Saturday, September 15, 2007

Market Mayhem – “Expectations” Matter

Because of the sub-prime fiasco, the “Market” is expecting a significant rate cut – fifty basis points. Real or not, this expectation is priced into the current stock market levels. For the investor, this presents an interesting problem:

Scenario 1: Fed drops rates 50 basis points. I expect the market will move up, but not dramatically. A big move means the fed is fighting a recession. Never good for stocks.

Scenario 2: Fed drops rate > 50 basis points. This “Market” will say the fed is panicking and/or has data to justify a huge move. Market tanks.

Scenario 3: Fed drops the rate <50 basis points. While the Fed would likely issue an “everything is fine” statement, the “Market” has a 50 basis point move built in. The market will fall to compensate for the lower cut. In addition, the “Market” will get anxious and flee to quality.

Bottom Line – we better get 50 basis points or the market will tank.

My Strategy – Play Defense ahead of the move.

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