FOMC Day - September 18, 2007

September 18, 2007
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FOMC Day

We expect the normal lateral pre-announcement track for the indexes today. We still believe that the FOMC will not change rates, but if Fed Funds is lowered we would prefer a 25 basis point cut.

Credit Liquidity Crisis - Rate Cuts Are Not the Way Out

Let's repeat a lesser known fact. The Federal Reserve does not regulate banks. It regulates bank holding companies. It uses an indirect tool, interest rates, to attempt to control the supply and availability of money and credit in this economy.

The Federal Reserve does not control or regulate the investment banks, like Goldman Sachs, or brokers, like Merrill Lynch. National banks, investment banks and brokers created this financial bubble. They loved it when their bubble was growing and glowing. Now, they just don't want to use their own capital to clean up their mess when the bubble burst.

They want to use our Federal government's capital mop and bucket.

Big Cut - Big Bear?

If the FOMC lowers by more than 25 basis points, then we may have to re-evaluate our view of a continuing Bull market. If you wonder about what would make me turn neutral to bearish for the longer term, it is a big rate reduction. The financial credit/liquidity seizure is a normal event in cyclical markets. It just occurs that this year's event is in the CDO market. Same story but different economic sector.

The "cleansing" must and will come, with or without a rate cut.

In past decades, the American economy was self-sustaining and self-fulfilling. The gradual change to its economic influence on other global economies today took about 50 years. Current domestic economic and federal policies affect significant changes around the globe in foreign domestic economies.

The British Northern Rock Bank story is a minor example of the ripples that come from this country's economic events. The credit crisis will not be solved by rate cuts, nor by a change in Federal Reserve monetary policy. The financial creators of these debt instruments must resolve this problem by publicly purging or writing down these assets. The investors in these credit vehicles will have to take their losses, and then make their way into the future.

Capitalism is not a panacea of endless profitable gambits.

Capitalism renews itself by shedding excess and, that shedding comes packaged with pain to those who invest in risk that fails. The shedding produces a leaner and more innovative, more expansive economy. The expansion filters deeper and deeper into the lives of all who live under the tent of a free economy. The benefits to the individual as well as to the economy, must be measured against the risk taken to achieve those rewards.

The perceived risks in the CDO investment market turned out to have a severe penalty measured against the modestly higher rates of return that are available in a U.S. Treasury risk free investment. Investors believed the creators and promoters of the fancy financial exotica. Most investors could not explain the risks nor understand the consequences of those risks becoming real.

Rate Cut Mania

Which has been hyped more, the credit crisis and the imminent collapse of the U.S. economy, or, that a Fed Funds rate cut of any amount will solve all of the financial and CDO market pricing problems? The two lies are Big Lies.

Big Lies shrouded in mystery, preached by latter day sainted economists and other media pundits who are believed by the masses, if they are heard often enough without counter arguments. Attitudes and behaviors are changed. People begin to wonder if disaster awaits them in the near future.

Isn't it a bit unusual that the creators of the problem are announcing the problem and its severity, while in the same sentence demanding the solution they have devised?

Nobody asks, "Who wins and who loses, if we do what you say to do? Who wins and who pays if your problem is solved?" These global financiers will answer questions only after you pay to fix their problem. It's the least they can do right.

Repeat - "It's a correction in a Bull Market."

If the FOMC cuts rates today, I believe that the correction may last longer and may drive index prices deeper than necessary. It doesn't automate the end of the Bull, but it might.
What does a rate cut really mean? It doesn't mean that real interest rates are too high. A rate cut does not mean that this economy has suddenly turned from growth to contraction in just 8 weeks.

A rate cut today will be seen as a concession to those who are unwilling to help themselves, but are able to take their own measures to solve their problems. "It is too painful!", they say. They want the Fed to kill the American economic goose that's been laying golden eggs, because they are sure the goose has a reproducible gold factory in its gut, instead of a gizzard.

The Federal Reserve will be seen as weak.

What a big rate cut will mean to the global markets is this: Sell U.S. dollar-denominated assets now! The $US will take a hard hit. Then the Asian carry trade adds to the slide in U.S. equities. The Yen goes home. Then, the perfect storm is waiting for the first real misstep by the Fed or the government to launch an out of control spiral downward.

This economy is not dying.

The U.S. economy is still slogging along quite well. Don't believe it? Then you don't know the American economic mystery or Americans themselves. Nothing stops them. Nothing. Some regions of the country aren't doing well like Michigan and Ohio. Some regional construction is well below the rates of 2005, like in parts of California and Florida. All are victims of their recent excesses and successes. Recovery for those in trouble depends on how they correct the causes of their troubles.

If Americans or their economy appear to be slowing or stopped, it's because they are down shifting to climb the next mountain of adversity. The only effective adversary the American people have is their own apathy. "We have met the enemy. It is us."

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I hope for no rate cut before the correction ends. Let the market's nature takes its course. After the correction, a rate cut will be okay but irrelevant to the American markets. Currency markets and foreign investors will still sell $US denominated assets, but it will be into a rising bull.

Forgotten lessons have to be re-learned don't they.

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As with any outcome today, we will be trading it.

We continue to expect 10-year Treasury Note yield to touch at least 3.94% and potentially 3.80%.

Let's see what reaction the P.P.I. brings before the opening.


W. B. Busin

Will you be Short? I hope so.

September 13

1420 EDT

"Trade what you see, not what you believe you see."

What do you see? What do you see on the daily chart? on intraday charts?

I see a daily sell on momentums, an hourly sell on sentiment (daily has been on a sell). But the biggest sell signal is the volume. Where did it go?

It does not really matter if the indexes go higher or lateral from this hour of Tuesday, September 13th. I trade with confidence, but am rarely sure.

At this point, everything I know and see is telling me to be short - as short as you can be (not catastrophe, or end of world).

There are a few times in a trader's or investor's life when they see the plain written word and signals to enter a market and take 1,000+ Dow points home with them in a few days. Further, after taking that 1,000+ points in a few days, the trader or investor has the opportunity to do it again by reversing the position.

In this situation, it is be short now, then be long at the lows in a few days. In my view, this is like knowing what was going to happen on September 27, 1998, or knowing what was coming on October 12, 1987 and reversing on the October 20th lows.

You may not be comfortable taking action now. Then you will likely stay in cash or hedged. If so, then that is what you should do. Investing and trading is about you and your plan. First, plan to not lose capital, then plan to make some. Follow your plan. Then trade it. Execute the plan.

If an investor wanted to be long, then the investor would buy U.S. Treasuries and hold for a few days.

Remember! The uptick rule is gone. The only downward protection to the indexes is the collars from the exchanges.

Lateral track into FOMC Meeting, Sept. 18th

Timing Market Turns
W. B. Busin Group Publishing

Current positions - 100% short

It doesn't matter if the FOMC cuts the Fed Funds rate and possibly cuts the Discount rate again. It doesn't matter if the FOMC doesn't cut rates at all. The straw man has been assembled, dressed in sacrificial sack cloth and trudging to the financial gallows. The Fed will be blamed no matter what it does.

That is like setting your house on fire and blaming the Fire Department for not stopping you.
Several weeks ago in this TimerTrac newsletter, we projected the 10-year Treasury Note yield to touch 3.94% and possibly 3.80% at the low of this stock market correction. We believe that those projections are still on target, as the Note yield closed today at 4.408% after breaking late 2006 support at 4.40% last week.

Tap on this Link to the 10-Year Note yield chart:

http://www.market-timing-wbbusin.com/10yearNote09122007MarketTimingbyW.B.Busin.html

If the stock indexes and Treasuries walk quietly laterally towards the FOMC meeting, Sept. 18, we expect rates to then drop quickly and bonds to register their final bullish upward leg. We expect stocks and indexes to drop downward toward the next published Time Locus turning point, Sept. 24th / Sept. 28th.

We expect that the long term 12-18 month look forward for debt will be extremely bearish since we project the yield on the 10-year Treasury Note to reach 5.5% within weeks, and at least 7.0% next year. We will add the 10-year Note to our timing coverage this month.

We view the end of early July high as the end of that bullish move in rates. The June high was just the 3rd wave high of the last leg from the March 2007 low.

Daily Sentiment remains fluctuating within the neutral spread.

http://market-timing-wbbusin.com/Daily_Sentiment_Index_-_Market_Timing_by_W._B._Busin.html

As for the next 4 trading days, we are and will likely stay 100% short in all index positions, both Swing and Investor. The risk is to the downside after the attempted rally into Fed Day.


W. B. Busin
W. B. Busin Group Publication