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September 18, 2007 – Comments (13)

So I'll actually be brief with my reaction since the main reason I'm posting this is to get the thoughts from the smart Fools reading my blog.

Anyway, we're looking at a 50 bps rate cut and a huge jump in all the indices. Is a 50 bps cut really good news? Or does this signal that the Fed thinks things really have gotten worrisome? I tend to think the latter.

So what say ye Fools?

Kopp 

13 Comments – Post Your Own

#1) On September 18, 2007 at 5:11 PM, LookMomBoogers (95.16) wrote:

I side with the fools that say this should have come one month earlier as a 25 bps cut, it worries me the 50bps all at once, I think it means there is bound to be more bad news on the horizon. I do like what the cut does to the value of gold and other commodities, I'm tactfully moving things around to get more exposure to the miners...

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#2) On September 18, 2007 at 5:13 PM, TMFEldrehad (99.99) wrote:

What do I say?

*Yawn!*

I'm investing for retirement.  While I'm no spring chicken, my investing horizon can still be measured in decades.  Half point cut?  Half point increase?  S&P up 3% in a day?

Who cares?

When I'm ready to retire, whatever the Fed might or might not do today will hardly register as a inconsequential blip when taken in the context of my overall investing performance.

Probably not the kind of answer you were looking for, but it's my honest opinion.

Regards,

Russell (TMFEldrehad)

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#3) On September 18, 2007 at 5:35 PM, QualityPicks (66.10) wrote:

In one of my previous blogs I mention how the markets price news and current knowledge really fast. So if you act upon what you are hearing on the media you will most likely be wrong. Of course, the smart fools here know this but still most of us think things will get worse for housing.

But you have to separate the stock market from the housing markets. I mentioned the market priced in the bad news we had been hearing all over the place.

The rate cut does not really matter because mortgage rates had come down already (for conventional loans, jumbos are still an issue). As a matter of fact, mortgage rates went up today because they had already discounted the fed move and some more.

The only ones that got screwed up today are savers. Because CDs and money market accounts will now pay less interest. But mortgage holders got their "rate cut" a few weeks ago.

Now, we just have to let the "good news" get priced into the market. Then you can short the home builders and many financial stocks (e.g. mortgage related).

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#4) On September 18, 2007 at 6:40 PM, Imperial1964 (97.78) wrote:

I agree that it screwed savers.   But it helped my stocks, as I was already betting on inflation and a falling dollar.

I'm thinking about moving my savings to Euros or something, though.  The 50 basis point cut won't be the last cut this year!

Interesting, though, that the 10-year treasury yield rose.  Sound like capital flight?  Do you think higher long-term rates will help homeowners?

Now to spend my money while it still has value... ;)

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#5) On September 18, 2007 at 7:15 PM, floridabuilder2 (99.24) wrote:

i was in gold cash and dsx... so i am ok with that... i think the 50 bp cut means the fed is really worried... i think this is great news because it confirms that the housing market is much worse than people think.... this cut is very inflationary and counter to what he was preaching... think about it... bernake the academia cutting 50 bp.... this is also why i don't short stocks or do puts... look at my caps score!!!!!!!!!!!!!!!!!

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#6) On September 18, 2007 at 8:08 PM, rd80 (98.39) wrote:

Not sure I qualify as a 'smart Fool,' but here goes:

There seems to be a lot of sentiment in some of the blogs that the Fed shouldn't have cut or that they cut too much.  I think they did the right thing and could have gotten away with a smaller cut if they had done it months ago.

This won't bail out the mortgage lenders, home builders or home buyers who did really stupid things.  A half-point will help at the margins, but for those who made or took things like the teaser rate loans or leveraged to the hilt at the peak, it's no where near enough to save them.  Housing will continue to be weak and, if I read floridabuilder's series (and if you haven't read it, you should) correctly, some of the builders who played fast and loose are still going to go under.

If the news reports were accurate, there was trouble brewing in the credit markets that was spreading beyond the no doc, leveraged buyout mania and limiting access to capital for real companies and people with solid credit.  That would have been a disaster if the Fed hadn't acted. 

I also think the Fed is trying to do this with a 'one and done.'  The statement that went with the cuts indicated they're still concerned about inflation, so I don't think we're going to see 'Helicopter Ben' raining money from the sky.  Time will tell.

Imperial1964 - I don't think it's unusual that long term rates went up.  Long term rates would go up to compensate for the increased inflation risks.

And, to brag a little, I got lucky and nailed the discount rate prediction, but missed on the funds rate by a 1/4 pt on FourthAxis' Fed Prediction blog.

Fool on!  Russ 

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#7) On September 18, 2007 at 8:33 PM, EScroogeJr (< 20) wrote:

It means George and Ben want to pay off foreign debt before the election and leave the house to Hillary in good order :)

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#8) On September 18, 2007 at 8:45 PM, retailsails (94.53) wrote:

This is a psychological boost - no more, no less. 

The debt markets are still shut down and have continued to deteriorate to this day, and the problem was never high rates...Banks still don't want to lend to each other or consumers, there are looming credit issues (homebuilder defaults/bk's coming soon), and nobody wants to buy the hundreds of billions of ABS, CDO's, CP, LBO Loans sitting on the banks' balance sheets. 

Yes Lehman beat reduced estimates today, but their next quarter will be worse as advisory business will be down substantially (can you think of many deals getting done in the last few months), they will have even bigger writedowns than the $700MM today - September has been even worse than Aug in the Fixed Income Markets - did you see that Goldmans Global Alph has gotten killed again this month, and recessionary pressure forces people to worry about a much greater risk of recession.

The rest of the year will be a constant game between the optimists who keep looking for a bottom and view rate cuts as the answer (2 more cuts anyone?) and histoy, which always has a knack of repeating itself...

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#9) On September 18, 2007 at 9:55 PM, camistocks (< 20) wrote:

Watch Heli-Ben's super heavy fleet take off... ;-)

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#10) On September 19, 2007 at 2:07 PM, TMFKopp (98.46) wrote:

Wow! Great stuff all...

I tend not to be focused on the actual rate cut per se (though it's certainly not inconsequential), but I'm more interested in 1) what the cut signals and 2) the market's reaction. To me 1) and 2) are out of whack.

For 1), some (cough, cough cami!) might say that heli-Ben has just been biding time before a rate cut. I tend to believe the inflation focus, so the rate cut says to me that the economy could legitimately be at risk.

2) is just funny to me in relation to 1) -- has most of the market missed the implications of the cut? Or is it wishful thinking?

I find the "Greenspan/Bernanke put" a little funny. Look back to 2001 when the Fed made the 50 bps rate cut as the Internet bubble was bursting. The S&P was already down about 15% and the market jumped about 5% on the news of the rate cut! Wishful thinking? I guess... the market went on to fall another 35% or so.

So if what Greenspan did was seen as saving stocks I'd hate to see the alternative...

I also like something that I read in the WSJ this morning, and that's that the rate cut and supposedly ignoring the claims that they'd be bailing out speculators could mean that the Fed is keeping its focus on inflation and economic growth rather than asset prices.

kopp

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#11) On September 19, 2007 at 10:20 PM, camistocks (< 20) wrote:

Kopp!

Greenspan didn't cut the rates so low because of the tech stock bubble. It was because of 911! I find it amazing that nobody mentions this event. This was a shocker and a threat to the financial system (and to the worldwide economy too). That's why he and other central banks lowered rates below 1%, among them the Swiss National Bank. Unfortunately it created the current credit bubble. Fed policy is a work in progress...

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#12) On September 20, 2007 at 11:44 AM, TMFKopp (98.46) wrote:

It looks like he did do a little something extra for 9/11, but check out the record -- by the time 9/11 rolled around the target rate was already at 3.5%, down from 6.5% before the first 50bps rate cut in Jan '03. So maybe 9/11 pushed the cuts to a level that Greeney hadn't initially anticipated, but it certainly wasn't the catalyst for cuts to begin.

kopp 

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#13) On September 20, 2007 at 4:19 PM, camistocks (< 20) wrote:

I agree 100%! The Economy started to fall into recession, that's why he started cutting "panically" in 0.5% steps.

Peter 

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