The Day that Was - September 18th 2007

As Jim Nabors used to say from the old TV show "Gomer Pyle, U.S.M.C" ...

Surprise, Surprise, Surprise..

Well Ben Bernanke did exactly that today. Everyone was caught by surprise by their actions and the statement that followed. Over the past 6 weeks we have heard from every FOMC member and non member talking about how the FOMC is not responsible for bailing out the markets. The repricing of risk in their view was just a way of saying "oh well... you placed a bet and lost, not our fault". And the economist's agreed, it is not the job of the Feds to bail out the hedge funds and brokerage houses for their deep reliance on assets that carried high risk. So as some hedge funds experienced large losses (and some folded up completely) and the brokerage houses talked gloom and doom the view of the FOMC has been "too bad". The various speeches over the past 6 weeks signalled that they would not bail out the markets and that bad investments would be just that. In their view the markets would have to re-price themselves and their job was to be responsible to controlling the broader economy and inflation/recession risks.

So after all the talk about how the market will have to fix itself and the FOMC would not be pressured into making decisions based on stock market action seemed to be completely tossed out the window today and the FOMC kneeled before the markets and did exactly what it wanted, even if it was irrational and potentially dangerous in the long run. Ben Bernanke today became the parent of a spoiled child. And the spoiled child is the stock market.

The announcement of a 50 basis point cut in the Fed Funds rate in addition to an additional 50 basis point cut in the discount window was the Gomer Pyle "Surprise". It went far beyond what most were expecting and far above what most everyone thought they would ever do based on their spoken views over the past 6 weeks. I'll play devil's advocate here for a moment. Does their action mean that they are seeing other data that foretells a much worse economy is in the offing and which required such an aggressive move? Was their action motivated by Government political figures who want to restore faith in the economy (even if it is for a short while)? Was their action motivated by events in the United Kingdom and NorthernRocks' 'run on the bank'? All good questions.

The FOMC statement all but wrote off inflation and was centered on growth. They essentially have decided by their actions that the value of the US dollar means nothing to them now. In our view that is reckless. A decline in the US dollar is going to come back and bite us in the behind down the road. And it will not be pretty. Bernanke recently stated that they were in touch with the brokerages and financial institutions. Was Ben giving into the markets or was it that these CEO's and Bernanke discussed some real evidence of a hard recession coming?

There have been some well respected economists who stated that a 50 basis point cut could be interpreted as a panic by the FOMC that things had gotten out of control and the economy is in worse shape then we realize. We can't say because we don't know what has taken place behind closed doors with the CEO's and the Feds. But if the 50/50 cut is not a panic move then it is at a minimum a move out of desperation to make a screaming child shut up for the short term. You know what happens when you give too much to a child, they only want more later and become even more demanding.

Our job at Rebeltraders is to help you understand the markets, learn about how they work, and how to make money in the stock markets over the life of your trading endeavors. Over the past two months we have been witness to a plethora of news events, employment data, mortgage meltdown, earnings reports, credit crisis, falling dollar, and Fed comments. All of which combined removed confidence from our markets. And is why we have been keeping you out of harms way while this fierce battle has been raging. The past two months have been a war.

During my years of working in the Aerospace industry I became familiar with a term which the military uses in various types of equipment. That term is called "Battle Short". A battle short is essentially a switch (or a series of manual processes) that disables all safeguards in a piece of equipment and forces it to keep operating even if it is broken. All electronic equipment has various protection systems in it. When something goes out of whack the equipment will flash a light (like a light on your dash board in a car) saying something is wrong. In normal situations the equipment would be shut down and sent to the shop for repair. But in times of battle you can't shut the equipment down, you have to keep it going at all costs. Even if it means the equipment will burn up eventually. This is what a battle short switch does. It disables all protection/safe guards and allows the equipment to keep running even though it may be burning up inside. In a time of war the equipment is secondary to everything else so anything to keep it going, even for a short time longer, will be done. Think of it as you driving a car even though your oil pressure gauge says you have no oil. Normally you would stop and have it fixed. But in a war you keep pushing the gas and get every last mile out of it knowing that eventually the engine will seize up.

Today Ben Bernanke pushed the "battle short" button.

So where do we go from here? It all depends on how many miles the market can go before it seizes up. But in the mean time we put together a play list for you to work with. We are going to watch the markets very carefully (as we always do) this week as we still have more market moving events coming. And let us not forget that this Friday is 'Tripple Witching" day with options expiration.

As Lisa stated earlier if we were already setup for day trades we would have taken you in and out of some good trades already. And that will be coming soon. Lisa is a very good trader and you will learn much from her as we progress to the fully operating web site. We are working on the server, software, web site programming, and a whole host of other things necessary in order to be fully operational for our subscribers. The swing trades of course will be there as well and will always be there. The day trading aspect of our service is just one way to make money when the longer time frame is not 'swing trade friendly' which has been the case over the past two months. .

Lisa and I will be discussing again in great detail what the plan going forward will be based on how the markets absorb today's action. Today was a party, we have watch now for sings of a hangover.

I would like you to take a read of a commentary from someone I respect in the financial community. Please read Frank Barbera's commentary tonight at "Financial Sense". You can read his write up here: http://financialsense.com/Market/daily/tuesday.htm. Frank goes into more detail on some of the ramifications that today's FOMC move may have in store for us.