Jan. 22: Dow 11,971 (down 128 points); trading range, 658 points

The specter of continuing the ugliness seen overnight in the global equity markets and a 95% decline in fourth-quarter (2007) net income at Bank of America (NYSE: BAC) combined to shake up those in charge of U.S. monetary policy.

So, facing the possibility of a 500-point drop in the Dow following the long holiday weekend, the Fed sprang into action early to shore up the markets.

The move was a 75-basis-point pre-market intermeeting cut just eight days before the Fed's regularly scheduled meeting to drop the fed funds rate to 3.5% and the discount rate to 4%. The Fed made this move "in view of a weakening of the economic outlook and increasing downside risks to growth," adding, "appreciable downside risks to growth remain."

The Dow battled all day to recover from an early session drop of 459 points to close down only 128 by the closing bell.

Greg Tucker is the executive editor of OptionsZone.com.

10 craziest days on Wall Street in 2008: #8 We've got a bad feeling about this ... originally appeared on BloggingStocks on Sat, 03 Jan 2009 12:30:00 EST. Please see our terms for use of feeds.

This strategy went from being a modestly successful trade through October to a hero-sized trade in the past 45 days.

The Fed funds rate, the most widely followed interest rate the banks charge each other for overnight lending, topped out in August 2006, at 5.25%.

When the Fed started easing rates thereafter, no one at the economic think tanks forecasted anything close to what we are seeing today (namely a Fed funds rate of zero to 0.25% -- a decline of a full 5% in 17 months).

The decline in rates started out so orderly and coordinated that it seemed almost too good to be true, and the Dow Jones Industrial Average hit an all-time high, topping 14,000 for the first time in July 2007.

However, the quarter-point cuts gave way to a three-quarter-point cut, or 75 basis points, on Jan. 22, 2008, signaling that the Fed was seeing a material breakdown in the credit and housing markets. Following that seemingly radical rate cut, just eight days later on Jan. 30, the Fed again slashed the Fed funds rate by another half point, or 50 basis points, to 3%.

From there Bernanke & Co. held steady for a couple months to see if any good would come of their efforts.

When evidence of further erosion in the credit markets surfaced with the impending collapse of Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), Indy Mac, Bear Streans and Lehman Brothers (OTC: LEHMQ), the Fed lopped another three-quarters of a point off the Fed funds rate, taking it down to 2.25% on March 18.

That was considered the absolute floor at the time, a level that would stick. But that wasn't the case.

Continue reading Best Trades of 2008: #2 Getting long and staying long the 30-year Treasury bond

Best Trades of 2008: #2 Getting long and staying long the 30-year Treasury bond originally appeared on BloggingStocks on Wed, 31 Dec 2008 12:00:00 EST. Please see our terms for use of feeds.

The Federal Reserve just announced a bigger-than-expected rate cut. And with that, it has used up its short-term rate cutting ammunition for the first time in history.

The sad part is that even though the Fed has been cutting rates -- from 5.25% last summer to today -- the economy has not responded.

The specifics of today's rate cut are historic. The Fed lowered its target for the overnight federal funds rate to a range of between 0% and 0.25% -- a record low. Even though it's a historic low, today's announcement was ratifying the market reality -- demand for interbank loans has been so low that the actual Fed funds rate has been at 0.1% in the last several days.

The problem is that even though we are in a financial meltdown caused by too much borrowing, the Fed has decided that the best way to solve the problem is to get people to borrow more. But they don't want to lend the money that the Fed is giving away. Meanwhile, prices dropped in November by 1.7% -- more than ever in recorded history -- due largely to a rapid decline in energy prices.

Continue reading Fed shoots its last bullet

Fed shoots its last bullet originally appeared on BloggingStocks on Tue, 16 Dec 2008 15:17:00 EST. Please see our terms for use of feeds.

From TheStreet.com Network

• BOE, ECB Slash Interest Rates
• Asian Stocks Close Lower Thursday

Continue reading Cramer on BloggingStocks: European central bank lets us all down

Cramer on BloggingStocks: European central bank lets us all down originally appeared on BloggingStocks on Thu, 06 Nov 2008 09:57:00 EST. Please see our terms for use of feeds.

The Federal Reserve couldn't wait until October 29th to cut rates. Instead, it slashed its Fed Funds rate 0.5% to 1.5% in a move that was coordinated with other central banks. Interestingly, Milton Friedman's acolyte, Anna Schwartz, recently observed that Fed Chair Ben Bernanke, who is reportedly a student of the Great Depression, is taking the wrong approach to this crisis.

Milton Friedman is widely regarded as the economist who figured out that a lack of liquidity is the reason that the economy took such a tailspin after the crash of 1929. Schwartz, 92, co-authored A Monetary History of the United States 1867-1960, with Friedman. And her assessment of Bernanke is brutal. She thinks he should be fired. The reason? She believes that he and Paulson made a huge mistake in bailing out failed companies. In her view, they underestimated the free market's ability to recover from such failures.

Scwhartz also faults them for issuing dire warnings about how capitalism would fail unless Congress passed their bailout bill. I guess Friedman and Schwartz have influenced my thinking as reflected in this post about letting free markets work and this one questioning the fear tactics used to sell their program. This morning's emergency rate cut suggests that for all the fear mongering used to sell their program, its effect has not helped the markets, which have lost $2.8 trillion since the day investors thought the bill would pass.

Milton would have let the failed institutions fail. But it's too late to know whether his ideas would have worked.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Fed cuts rates 50 basis points. What would Milton do? originally appeared on BloggingStocks on Wed, 08 Oct 2008 09:30:00 EST. Please see our terms for use of feeds.

Continue reading Cramer on BloggingStocks: The cut lets you fold the weak hands

Cramer on BloggingStocks: The cut lets you fold the weak hands originally appeared on BloggingStocks on Wed, 08 Oct 2008 09:00:00 EST. Please see our terms for use of feeds.

Most analysts believe that the Fed will not make an emergency cut in rates. The decision is a mistake and the agency will live to regret it.

According to Reuters," Federal Reserve policy-makers are expected to stop short of lowering U.S. interest rates at a meeting on Tuesday ." Bernanke & Co. will probably state a willingness to bring rates down if it feels that the economy needs to be protected.

The economy needs to be protected now. Wall Street is not the only part of America that is coming apart. The number of people out of work is rising according to the government's own data. With layoffs in the financial sector and at companies including Hewlett-Packard (NYSE: HPQ), which yesterday cut almost 25,000 jobs, the mass of people out of work will continue to rise sharply.

The average middle class American has not only lost all of the equity in his home, he now faces a sharp drop in the value of the portion of his retirement invested in the stock market.

If the current situation is not an emergency, what is?

Douglas A. McIntyre is an editor at 247wallst.com.

A mistake, Fed won't help with interest rate cuts originally appeared on BloggingStocks on Tue, 16 Sep 2008 08:58:00 EST. Please see our terms for use of feeds.

Continue reading Cramer on BloggingStocks: You can't have it both ways

Cramer on BloggingStocks: You can't have it both ways originally appeared on BloggingStocks on Tue, 05 Aug 2008 09:15:00 EST. Please see our terms for use of feeds.

The Federal Reserve Bank of Kansas City released its Beige Book Report detailing economic activity among the twelve Federal Reserve Districts across the country. The pace of economic activity was quite sluggish throughout much of the country. At the same time, there have been hawkish comments recently by several Fed governors. This leads us to the question of the possibility of a Fed rate increase on the horizon.

However, one must remember that hawkish talk is quite different from hawkish action. As I have said in my book, Follow the Fed to Investment Success, "watch what the Fed does not what it says."

The Fed has given no indication that an imminent raise in interest rates is forthcoming. There have simply been hawkish comments, which are an incredibly inexpensive means of maintaining its inflation-fighting credentials. However, every time market turmoil arises, the Fed adopts a more conciliatory tone.

Continue reading The Fed Beige Book Report: Hawkish talk, but no action

The Fed Beige Book Report: Hawkish talk, but no action originally appeared on BloggingStocks on Wed, 23 Jul 2008 15:33:00 EST. Please see our terms for use of feeds.

Fed rate cuts help people who hold adjustable rate mortgages (ARMs) but they're less valuable to people seeking new mortgages.

That's because ARM rates reset periodically -- e.g., every year -- based on an index plus a lender's margin -- the amount a lender adds to the index, usually two percentage points or four percentage points, to set the actual interest rate of the ARM. The most common index for ARM adjustments is the one-year U.S. Treasury bill.

Last Friday, the one year treasury rate was at 1.88% -- down 3.04 percentage points below the 4.92% rate it was at in April 2007. The Fed's rate cutting has lowered the rates at the reset periods for those who already have adjustable rate mortgages. So a person who paid 2% plus the 1-year t-bill rate in April 2007 would have paid 6.92% during the last year and enjoyed a reset to 3.88% as of last week.

Continue reading Do Fed rate cuts help adjustable rate mortgage holders?

Do Fed rate cuts help adjustable rate mortgage holders? originally appeared on BloggingStocks on Wed, 30 Apr 2008 17:20:00 EST. Please see our terms for use of feeds.

Fed cuts rates, signals pause -- Dow tops 13,000 originally appeared on BloggingStocks on Wed, 30 Apr 2008 14:43:00 EST. Please see our terms for use of feeds.

Fannie Mae (NYSE: FNM) is recently up $4.99 to $27.17. Goldman Sachs lowered its 12-month price target to $16 from $24. FNM call option volume is 46,713 contracts, compared to put volume of 64,318 contracts.

FNM April option implied volatility of 98 is above its 26-week average of 58 according to Track Data, suggesting larger price risk.

The Volatility Index (VIX) is down 3.26 to 28.98.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

Option update: Fannie Mae volatility stays elevated as shares rally into rate cut originally appeared on BloggingStocks on Tue, 18 Mar 2008 15:25:00 EST. Please see our terms for use of feeds.

With the Fed rumored to be contemplating a rare 100 basis point rate cut, it's worth considering whether this policy is doing any good. I'd say those rapid rate reductions are doing more harm. Here's why: non-stop interest rate cuts make business lose confidence in the Fed - since those cuts are ineffective - while signaling that economic conditions are desperately bad or that the Fed is panicking and unable to fix the problem.

I think the problem is that banks and other owners of Collateralized Debt Obligations (CDOs) and other asset backed securities have not accounted yet for the true loss in value of these securities. Therefore corporations and others that deal with the banks don't know whether those institutions are solvent. The solution would be to write down the value of those assets and then recapitalize the banks to the extent of the write downs.

While the non-stop interest rate cuts do not solve what's ailing the credit markets, they also accelerate inflation. This causes businesses to hoard their money because they expect that it will be worth less in the future. In effect, the Fed is creating very high inflationary expectations which creates a very high hurdle rate for investments - and in a slowing economic climate, there are not many investments that can earn a high enough return to get green-lighted.

Continue reading How the Fed's rate cuts stifle capital investment

How the Fed's rate cuts stifle capital investment originally appeared on BloggingStocks on Tue, 18 Mar 2008 12:15:00 EST. Please see our terms for use of feeds.

Reuters reports that like last week, the global markets are cratering. The question is whether the Fed will come in with the same emergency 75-basis-point rate cut it used last Tuesday when U.S. markets opened to damp the downturn. Here's the damage:

• The pan-European FTSEurofirst 300 was down 1.3%, taking January's losses close to 13%
• Nikkei dropping nearly 4%

In addition to the $150 billion stimulus package, the Fed is already expected to cut interest rates again this week; interest rate futures show the market is betting on another 25 or 50 basis points in cuts, possibly taking rates as low as 3.0%.

But with Dow futures down 57 at 7:15 a.m., it looks this morning like it's not enough -- the Bernanke Call -- investor's expectation that his rate cuts mark a ceiling below which the market will tumble -- appears alive and well. I wonder whether Bernanke will try another emergency rate cut this morning.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Bernanke Call: As globe quakes, will Fed cut again? originally appeared on BloggingStocks on Mon, 28 Jan 2008 08:53:00 EST. Please see our terms for use of feeds.

The Federal Reserve Board and Chairman Bernanke are not done cutting. Last week before departing on holiday I posted Serious Money: 1% drop by Fed is possible and I awoke today to find that Ben is reading my posts. Today's cut is just the beginning. Today was the rough cut; next week The Fed will be sanding around the edges trying to smooth the markets out with possibly another quarter or even half a point cut.

What's the hurry you ask? I discussed that last week. The Fed needs six months for the impact to be felt by the overall economy, and more importantly, prior to us walking into the polling booths on election day. That means: cut now, polish later. You will be seeing and hearing the politicians all running in front of the parade come summer -- count on it!

The banks and retailers are up solidly today as I write this because the cut will help banks in two ways. It will create more borrowing, and the latent rate reductions in "increased margin spreads" will mean higher short term profits. The retailers are up as speculators believe consumers will head back to the stores ... that may be premature.

This morning, the market has been extremely volatile, which personally is very ironic because I am writing this from the foot of the Arenal Volcano in Costa Rica.

If you want to buy into this market, the best way to do so is to dollar cost average into the index funds and ETFs. Read last weeks post - got to run...

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. Read his Chasing Value and Serious Money columns.

Serious Money: The Fed will cut rates again -- what to do originally appeared on BloggingStocks on Tue, 22 Jan 2008 14:45:00 EST. Please see our terms for use of feeds.

Continue reading When a 200-point plunge causes a sigh of relief (of sorts)

When a 200-point plunge causes a sigh of relief (of sorts) originally appeared on BloggingStocks on Tue, 22 Jan 2008 11:55:00 EST. Please see our terms for use of feeds.

Continue reading Weekly inventory report pushes oil prices even lower

Weekly inventory report pushes oil prices even lower originally appeared on BloggingStocks on Wed, 28 Nov 2007 13:25:00 EST. Please see our terms for use of feeds.

The Federal Open Market Committee (FOMC) decided to lower its Federal Funds Rate target by 25 basis points to 4 ½% and to lower the Discount Rate by 25 basis points to 5%. The decision to lower the Fed Funds Rate had one dissent, and the Discount Rate decision was unanimous.

The Fed left open the possibility of additional interest rate cuts but gave no indication of future action. It also mentioned the improvement in core inflation and the equal balance between upside risks to inflation versus the downside risks to growth.

The primary concern with current Fed actions is that Chairman Bernanke will get caught behind the curve since Fed actions can take several months to a year to take effect. The GDP report this morning indicated that the economy may be more resilient than many believe. Core inflation for the moment also appears to be less of a problem.

Continue reading The FOMC Halloween decision: No tricks here

The FOMC Halloween decision: No tricks here originally appeared on BloggingStocks on Wed, 31 Oct 2007 17:20:00 EST. Please see our terms for use of feeds.

Flash : Fed cuts rates by 25 basis points originally appeared on BloggingStocks on Wed, 31 Oct 2007 14:18:00 EST. Please see our terms for use of feeds.

Continue reading What can we expect from yesterday's rate cuts?

What can we expect from yesterday's rate cuts? originally appeared on BloggingStocks on Wed, 19 Sep 2007 11:00:00 EST. Please see our terms for use of feeds.