Yesterday's Weakness Is Great News for Traders
By Jeff Clark
January 31, 2008
Leave it to Bernanke.
His nickname may be Helicopter Ben, but I think Willy Wonka is more appropriate. Our esteemed Federal Reserve Chairman tossed a little candy at the markets last week and decreased interest rates by 75 basis points... It was an emergency measure designed to increase liquidity and stabilize the financial markets.
It seemed to work. Stocks are up sharply since then, and financial companies – those entrusted with providing liquidity to the consuming public – are up the most.
"We must give them more," I imagine Willy Wonka said to his gang of Oompa Loompas yesterday.
And so they did. The Federal Open Market Committee (FOMC) cut rates another 50 basis points – not because we needed lower rates to increase liquidity and stabilize the markets. They did it because investors wanted them to.
I once found out a babysitter had given my kids jellybeans right before bedtime. When I came home and found my kids playing trapeze on the chandelier, I asked the babysitter why she would do such a thing.
She replied, "Because that's what they wanted, and I didn't want to disappoint them."
Yesterday's FOMC statement said basically the same thing. The markets wanted another 50 basis point interest-rate cut, and the Fed didn't want to disappoint them for fear of a stock market selloff. So it was Everlasting Gobstoppers and Wonka Bars for everyone.
Investors cheered the decision and immediately rallied stocks almost 200 points following the announcement. But just like my jellybean-infused children, who ran up the walls of my house and then crashed into an insulin-induced slumber, investors drifted into a coma, and stocks drifted into the red.
It may just be a temporary condition. After all, with so much easy money sloshing around, some of it is bound to find its way to the stock market. But the market's failure to hold on to yesterday's post-announcement gains is troubling.
And it has me wondering... What happens when the Fed runs out of jellybeans?
Best regards and good trading,
Jeff Clark
