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Take it out of the Dollar |
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Tuesday, 18 March 2008 |
Lehman announced profitability overnight, and the stock market opened to a powerful bull rally. The DOW is up over 250 points, but where is this money coming from? Your dollars.
Yesterday was an edgy day - volume was huge and the market made wild
swings down and up and repeated that cycle all over again.
So how exactly is it that the market can rally on bad news and go even
higher when a major bank like Lehman Brothers simply announces that it
will be able to stay in business?
The phrase you may hear repeated is that "traders have priced in a 100
basis point interest rate cut." The expectation on Wall Street is that
the Federal Reserve will announce a MAJOR interest rate cut in three
hours (2 pm EST), making money cheaper, and allowing nominal valuation
of stocks and commodities to continue their inflationary price growth.
Consider this chart from Ino.com, showing the US Dollar index over the last three months:
This shows the true cost of the incredible Federal Reserve intervention
over the last quarter. In just three months, the dollar has lost 9% of
its value compared not just to the Euro, but compared to several major
currencies. While cheaper dollars allow traders to keep stock values
flat or moving up, it doesn't help consumers filling up gas tanks or
going to the grocery store.
The even worse news: The Fed's actions can take up to six months to
fully resolve. The actions taken over the last three months haven't
been fully priced into the dollar yet and the drop shown here is based
on actions taken between June and September of 2007. Six months from
now, another huge drop in the dollar could be expected and the only
backup plan being discussed is international intervention by the EU
central bank.
Just remember, if Wall Street is having a hard time because of bad
decisions and a herd mentality, we'll just take it out of the dollar to
save them.
We'll keep an eye on Bernanke's announcement later in the day. I would
expect a 50, 75, or 100 point cut, but I would love to see them hold
steady on interest rates for once.
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