The DOW Answers our Call
Well, the DOW has answered our question. It is trading down over 170 points as I write this A.M.
Pending home sales fell 12.2% which is the largest drop since the statistic's history. Ouch! I would like to reiterate my belief that the housing market will get much worse before it gets better, and this will drag the economy into recession.
Job growth slowed according two a couple of studies, while lay offs rose. Again, the underlying weakness in the U.S. economy is beginning to rear its ugly head. I expect this to only get worse.
Finanally, as I write, the Yen-Dollar is trading up approxiametly 1% at 115.1. I am very bullish on the yen as the carry trade continues to unwind. I expect this to be a culprit in ripping liquidity going forward.
Where to from here?
In my opinion, as I wrote yesterday, I see the DOW oscillating between its 50 and 200 day MAs. In discussing the DOW a month from now, we have to talk about the Fed, and what they will do.
Now if you ask one of the talking heads on CNBC, they are about 100% positive a rate cut will ensue this September. If you ask me, there is probably over a 50% chance of a rate cut, but I'm not counting my chickens before they hatch.
The Feds achieved their desired goal when they cut the discount rate. This allowed the big investment banks such as Goldman, Bear, Citi, Morgan Stanley, etc. to bring 100's of billions of dollars of morgage backed securities for collateral and get cash.
Now 6 months ago this use to be an OVERNIGHT lending rate. Now its 3 weeks, 60 days, or even 90 days. So what was the Feds goal?
Well you have to realize the helicopter Ben doesn't give a flying rip about Joe Schmoe and the house that he is going to lose. All the Fed cares about is these brokerage houses and keeping them afloat.
Essentially, the lowering the discout rate and changing the rules of this type of lending has allowed the Fed to provide the desired liquidity to the market.
So the Fed doesn't need to cut the Fed funds rate to achieve its desired goal. Now, it is under extreme political and public pressure to do just that.
So going forward, we have to watch the jobs data, and even the financial data leading up to the meeting.
The thing that should worry you is that the market has pretty much priced in a 25 basis point rate cut. Look for the equities market to react accordingly to a rate cut.
Now it's really sickening that these idiots desire a rate cut, being that low interest rates were the problem in the first place, but what if these schmucks don't get what they ask for?
I would expect that if the Fed comes out and holds the Fed funds rate steady that we will see equities take a hard hit.
More on how a rate cut will affect the financial markets coming shortly...