Ben Bernanke and The Fed cut the Federal Funds Rate, also known as the benchmark rate by 75 basis points. The markets rallied heavily after the announcement at 2:15pm, after gaining steam early from the anticipation of the cut. This is a typical bear market rally, strong, short, and sputtering, the traders seem to be jumping on a trampoline. It is inevitable that the gravity of the situation, that is, oil being over $106/barrel, Gold being over a $1006/ounce, and a struggling dollar, will soon send the market plunging back down. As the Fed Rate declines, the value of the dollar falls. It has been steadily been cut over the last 6 months, in order to increase the supply of money and help a regressing economy.
Although wall-street was hoping for a larger cut, the market rallied tremendously, spurred by Lehman and Goldman earnings which beat the street's expectations. This rally, dubbed Turnaround Tuesday by CNBC, follows a dreadful Monday where Bear Stearns announced it did not have cash to continue day to day operations (liquidity crisis). Through a cash infusion sponsored by the Federal Government, J.P. Morgan Chase purchased the investment banking giant at $2 a share, total cost approximately $260 million.
As the chart shows the DOW, S&P, and Nasdaq all rallied, with leading gains in the financial sector (XLF), which has been taking it on the chin for the last 12 months . The other sectors are illustrated by the spider ETFs: Energy (XLE), Technology (XLK), and Healthcare (XLV). It is interesting to note that Healthcare had modest gains compared to other sectors, even though it is fundamentally poised to have the strongest growth in our future economy.
The cut boosted the markets simply because future value changes with the Fed Funds rate, which affects valuation. It is a short term fix to a growing crisis in our economy. Politicians, CNBC, and others with their own agenda want you to believe everything will be okay. However, your personal economy is the most important factor, regardless of how the overall economy is doing. The fact is that the overall economy will dictate your personal economy and you will notice, no matter how minute, the elements of the global economy affecting your daily life (your personal economy). If the amount of money you use to fill up your tank continues to rise, while the price of your food and essential daily services (food, energy, living expenses) increases, and you face employment issues (laid off, fired, can't find a job), you will be crippled by the cobra's poison.
You will spend less money, trust the government less, and this will reflect the consumer confidence index and all the other economic instruments, which will simply validate that we are in a shitty economic state. A completely autonomous free market economy does not work. There need to be constraints, governances, and issues that have to be addressed for the efficient use of capital.
I heard an economist from Wachovia stating that individual Americans would be facing an economic crisis similar to that in 1991 and 1982-1982. Americans have a short memory. The times are certainly going to get hard in the distant future. Previous Fed Chairman Allan Greenspan never cut the Fed Funds Rate more than 50 basis points at a single meeting. This is a sign that we are in a desperate situation.
As far as investing is concerned, these volatile markets are an excellent opportunity to make some cash. I'm not speculating doom and gloom scenarios, just my two cents on the rate cut and the current state of affairs with the economy.
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