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Wednesday, January 30, 2008 5:37 PM

Fed Fears Deflationary Debt Collapse

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Today's action smacks of a classic bear trap rally.

A friend going by the name KodiakBear had this comment today. "A bear market rally is like a shark – it has to keep moving or else it dies."

S&P 500 5-Minute Chart

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Inquiring minds might be interested in the text of the FOMC announcement.

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today's policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.
Actions Speak Louder Than Words

As you can see, the Fed did not really say much of anything other than risk was to the downside, something that any thinking person could figure out on their own accord. Fed actions however, are another matter. Cutting interest rates from 4.25 to 3.0 in less than two weeks tells the real story. This is what Fed actions say: "We are scared to death about a deflationary debt collapse".

Amazon Clobbered After Hours

MarketWatch is reporting Amazon earnings double on strong holiday sales.
For the quarter ended Dec. 31, Amazon (AMZN) reported earnings of $207 million, or 48 cents a share, compared with earnings of $98 million, or 23 cents a share, for the same period the previous year.

The bottom line results were in line with expectations from analysts, according to consensus forecasts from Thomson Financial.

However, expectations for operating profits disappointed. The company expects operating income to come in between $785 million and $985 million for the full year. The mid-point of that range - $885 million - is below the $958.4 million in operating income that was expected by analysts for the year.
"The argument against this stock for years has been that Amazon is great at selling things but not great at making good money," said Tim Boyd of American Technology Research. "Basically, it looks like they are back to their old ways here."
Amazon A Wile After Hours Ride

After hours, Amazon fell from $74 to $70, then rose to $77 and is now trading at $65 and change. This is just another indication that Tech Has Topped.

Heading into a consumer led recession there are simply not going to be many places to hide out. However, one would never know that listening to the analysts on Bloomberg after the FOMC announcement. Several analysts actually predicted the Fed will be hiking rates within a year and this is all going to blow over by the fourth quarter.

Faith in the Fed remains in bubble territory. That faith will eventually be shattered.

Mike "Mish" Shedlock
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