What to Make of the Month

Well, January could have been worse. The month started as an absolute bloodbath and finished with some roses.

How? I'm not sure how.

MBIA CFO pulled off a dozy. The company announced huge quarterly loss, announced that they did not think they would lose their AAA rating (which is still in doubt), and even if they did they would stand to lose $100-200 million. And the market rallied on this news.

Not that the math made sense. The company wrote off $2.3 billion in losses. It also announced that it was getting a $500 million injection from private equity firm Warburg Pincus,

Somehow, it sounds like swing hard and hope type of ideas.

The also saw a lot of the Fed this month.

We are starting to see a fledging refinance boom recently. Actually, a lot of people are hoping to be able to refinance and just aren't seeing the rates low enough right now. Most are thinking that rates will be down in the next couple of weeks. I really don't know. We are definitely going to see what shakes out with employment and get a better read on how aggressive the Fed is going to be.

I have seen reports of possibly just one more .25% cut in March or April and then backing off. I have seen an analyst report stating that the Fed will have to cut rates back down to the 1% level seen with the Greenspan Fed. I do not believe the Fed can afford to drop rates to that level with inflation still there. The Fed says that inflation should moderate over the coming months, but give no reason why. What is going to cause the moderation? I don't see a catalyst to that side.

When Greenspan cut the rates to that level there was no major threats to inflation. Remember, they were concerned about deflation at that time. This is a totally different world picture. We see other economies such as Europe, China, and Brazil raising rates fighting the raise of inflation.

I look to see another .50% to 1% cut off the current rate.

Another Cut Is Coming Why Not Now?

Everyone knows that it is going to happen. Why wait? Ben and the Fed are going to cut rates again this year. It is a fairly well known rumor that will be fact. Bond legend Bill Gross is calling for a rate cut sometime before the end of this year and ultimately getting the Federal Funds rate to 3.75%, a full percent lower than where we currently stand.

Well, if we are going to see another cut...do it at the October 31st meeting. Don't wait. Earnings are coming in fairly low comparable to most seasons. This is going to continue. Cut now. Do it. Get it into the system.

Yes, I have had a change of heart. Ok, not really. I didn't think that the first cut was necessary. I would rather have the issues with liquidity now to avoid a MAJOR issue later with inflation at it's heart. But that isn't going to happen. So if this is how we are planning on fixing this issue...get on it now. Don't pause at the October meeting.

Every time I see a respectable company like Wells Fargo miss estimates and ratchet up their holdings for loan losses...it makes me nervous. Wells Fargo is a conservative lender comparable to most out there. If they are struggling, guaranteed other banks have some nasty earnings surprises out there. At the same time it kind of makes me happy. Every earnings miss by a major player, the closer we get to that next cut that is imminent anyway.

Get on with the cuts already!

Samuri Ben

Ok, I gave 10 reasons not to cut this weekend and did Ben & Co. listen? Nope. They didn't listen to a darn thing that I wrote. I was encouraged that they did still mention that inflation was still a concern. If I say it once, I will say it a hundred times...inflation should forever and always be the Fed's main concern. Look at what treasuries did today.

Short term bonds are already starting to price in another cut. I think that may be misplaced. By cutting the rate .50 basis points here, the Fed can sit back and watch how things unfold over the next couple of months (as long as things don't get worse) and see what happens. If they had cut by only .25 basis points, that would have signaled a rate cutting campaign.

But notice that longer term treasuries sold off? Long term bonds determine long term interest rates, i.e. mortgages. It also is a clear signal that inflation is going to raise. Not a good thing.

Ultimately, I'm a little disappointed that the Fed did not make a stand here. By cutting the rate, it sets up the future to be more grim. Throwing easy money at an issue created by easy money doesn't make sense and someday in the future, maybe not this year or next, or even the year after that but someday we will all have to pay for the excesses we have seen over the last few years.

So we had a good rally today because of the Fed. Lehman Brothers posted a better than expected earnings report. Does this make everything gung-ho going forward? Not so fast my friend. Too many issues still remain and will remain no matter what the Fed does. It makes the holiday season a little brighter as credit card rates will decline. It will make businesses reinvest and start spending money again but these are short term fixes to a long term problem.