Anticipating Credit Relief and Interest Rate Action 10-03-08

The market's reaction to passage of the "Rescue Bill" will be an important tell as the need for a Fed funds rate cuts increases with deteriorating economic fundamentals.

Yachtsman Trading Desks Update

Friday, October 03, 2008

The trading desks are anticipating the reaction to the passage of the “Recovery Bill” as the S&P Futures have climbed on the generally accepted “rumor” of its passage. Most traders expect an initial upside knee-jerk reaction to the bill’s passage. The real question is the “sell the news” follow up once profits are taken from this morning’s move and the market’s upside passage reaction subsides.

The real question is whether there will be buyers to step in and buy the dip. That will be a real tell for the broader market going forward. Here’s what the traders on the desks are watching along with several hedge fund managers I spoke with just before lunch.

A breakout above 1172-1176 that holds into the close would be very bullish going into Monday. The FDIC increased insurance provisions along with the very badly needed liquidity and mortgage purchase provisions should help to provide loan availability for small and medium size businesses currently stuck in this credit crunch. While I am in no way endorsing this pork-laden legislation, the intended consequences of providing some short-term relief to the current credit morass are undeniable. Businesses and many individuals are desperate for credit relief.

I believe the passage of this “legislative nightmare”, as one economist described it to me, will also help to encourage the central banks of foreign governments to implement the interest rate cuts needed to spur economic recovery and growth among our trade partners we need to increase our exports.

The likelihood of these worldwide interest rate cuts would also be enhanced by a Fed funds rate cut by our Federal Reserve. Given the weakness in today’s Job numbers and recent manufacturing weakness, Gentle Ben has all the cover he needs to lower the Fed funds rate. Additionally, the bond market has already priced in a .50% Fed fund rate to 1.5%. I hope Ben is listening.

Should the bill fail again, I don’t think the door will be big enough for everyone trying to run through it. Just as we saw last Monday as the market’s mini-crash caused our career legislators to “reconsider” the wisdom of their ways. Let’s hope we do not see an instant replay of that stock market carnage.

Regardless of the outcome and the market’s response, do not take the market’s first reaction as the final response. Remain patient and do not chase them up or panic sell them down. As we have seen time and again, emotions are the enemy of all investors.

Good luck today and keep fear and greed out of your investment thesis.

Yacht

Navigating investors through the turbulent waters of retirement investing and wealth management.