were released on Thursday.

A severe slump in the housing market, a stubborn credit crisis and turbulence on Wall Street are endangering the country's economic health. Growth in the current October through December period is expected to have slowed to a feeble pace of just 1.5 percent, or less.

Economists, including Greenspan, have warned that the chances of a recession are growing.

Asked whether the economy will tip into a recession -- something that has not happened since 2001 -- Greenspan said, "It's too soon to say, but the odds are clearly rising."

He said he felt this way because of the slowing pace of growth. "We are getting close to stall speed," he said. "We are far more vulnerable at levels where growth is so slow than we would be otherwise," he added. "Indeed, it's like someone who has an immune system that's not working very well is subject to all sorts of diseases and the economy at this lever of growth is subject to all sorts of shocks."

Greenspan's remarks come just days after the Federal Reserve, under Chairman Ben Bernanke, sliced a key interest rate for a third time this year to prevent the housing and credit troubles from sinking the economy.

The situation poses the biggest challenge yet to Bernanke since succeeding Greenspan in February 2006.

Some analysts have questioned whether Bernanke waited too long to cut the Fed's key rate and whether he has acted aggressively enough to soothe the economy's woes. The Fed initially dropped its key rate in September, the first reduction in four years. That was followed up by additional rate cuts in late October and then again on Tuesday.

Greenspan again rejected criticism that his policy actions helped to feed a housing boom that eventually went bust. Critics say Greenspan held interest rates too low for too long after the 2001 recession.

To have prevented such euphoria in housing that fed a bubble in prices, Greenspan said the Fed would have had to jack up interest rates so high that it would have damaged the economy. "That would have broken the back of the economy, and brought the housing boom down," Greenspan said.

Hi All
Long time no post!
Thought this was refreshing.
Happy Holidays and New Year to everyone.
All the Best
GMan


China and the Arabian Peninsula as Market Stabilizers
December 11, 2007 20:13 GMT
By George Friedman 


The single most interesting thing about today's global economy is what has not occurred. In 1979, oil prices soared to slightly more than $100 a barrel in current dollars, and they are approaching that historic high again. Meanwhile, the subprime meltdown continues to play out. Many financial institutions have been hurt, many individual lives have been shattered and many Wall Street operators once considered brilliant have been declared dunderheads. Despite all the predictions that the current situation is just the tip of the iceberg, however, the crisis is progressing in a fairly orderly fashion. Distinguish here between financial institutions, financial markets and the economy. People in the financial world tend to confuse the three. Some financial institutions are being hurt badly. Those experiencing the pain mistakenly think their suffering reflects the condition of the financial markets and economy. But the financial markets are managing, as is the economy.

What we are seeing is the convergence of two massive forces. Oil prices, along with primary commodity prices in general, have soared. Also, one of the periodic financial bubbles -- the subprime mortgage market -- has burst. Either of these alone should have created global havoc. Neither has. The stock market has not plummeted. The Standard & Poor's 500 fell from a high of about 1,565 in mid-October to a low of 1,400 on Oct. 19. Since then, it has rebounded as high as 1,550. Given the media rhetoric and the heads rolling in the financial sector, we would expect to see devastating numbers. And yet, we are not.

Nor are the numbers devastating in the bond markets. By definition, a liquidity crisis occurs when the money supply is too tight and demand is too great. In other words, a liquidity crisis would be reflected in high interest rates. That hasn't happened. In fact, both short-term and, particularly, long-term interest rates have trended downward over the past weeks. It might be said that interest rates are low, but that lenders won't lend. If so, that is sectoral and short-term at most. Low interest rates and no liquidity is an oxymoron.

This is not the result of actions at the Federal Reserve. The Fed can influence short-term rates, but the longer the yield curve, the longer the payoff date on a loan or bond and the less impact the Fed has. Long-term rates reflect the current availability of money and expectations on interest rates in the future.

In the U.S. stock market -- and world markets, for that matter -- we have seen nothing like the devastation prophesied. As we have said in the past, the subprime crisis compared with the savings and loan crisis, for example, is by itself small potatoes. Sure, those financial houses that stocked up on the securitized mortgage debt are going to be hurt, but that does not translate into a geopolitical event, or even into a recession. Many people are arguing that we are only seeing the tip of the iceberg, and that defaults in other categories of the mortgage market coupled with declining housing markets will set off a devastating chain reaction.

That may well be the case, though something weird is going on here. Given the broad belief that the subprime crisis is only the beginning of a general financial crisis, and that the economy will go into recession, we would have expected major market declines by now. Markets discount in anticipation of events, not after events have happened. Historically, market declines occur about six months before recessions begin. So far, however, the perceived liquidity crisis has not been reflected in higher long-term interest rates, and the perceived recession has not been reflected in a significant decline in the global equity markets.

When we add in surging oil and commodity prices, we would have expected all hell to break loose in these markets. Certainly, the consequences of high commodity prices during the 1970s helped drive up interest rates as money was transferred to Third World countries that were selling commodities. As a result, the cost of money for modernizing aging industrial plants in the United States surged into double digits, while equity markets were unable to serve capital needs and remained flat.

So what is going on?

Part of the answer might well be this: For the past five years or so, China has been throwing around huge amounts of cash. The Chinese made big, big money selling overseas -- more than even the growing Chinese economy could metabolize. That led to massive dollar reserves in China and the need for the Chinese to invest outside their own financial markets. Given that the United States is China's primary consumer and the only economy large and stable enough to absorb its reserves, the Chinese -- state and nonstate entities alike -- regard the U.S. markets as safe-havens for their investments. That is one of the things that have kept interest rates relatively low and the equity markets moving. This process of Asian money flowing into U.S. markets goes back to the early 1980s.

Another part of the answer might lie in the self-stabilizing feature of oil prices, the rise of which should be devastating to U.S. markets at first glance. The size of the price surge and the stability of demand have created dollar reserves in oil-exporting countries far in excess of anything that can be absorbed locally. The United Arab Emirates, for example, has made so much money, particularly in 2007, that it has to invest in overseas markets.

In some sense, it doesn't matter where the money goes. Money, like oil, is fungible, which means that if all the petrodollars went into Europe then other money would flow into the United States as European interest rates fell and European stocks rose. But there are always short-term factors to consider. The Persian Gulf oil producers and the Chinese have one thing in common -- they are linked to the dollar. As the dollar declines, assets in other countries become more expensive, particularly if you regard the dollar's fall as ultimately reversible. Dollars invested in dollar-denominated vehicles make sense. Therefore, we are seeing two massive inflows of dollars to the United States -- one from China and one from the energy industry. China's dollar reserves are derived from sales to the United States, so it is stuck in the dollar zone. Plus, the Chinese have pegged the yuan to the dollar. The energy industry, also part of the dollar zone, needs to find a home for its money -- and the largest, most liquid dollar-denominated market in the world is the United States.

The United States has created an odd dollar zone drawing in China and the Persian Gulf. (Other energy producers such as Russia, Nigeria and Venezuela have no problem using their dollars internally.) Unhinging China from the dollar is impossible; it sells in dollars to the United States, a linkage that gives it a stable platform, even if it pays relatively more for oil. Additionally, the Arabian Peninsula sells oil in dollars, and trying to convert those contracts to euros would be mind-bogglingly difficult. Existing contracts and new contracts managed in multiple currencies -- both spot and forward managed -- would have to be renegotiated. Any business working in multiple currencies faces a challenge, and the bigger the business, the bigger the challenge. The Arabian Peninsula accordingly will not be able to hedge currencies and manage the contracts just by flipping a switch.

This provides an explanation for the resiliency of U.S. markets. Every time the news on the subprime situation sounds so horrendous that it seems the U.S. markets will crash, the opposite occurs. In fact, markets in the United States rose through the early days, then sold off and now have rallied again. Where is the money coming from?

We would argue that the money is coming from the dollar bloc and its huge free cash flow from China, and at the moment, the Arabian Peninsula in particular. This influx usually happens anonymously through ordinary market actions, though occasionally it becomes apparent through large, single transactions that are quite open. Last week, for example, Dubai invested $7 billion in Citigroup, helping to clean up the company's balance sheet and, not incidentally, letting it be known that dollars being accumulated in the Persian Gulf will be used to stabilize U.S. markets.

This is not an act of charity. Dubai and the rest of the Arabian Peninsula, as well as China, are holding huge dollar reserves, and the last thing they want to do is sell those dollars in sufficient quantity to drive the dollar's price even lower. Nor do they want to see a financial crisis in the U.S. markets. Both the Chinese and the Arabs have far too much to lose to want such an outcome. So, in an infinite number of open market transactions, as well as occasionally public investments, they are moving to support the U.S. markets, albeit for their own reasons.

It is the only explanation for what we are seeing. The markets should be selling off like crazy, given the financial problems. They are not. They keep bouncing back, no matter how hard they are driven down. That money is not coming from the financial institutions and hedge funds that got ripped on mortgages. But it is coming from somewhere. We think that somewhere is the land of $90-per-barrel crude and really cheap toys.

Many people will see this as a tilt in global power. When others must invest in the United States, however, they are not the ones with the power; the United States is. To us, it looks far more like the Chinese and Arabs are trapped in a financial system that leaves them few options but to recycle their dollars into the United States. They wind up holding dollars -- or currencies linked to dollars -- and then can speculate by leaving, or they can play it safe by staying. In our view, these two sources of cash are the reason global markets are stable.

Energy prices might fall (indeed, all commodities are inherently cyclic, and oil is no exception), and the amount of free cash flow in the Arabian Peninsula might drop, but there still will be surplus dollars in China as long as it is an export-based economy. Put another way, the international system is producing aggregate return on capital distributed in peculiar ways. Given the size of the U.S. economy and the dynamics of the dollar, much of that money will flow back into the United States. The United States can have its financial crisis. Global forces appear to be stabilizing it.

The Chinese and the Arabs are not in the U.S. markets because they like the United States. They don't. They are locked in. Regardless of the rumors of major shifts, it is hard to see how shifts could occur. It is the irony of the moment that China and the Arabian Peninsula, neither of them particularly fond of the United States, are trapped into stabilizing the United States. And, so far, they are doing a fine job.