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Tuesday, March 18, 2008 2:52 PM

Broker Dealers Fly, Gold Falls as Fed Cuts 75 Basis Points

Mish Moved to MishTalk.Com Click to Visit.

The markets had been expecting a full 100 basis points but the Fed cut by 75 with two dissenting votes.

Here is the Press Release.

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, 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 act in a timely manner as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.
Worries About The Dollar

No statements were made by the dissenting voters, but what is likely on their mind is the US dollar. Those dissenting are a perhaps a hint that the Fed will be slower with future hikes than the markets expect.

Gold is selling off on the news. Right before the announcement Professor Paulenoff posted this commentary about gold on Minyanville.
Big day for gold and the streetTRACKS Gold Shares(GLD) because just about everyone believes that the Fed will cut rates 75 to 100 bps, which will crush the dollar and trigger another upleg in gold.

My technical work argues differently -- that the GLD has peaked and that "good news" will be sold at the top of the Jan-Mar channel, and the GLD will traverse towards the lower portion of the channel, now in the vicinity of 94.00.

click on chart for sharper image
The above represents a short term, picture. The long term trend is still up of course. However, risk is clearly higher now than $250 bucks ago.

The big news today has nothing to do with the Fed's decision.

Broker Dealers Fly

Goldman Sachs (GS) is up 15%
Merrill Lynch (MER) is up 12%
Lehman (LEH) is up a whopping 42%
Bear Stearns (BSC) is up 36%

Bear Stearns is meaningless because of the level from which it rose. The reason that issue is trading higher is bond holders are scrambling to buy shares just to make sure the deal gets done and the Bear does not go bankrupt.

Lehman Daily Chart

In the last two days bottom to top, Lehman is up over 100%.

I am listening to Bloomberg now talking about the "strong" earnings of Goldman and Lehman. Let's take a look at those earnings: Goldman, Lehman earnings fall but top views.
First-quarter profit declined 53 percent at Goldman, the largest Wall Street bank by market value, hurt by more than $2.5 billion of losses on loans and other assets, though it benefited from strong trading results.

At Lehman, Wall Street's fourth-largest bank, profit declined 57 percent as bond trading revenue plummeted, but improved results from merger advising cushioned the blow.

"Goldman's report was a good report and Lehman's was not the end of the world," said Sal Arnuk, co-manager of trading at Themis Trading in Chatham, New Jersey.
End Of World Did Not Come

Those were not good earnings. Those were horrid earnings. However, the end of the world that many were expecting did not come. It's hard to say for sure but the realization the world is not ending today is likely what's behind this rally. The Fed's rate cut today that everyone is yapping about on CNBC likely has nothing to do with it.

Lehman may not be Bear Stearns but it is still leveraged 30.7 to 1. Citigroup and many financials are hugely leveraged as well. Eventually the market will have to face a deleveraging of those assets. Huge additional writeoffs are coming. Furthermore, many homebuilders are going to go bankrupt and today does not change that. But that is not today's business.

Today's business is simple: The much anticipated end of world did not come. Looking forward however, the underlying economic fundamentals have not changed.

Mike "Mish" Shedlock
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