Mike:
I'm thinking there may be a different slant to the Fed's rate cut; something other than providing liquidity so banks can more easily make loans of dubious quality.
When the DOW Industrials dropped below 7500 this past October, there was a lot of money that came into the market. It wasn't a general inflow, but was concentrated on several DOW components, and was of such an amount as to stop the decline in the index. Then a couple of days later, the Fed came up with its "surprise" rate cuts. On other boards there was speculation that the government was behind the intervention.
A political reason for the action could be: "It's the economy, stupid," and as long as the market stays healthy, and the populace can see that they're getting rich returns on their various accounts, then I imagine that Clinton feels he'll retain his presidency. This gives his appointees, Rubin and Greenspan, incentive to keep the market from sinking.
An economic justification could be related to the table contained in Cycle Pro, the link was posted here a while back, where it gave a projection of the drastic losses money center banks would incur, due to derivative exposure, if there were a protracted 30% decline in the averages.
I think it may be a combination of the two that caused the intervention (if that is what actually happened, and IMHO it did). So I doubt there'll be any meaningful drop until after the impeachment proceeding is resolved. That would probably mean until after the end of this year, taking into account the usual bullish tilt the market has for the Christmas season (or the buy Rosh Hashana dictum).
So if investor's attitudes are changed after the first of the year because of inflationary pressures from the trade deficit, or from the Fed increasing money supply, or foreign money gets repatriated due to an attractive gold-backed Euro, or the Japanese accelerate their yen repatriation in order to set up a yen-backed Asian economic bloc, or by negative earnings announcements and/or the lowering of analyst estimates, we could finally be ready for the BK.
Unless the Fed keeps cutting rates, but then I don't know how much derivative exposure Goldman has to a falling market.<G>
Of course that's all rank speculation, but I'd be curious to get your feedback.
Merritt |
