Investment

» somedude3 - Fed Funds Rate Cuts Imminent?

In response to Fed Funds Rate Cuts Imminent? posted by success409:

The fed is by far more sensitive to the destructive aspects of inflation. The loss of faith in the money the fed controlls is the least desirable outcome. The fed is much less concerned about a slowing, flagging or even recessionary outcome. The fed is always going to be predisposed to over anticipating economic growth and under estimating economic slow down. If it's a choice between potential inflation or stiffling the economy to the point of reccesion that's an easy choice for the fed.

-- posted by somedude3

» axolotl - Fed Funds Rate Cuts Imminent?

In response to Fed Funds Rate Cuts Imminent? posted by Normxxx:

The hedge fund managers did not hold a gun to anyone's head, did they? Buffett asks if anyone can name 10 hedge funds that will outperform the SP500 next 12 months? Of course, Warren did put about 600 mill in a hedge fund once and lose a little money. Bill Gates made his money from having a lot of luck and the situation known as a near monopoly. Back around 2000, there were a couple of hedge fund managers who were offered 500 mill from some mideast guys to invest and they turned it down - they said they had run out of opportunities and it would not be fair to take more money. I do respect the hedgies who have their own money in it like Boone Pickens. There is a former employee of Goldman Sachs who is starting his own hedge fund - he seeks special situations anywhere in the world - if he has the talent & work ethic that he is supposed to have, then he is probably worth the high fees.

-- posted by axolotl

» success409 - Article On Interest Rate Cut

Here is an article advocating a cut in interest rates. Note the comment, "Mortgage lenders are still under strain. So are leveraged hedge funds that lost money and are facing redemptions, and bond investors hurt by a sharp increase in corporate borrowing rates."

A rate cut will help bail them out from the risk they took. If we have to have a rate cut to ensure the safety and soundness of the markets, then the Federal Reserve should at the same time propose investigating and implementing additional regulation over mortgages, hedge funds, and credit derivatives. There has to be some accountability and correction or the same thing will happen again but maybe much worse next time. Also, these crises may happen more frequently. We can't allow significant risk to be taken and then when things go bad not allow that risk to run its course. If we keep doing this, there will be negative consequences in some manner such as inflation, stagflation, slow growth, deflation, etc.

http://www.usatoday.com/money/markets/20...

-- posted by success409

» Normxxx - Fed Funds Rate Cuts Imminent?

In response to Fed Funds Rate Cuts Imminent? posted by somedude3:

Not likely. The people on the FED either like to be actively revered (as AG) or at least not burned in effigy, as Paul Volcker.

-- posted by Normxxx

» success409 - Markets Demand Rate Cut

Christmas Sales in the high end stores in New York could be bad if Ben doesn't get with the program. All of those getting rich in the finance markets are getting pissed off. Their fees, commissions and earnings are going down big time. They need big Ben to save them. He must cut rates now or else. If no deals are being made, no money being borrowed, no LBO deals, everyone running to safety, investors refusing to invest in the debt markets, people trying to take their money out of hedge funds, derivatives not happening, etc. they cannot make any money. Instead of making $10 million this year they may only make $200,000. Their bonus may only be $50K instead of $5 million. Woe is me! This is a disaster and they will not stand for it. If Ben doesn't act soon they are going to try to take everyone with them. He must cut rates or else. If he doesn't the markets will crash, unemployment will go up, a recession will happen big time, housing prices will crash; you haven't seen anything yet. It will all be Ben's fault. Ben has to put the risk taking, poor decisions, cavalier attitude towards risk, increased profits, easy credit, easy money, etc. back on track or else. He needs to get the party going again or who knows what will happen to Christmas sales in NY city. He better not try to regulate Hedge funds or credit derivatives either. Someone made $200M last year managing a hedge fund and uncle Ben better not ruin it for him. He just bought a $100M mansion. As Cramer said, Ben doesn't get it. He doesn't know how bad it is. The Lamborghini Dealer down the street is shaking in his shoes. Ben better cut those rates soon and it better be a big one. How dare him try to act responsibly and think that those who took risk should now pay the piper or that hedge funds and credit derivative should be regulated. Who does he think he is. He should go back to Academics if he can't get his act together.

-- posted by success409

» Normxxx - Global Margin Call?

Global Margin Call? [¹]

By Boris Sobolev | 21 August 2007

Fed's First Step

When the FOMC members woke up on Friday morning and saw the Nikkei 225 down almost 900 points and other foreign markets down sharply, they had no choice but to vote to cut the discount rate by 50 basis points to prevent a US stock market meltdown.


Fearful of a drastic reaction by the markets and determined to show that it is not panicking, the Fed found a compromise by 'helping' the banks with the discount rate and other, more substantive measures, but decided to wait for as long as possible, even as long as to the September 18th meeting, to proceed with a fed funds rate adjustment.

Why will the Fed have to cut the fed funds rate?

1. The reduction of the discount rate is just a temporary patch. The move gave weak banks the ability to borrow from the Fed more cheaply, extended their loan payback period to 30 days [[(from 1 day): normxxx]], and relaxed certain technical restrictions on borrowing [[(e.g., they permitted the use of less than prime collateral): normxxx]]. The Fed can reduce the discount rate further to 5.25%, but this will not fix the problems. The Fed had already tried injecting short term funds with the use of REPOs, but these attempts failed. The real problem is that the banks simply do not trust one another and are unwilling to provide each other with overnight loans. Moreover, trading on Mortgage Backed Securities (MBS) [[and Asset Backed Securities of all kinds, even the 'solid' stuff: normxxx]] has almost been suspended except for the very highest quality paper. Finally, the crisis is spreading to the consumer side, as the banks are making it increasingly difficult for customers to borrow, by raising rates and tightening lending standards. As a result, a large part of the real estate market is totally freezing up.

[ Normxxx Here:   This latter is a first; we have never had a housing market 'freeze up' before. ]

2. The Fed is trying to buy time, save the real estate market (especially the 'new' mortgage market), and help many in the housing industry (but especially the banks) to avoid bankruptcy. A large portion of the mortgage banks' revenue comes from MBS' trading operations which were highly profitable. Now, the trading has all but halted, and bank profits have evaporated. Risks of bankruptcies are rising even among the major players in the field. But in the end, the only relatively reliable way to prevent a ripple effect will be to support the consumer through cheaper credit, e.g., a lowering of the fed funds rate.

To prevent a financial system crash and to relieve the credit crunch sufficiently, a dramatic decrease in fed funds rates may be required. Goldman Sachs is forecasting a 75 basis point cut by the end of the year [[Hint! Hint!: normxxx]]. We believe this is a realistic prognosis.

Against the backdrop of 'credit crunch' fear, the fed funds rate cuts should bring on another big wave of credit inflation to save the day.

[ Normxxx Here:   But, will it? If the consumer is sufficiently panicked, he will not borrow-- or borrow only enough "to survive for the time being." This is the fear of deflation, where you cannot revive the consumer even with zero interest loans! ]

Global Margin Call?

What happened around the globe last week? The main reason the market decline was so severe is not due to any particular one source of fear, [[I have come up with a half dozen equally good explanations-- different from the one here: normxxx]], but due to the yen carry trade unwinding. As we have mentioned many times, aggressive traders that move the markets (such as hedge funds) are highly leveraged. Leverage ratios are commonly 1:5, 1:10, 1:20, etc. Since most of the traders' debt is denominated in yen [[which still sports a near zero interest rate: normxxx]], a rise in the Japanese currency forced some participants to begin liquidating their positions in stocks and buy back enough yen to pay their debts. This pushed the yen even higher and stocks lower creating more problems for other traders-- a cascade effect.

http://www.321gold.com/editorials/sobole...

http://www.321gold.com/editorials/sobole...

Looking at the S&P 500 and the Nikkei charts, it appears that the world was on the edge of a global margin call. This would have meant a global equity crash. But the Fed was able to prevent this scenario for the time being.

Why Gold Indices Are Worst Performers

Historically, gold and silver stocks are among the most volatile sectors in the markets. With the Volatility Index (VIX) hitting its highest levels since 2002, the precious metals sector suffered as well. Even Apple, Inc., the [[erstwhile: normxxx]] Wall Street favorite, fell by 24% from peak to trough in just two weeks [[think the iPhone bomb may have had some little to do with it?: normxxx]]. Interestingly enough, HUI's peak to trough decline was 23%.

http://www.321gold.com/editorials/sobole...

There are also other reasons why this correction was so severe. First, as we have discussed before, the XAU and HUI indices are composed mostly of large producers that are experiencing rising costs and declining profit margins!?![[this is hardly news!: normxxx]] Second, smaller producers and exploration stocks, also included in the indices, are often illiquid and small selling pressure can go a long way.

[ Normxxx Here:   I believe the entire capitalization of the gold stocks' market is still less than that of GM.


And, gold figures into many of the carry trade machinations in a big way. Also, in many cases, it was the only asset that the owners had that they could readily sell to buy currency to satisfy margin calls, etc. ]

Even though many shorter term support levels on gold indices were penetrated, the major support levels of the last year and a half remain in force.

[ Normxxx Here:   The last thing you want to do here is to sell any gold holdings! This is a great opportunity to add to positions. ]

Normxxx    
______________
The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

-- posted by Normxxx

» success409 - Volatility Continues

The Fed doesn't know what to do. The fundamentals don't support a cut in rates yet, but the market's are begging for one. The Fed cannot let the markets fall apart. IMO, If they do cut rates at this time without a significant change in fundamentals they should also announce an investigation and possible recommendations concerning additional regulations over hedge funds, credit derivatives, sub prime mortgages, LBOs and other types of leveraged debt. Liar loans are fraud and should not be tolerated. Transparency is important as we are finding out. We can't have bad debts such as the sub prime mortgages being hidden from everyone by complexities brought to you by computers and Financial Engineers. This is necessary so that the Fed deals with the accountability of those taking unwise risk. The cut in rates will help to bail out many poor decisions and will tend to cause additional bad behavior and improper pricing of risk. A move towards more regulation will announce that it isn't going to be business as usual in the future. The Fed will not continue to bail you out. If you can't act responsibly and you are greedy then regulation is the necessary evil and the cure. I never thought I would be saying this but either the Fed stand tall and resist the pressure or they need to propose more regulation. The worse thing they can do is cut rates because the market gurus are demanding it. Their credibility as inflation fighters will be harmed. The eventual consequences will likely be dire.

-- posted by success409

» axolotl - MARKET HAS "CUT" SHORT RATES

FED needs to follow soon - in 4 weeks at least. The danger of a recession on top of the debt and credit problems is not something the economy needs at this time. It is going to require time to work out the real estate problem and mortgage and credit problems and cutting the rate on the short end will help provide the time.

-- posted by axolotl

» success409 - MARKET HAS "CUT" SHORT RATES

In response to MARKET HAS "CUT" SHORT RATES posted by axolotl:
They may need to cut rates but if they do they need to come out fighting. They need to state this is only a temporary measure to calm the markets. They need to say they don't agree with cutting rates and helping to bail out those who took too much risk. They need to state they are starting an investigation of the need for more regulation of the industry to prevent future similar problems. They need to state liar loans are fraud and they won't be tolerated. They need to state Hedge funds and credit derivatives and CMOs need to be transparent and possibly regulated to ensure risk is appropriately priced. They need to state risk needs to be properly priced and risk premiums need to be more transparent. They need to state something like greed is not good and decision makers need to act more responsibly. If they don't come out fighting I think their inflation fighting credibility may be over or at least severely damaged. They will be proving they are willing to cut rates when things get tough and they are pressured. They will be signaling the finance power brokers are able to determine if a rate cut is to happen rather than the Fed based on inflation and economic growth.

-- posted by success409

» success409 - What's going on?

The credit crisis seems to be largely caused by greed. Why are so many people acting greedy and irresponsibly? What happened to ethical behavior? Most of the world is living on $20.00 a day so why are so many people in American and particularly in the Finance markets trying to make such large sums of money? How far will they go to make money? How come there is such a thing as liar loans? What happened to being prudent, saving for a rainy day, being conservative, trying to be debt free, etc. ? Where were the reasonable, prudent and conservative managers and staff at the rating agengies such as Moodys? Is the Enron and Worldcom problems with greedy senior management just the tip of the iceberg in our society? Can our economy and society function with unethical and greedy people? Why are people willing to ignore risk in order to make more money? How far will people go to make a buck? Will money make you happy? Why do so many people think they need more and more money beyond the money needed for basic living? Why is keeping up with the Jones important? Doesn't this mean you don't have self control? Does the person with the most toys at the end actually win? What's going on?

-- posted by success409