Summary for Week Ending 29th September 2007
Oil is rising, Interest rates are falling, the Stock market is rising and the USD is falling..what a mess. the FED sent a huge spike in the direction of the share market last week, with a much anticipated drop in the official rate. Curiously, it as expected that the cut would only be 25 points, yet internationally, the expectation was for 50 points so waking to a 50 point cut was no surprise to most yet the market reacted as if Benny was indeed throwing money from helicopters.
The huge spike which occurred on the previous Tuesday had no real chance to be maintained. Even if the cut lessens borrowing pressure, it wont become apparent for at least 90 days. If the punters are buying simply on the back of the prospect of another series of rate cuts for the next 6 months, then they had better not be holding on for too long. If we look from the perspective from international investors then any constructive rise in the market is being countered by the decline in the USD. Win one lose one and just tread water. If this is the outcome then it doesn't take long to figure out that the underlying risk of investment is not being offset by rewards over and above the risk free rate of return. If this is the case then the market will need to be supported by local players only and I don't think that the current (and forecast future) state of the US economy is capable of holding this up on its own. Let the scenario run a little further and we have capital flight causing rationalization on other assets requiring more liquid assets ( stocks) to be liquidated. You end with a death spiral !
The above may be a little dramatic, but the common sense underlying the assumptions are simple enough to be readily grasped, and that's where the true danger may lie. If its this obvious, then the little guy might get scared too and start liquidating external investments which in turn buy stocks (which as above drives its own conclusion).
The past week has seen mostly consolidation which goes towards backing up some of teh above. The first 2 weeks in October are the next hump thatthe market must get over, else we are in for some more declines. The trigger for these events may simply be domestic.
There may be simply too much over hang this time around for the FED to do anything to help. If interest rates are the only weapon, then we are all in trouble. At some point Credit must be turned into cash, and if the cash simply isn't there !? Dantes hell for all perhaps.
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