Daily Archives: January 6, 2008

A Half Point Interest Rate Cut By The Fed?

Some Wall St. analysts believe that the Fed will cut rates a half a point this month. That may raise the expectations high enough so the a smaller cut could send marketing into a tail spin.

According to Reuters "both Goldman Sachs (GS) and JP Morgan (JPM) said on Friday they now see the Fed slashing the benchmark federal funds rate down to 3.75 percent from the current 4.25 percent, with Goldman also considering the possibility of an intermeeting move."

There are plenty of signs that the economy may be in recession in the current quarter. The Fed’s fire fighters may show up too late. Housing, financial services, and the automotive industries are already in recession. The same may hold true for retail and consumer durables.

If the Fed is tardy, a recession could last through the end of 2008.

Douglas A. McIntyre

Posted on: January 6, 2008 – 7:04 am in Economy, ,

A Fed Without Direction

One of the key members of the Fed admits that there is a great deal of debate within the body about cutting rates. Based on a speech by the Fed’s vice chairman Donald Kohn, Reuters points out that "hints at a split between policy-makers that critics find worrisome, because it raises doubts about how far the Fed will be prepared to cut interest rates to shield the economy from a slumping housing market, increasing the odds of a recession."

In other words, it is not clear whether concerns about inflation or recession will govern the actions by the Fed in the early parts of 2008.

If the Fed leans toward viewing inflation as the greater of two evils, the half point cut that Wall St. expects later in the month may end up being only a quarter point. No one can guess what that will do to the market, It would be hard to quarrel with the fact that it could push the Dow down 250 to 500 points, at least temporarily. Some sectors like housing and automotive could fall even further.

Debate at the Fed may have a modest effect on the economy, but it could be the undoing of the stock market.

Douglas A. McIntyre

Posted on: January 6, 2008 – 6:42 am in Economy

OPEC Say $100 Oil Is Not Its Fault

OPEC says no one should point the finger at it for $100 oil. The new head of the cartel told Bloomberg “There is enough oil in the market. It’s the problems in Nigeria, in Pakistan and the credit crisis caused by the U.S. subprime- mortgage market collapse that caused prices to increase.”

It is a convenient view. High prices will not cut demand. It does not take into account the fact that the huge growth of energy use in a country like China is underwritten by the government. Thus, the dynamics of demand mean nothing. It does not take into account that the use of oil for heating will not fall much if people are cold.

OPEC also points to the hedging of oil against the dollar. But, the back of hedging might well be broken if OPEC announced new supply and "frightened" some of the speculation out of the market. Like shorts covering in a squeeze when the price of a stock moves sharply, many oil hedges would unravel causing the downward correction to be magnified.

The price of oil sits in OPEC’s hand more than any other single place.

Douglas A. McIntyre

Posted on: January 6, 2008 – 6:32 am in Oil & Gas

The Consequences Of $100 Oil

A recent study in the UK says that the country will lost 1.5% of its GDP is oil stays above $100 for any extended period. According to The Guardian "half of this coming from higher domestic fuel bills, meaning consumers have less money to spend on other goods and services."

Even though some movement in oil is based on using it has a hedge against the falling dollar, a haircut of 1.5%, if applied to the US economy, could be the difference between very slow growth and the two months of negative growth that would define a recession.

Perhaps the world’s nations could get together and outlaw hedging

Douglas A. McIntyre

Posted on: January 6, 2008 – 6:21 am in Oil & Gas