By now, we all know that the Fed (U.S. central bank) cut its "discount rate" from 6 1/4% to 5 3/4%. This is the rate at which the Fed itself is willing to loan out to qualified financial institutions. It's not as sharp of a tool as the Fed's Fed Fund rate, which is the rate at which banks charge each each other for overnight liquidity needs. So naturally it sparked a rally in stocks especially among financial issues. Interestingly, in the midst of Thursday's huge 300-point sell-off, before nearly closing unchanged, it was the financials and brokerage stocks that caught a curious and furious bid long before any other sector. I noticed Bear Stearns (BSC) was even solidly green even as the Dow gyrated between being down 200 to 300-points. Clearly, someone had been tipped-off that the Fed would pull this stunt before Friday's opening. Who did the Fed bailout? A conference call among bankers and Ben Bernanke reportedly had apparently taken place sometime between Thursday afternoon and Friday morning. Someone was either short a massive number puts on S&P futures or long calls on S&P futures that were about to expire worthless. Or, this was a chance for some financial institutions in dire need of some free cash to pile into a trade that was essentially guaranteed to payoff. Obviously, I'm not totally confident that these bankers, knowing what was in store for Friday morning, didn't tip-off trading desks at their respective firms. We would like to believe that free markets are a little more free than that, but I'm not so sure. So someone was bailed out. And others, not being as well connected as Goldman Sachs (GS) CEO, Lloyd Blankfein or Lehman's (LEH) Richard S. Fuld, were inadvertently annihilated. But as good as the bounce might feel, the Fed has shown its hand and a clueless group of bankers that are now panicked means its most definitely lights out for condo speculators and margined hedge funds. The move was an admission that things in the credit market had deteriorated to the point of needing a bailout by the central planners at the Fed. Not that this wasn't the spark that will likely carry a rally in the Dow back into the mid 13,000s, it probably will. But this just gives the institutions a few more weeks and maybe months to off-load their impaired financial instruments onto John Q. Public who don't know Ben Bernanke personally and cannot arrange a discreet, impromptu and confidential conference call to discuss the wilting value of their currency and to propose things that are in their best interest.
Again, I'm passing on some pretty clever and entertaining observations forwarded to me by Stephen Giauque in his Friday e-mail. I don't make a habit of watching Larry Kudlow or Jim Cramer on CNBC USA that often. But I'm aware of Larry Kudlow's modus operandi, so I thoroughly enjoyed Stephen's slant given the recently unfolding events. Enjoy:
"Jim Cramer, on Bubblevision July 16th: 'Subprime' is totally meaningless. I am now saying that if every loan in 2006 that was subprime blew up - $500 billion - if they all blew up, you would still not notice....It has no relevance whatsoever." Later that day, the Dow Industrials closed at a new high of 13950 and just 50-points from its eventual high of 14,000 on July 19th.'
Jim Cramer on Bubblevison August 3rd: 'Open the darn Fed window.....He (Ben Bernanke) has no idea what it's like out there - None!....They (the Fed) know nothing. The Fed is asleep....My people have been in this game for 25 years . . . They are losing their jobs -- these firms are going out business....Bill Poole (St. Louis Fed President) is shameful....Cut the rate. Relieve the pressure.....In the fixed income markets we have Armageddon!!'
Mmmmm? Seems Larry Kudlow has also transitioned his rhetoric from describing the U.S. economy as 'The Greatest story never told' to something akin to: 'We need our asses bailed by the Fed!!' How is it possible that we have transitioned to 'God Help us!!!' from 'The greatest story never told,' in a matter of roughly 18-days? From July 19th's new all-time high for the Dow Industrials to August 3rd---360 hours, we have watched the world's economy and financial system strutting around on steroids and getting all the girls to literally cowering in a corner and sucking on its thumb. It's pathetic!!! Now, Larry Kudlow's nightly 'Greatest story never told' cheerleading hour has been reduced to him and his anti-free marketeers, pro-welfare-for-the-super-wealthy guests pleading with Ben Bernanke and the Fed for an immediate rate cut (read: bailout). When we see financial markets become so impaired in such a short order, it's not because the symptoms hadn't been brewing and were unrecognizable. The fact of the matter is that Larry's 'Greatest story never told' economy was simply a mirage or an intoxication brought about by massive amounts of debt, leverage and ill-conceived investment strategies designed to 'max-out' the surfeit liquidity (debt) environment that for a while was deemed to be 'money-good' when in fact it was acting as a short-term prop for asset values provided that most of Wall Street and all of its co-conspirators (CNBC, credit rating agencies, et al.) could delude themselves and others into believing that this debt was serviceable infinitum and the environment was not totally out of the ordinary. And now that those props are collapsing so too are asset values by which it all had buttressed. It was probably the biggest ponzi scheme the world has ever seen. A financial system based on lending money to people and institutions that can't pay it back for things they don't need or for the purchase of exotic leveraged financial products that they don't even understand, just might not work.'"
Touché!!
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