12-12-07 Trading Desks Update

Short covering is the operative word of the morning. That and language regarding Bernanke and the Fed not printable. Imagine as a professsional trader, with millions of dollars under management whose performance is measured daily, being whipsawed beyond human tolerance. Hedge funds who went big-time long into the Fed announcement were scurrying yesterday to sell and then shorting into the close. Now this morning having to cover those shorts and make a call on where we go from here while losing money on both trades. Still want to be a trader for a living?

That’s the scene and market overview this morning. No one has any confidence in this early move and yet no one is ready to fade (short) it. The real concern is the total lack of confidence that has emerged regarding the Bernanke Fed. While their little $40 Bill. stunt this morning was initially perceived as a helpful liquidity infusion it soon gave way to the realization that interest rates are still way too high and totally out of sync with the bond market. The Fed’s move in no way does anything constructive for the credit markets beyond a 30 day loan. That solves nothing.

Whether this morning’s gambit was a preconceived move by the Fed is debatable. I received a call from a contact close to the Fed right after the market closed yesterday telling me the Fed had seen the reaction and has “other tools” available to use. I was discussing this as Bloomberg reported the Reuters news around 6:45 p.m. EST.

Tue Dec 11, 2007 6:41pm EST

WASHINGTON (Reuters) - The Federal Reserve is actively considering all of the tools it has available to address liquidity issues, a Fed source said on Tuesday.

Fed officials are not unaware that funding pressures have gotten worse, the source said. Although the Fed statement issued on Tuesday does not mention liquidity measures, tools to address liquidity issues remain under active consideration, the source added.

Notice the terminology and tense “is actively considering” tools it has available. Sure sound like a Plan B approach to me. In any event, nothing has changed for the financials and that means the distressed assets and credit crisis remains as critical as before the Fed’s satatement.

I expect to see more selling into this and any rally as has we have seen occur from the highs earlier this morning. Until some degree of confidence is regained by the Fed I don’t believe traders are anxious to gain anywhere near full market exposure. The comments from traders alone showed their distain and obvious frustration with the Fed.