Tuesday, August 5, 2008

Stocks Soar as Fed Leaves Rates Unchanged

I really would love to be a Governor of the Federal Reserve, more specifically, a member of the Board of Governors of the Federal Open Market Committee (FOMC) of the Federal Reserve.

Why, you ask?

Well, outside of being a fictional character like Santa Claus or the Easter Bunny or Tooth Fairy, nobody can make more people happy simply by doing nothing, which is exactly what the FOMC did today - they left the federal funds rate alone, at 2%, and stocks went straight up.

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Brokers are happy, investors are happy, fund managers and options traders are happy. Thank you Fed Governors. Thank you, thank you, thank you.

Actually, it's probably the best they could do. Oil prices have cooled. Inflation isn't a huge, out-of-control problem. Banks are still making mortgages - fewer than a year or two ago - but, they're mostly still in business.

Raising rates would have been a mistake at this juncture. Business conditions are not very robust, and prices should continue to fall due to decreased demand. Interest rates, for what they're worth, should be about 5-6% for mortgages, business loans, CDs, just about everything. For now, with their ovrnight rate at 2%, the Fed is still far from the proper mark.

Now, if they would just leave it alone. Take a vacation, boys, and let the market work itself out. Really, I mean it. Take six months off.

Dow 11,615.77 +331.62; NASDAQ 2,349.83 +64.27; S&P 500 1,284.88 +35.87; NYSE Composite 8,471.85 +203.20

Lest I leave the wrong impression, I should point out that big, one-day moves are clear indications of bear markets, which we are in, and will continue to be in, until the primary trend changes. There are more bank failures and another round of Alt-A mortgage defaults on the horizon, plus the next issue will be government deficits, such as states, counties and cities, unable to derive needed tax revenues in a time of devaluation.

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I said it yesterday, and before that. I've been saying it for more than six months. Everything's going to get cheaper. And that includes stocks. The July bottom will be tested by October. Count on it.

On the day, advancing issues held a healthy advantage over decliners, 4462-1798. New lows remained ahead of new highs, 226-116.

Oil for September delivery was down $2.24, to $119.17. Gold took an enormous hit, falling $21.80, to $886.10, the first time gold has fallen back under $900 since May. Silver fell a full 57 cents, to $16.57. Look for silver to fall back below $14 by the end of the year, if not sooner. Gold, too, is about to capitulate. The bull run in the metals, and most other overpriced commodities, is over, over, over. Gas will be under $3.00 by election day. Count on that, too.

For what it's worth, volume was light, so Tuesday's gains should be taken in light of some scrambling by short sellers and a concerted effort by market bulls. It won't last.

NYSE Volume 1,415,935,000
NASDAQ Volume 2,374,429,000

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