Should the Fed Do Nothing Today?

Includes: DIA, SPY, XOM
by: Philip Davis

I was browsing the archives to check out what we were thinking around the last Fed meeting (Halloween) and it turns out that was the Monday, with the Dow at 13,727 (up 840 points in 6 sessions), that I accused the markets of yadda-yaddaing the bad news as we irrationally ran up into the Wednesday meeting. What’s really funny about that day is that, in the morning, UBS had forecast a $600M loss, an amount they topped yesterday by $9,400,000,000. Ah yes, happy days are surely here again!

Nobody believed me then either… We had been shorting TSO at $65 and they said I was mad when I said: " I will drink the gasoline if these guys have a good quarter!" (NYSE:XOM) was at $93.50 and we were painfully shorting them too. (NASDAQ:WYNN) was our 10/30 focus put at $170 (that went well!) and we also made the very obvious play of shorting (MER) at $68, who had just lost over $7Bn in sub-prime write-downs and ditched their CEO. (NYSE:TSO) and WYNN are still dead but MER and XOM have made spectacular comebacks - it’s like nothing ever happened…

We closed our pre-Fed Tuesday at 13,792 despite oil holding $90 a barrel and the S&P/Case-Shiller home price index showing a 4.4% decline in home prices. We added puts on DRYS at $130 and BIDU at $360 and it’s kind of interesting how again, one comes back and the other doesn’t. I was wrong about (NASDAQ:DELL) at $29, figuring a tech exporter should fare well with the declining dollar (76.5 at the time). We opened Fed day with a Dow strangle in place and boy do I wish we had done that last week! At 8:30 am we got a 3.9% GDP report and, with our new (and totally BS) 4.9% GDP report now in hand, I will repeat what I said then:

"The Fed absolutely should NOT cut rates today, the economy grew at 3.9% EVEN THOUGH housing was collapsing. All a rate cut will do is stoke inflation and IT IS THEIR MANDATE TO FIGHT INFLATION, NOT LINE SPECULATOR’S PROFITS! A rate cut is still considered "in the bag" on the futures market as the governors are under enormous political pressure to deliver a good market into next week’s elections."

said so much in my eveing post. We had cashed out our calls on the Dow’s failure to break 14,000 as I said in Wednesday’s member comments: "This is not a rally, this is limping halfway back to our 14,200 high from a sharp and relentless drop to 13,600. The big drop came 10/19 at 13,900 (to 13,550) after a protracted sell-off from 14,200 on the 10th. So here we are on the 31st at 13,930 (and boy was that finish forced!) acting like everything is great. After the last Fed blast (9/18) we drifted flat along 13,800 for a week so it’s all going to be about next week’s action. Today is meaningless." The WSJ summed it up nicely with this statement:

"Of course, the reaction out of the equity market wasn’t all that bewildering. After all, allow a six-year-old child to eat all of his Halloween candy, and one can’t be blamed when he’s bouncing off the walls a few hours later. After all, the stock market got what it wanted, which was its candy, as the Fed apparently was swayed by the market’s expectations, which basically amount to worrying that something worse was going to happen (even with stocks near record highs and oil closing in on $95 a barrel, but never mind all that). “There have been numerous recessions and market crashes caused by credit going from being too loose to too tight,” notes Charles Rotblut, chief strategist at Zacks Investment Research. Fear was enough — the Fed fearing the markets. So the Dow industrials finished 136 points higher, a gain of about 50 points from the pre-Fed rally, as investors gobbled up whatever they could by taking the “it’s all good” approach to analysis of the Fed statement. That is to say, the economy is doing well but could slow, which is still good, because more rate cuts! And if not, no worries, hey, look, candy. "

That reaction lasted all of 17.5 hours as the next morning the markets opened at 13,924 and, before you could say "I need another rate cut," the market had fallen 402 points and finished the day much nearer the low than the high at 13,567. The proximate cause of the collapse was an earnings miss from our pals at XOM, even with oil flying to $95 a barrel thanks to Uncle Ben’s dollar dump. XOM fell 10% over the next two weeks, as did the Dow, which bottomed out a month later on 11/26 at 12,707 when I said to BUYBUYBUY as everything was on sale.

I had written an article in mid-October, when I was predicting the post-Fed crash, called ""How to Spot a Market Correction a Mile Away," stating everything I needed to know about how to play this market I learned by watching Rodney Dangerfield in Caddyshack! When the market is full of sheep, it’s easy living for the wolves and I am ashamed at the behavior of my fellow investors as they rush headlong into the same potential catastrophe that just burned them 40 days ago. Even the President knows it’s shameful to get fooled again and again by the same nonsense yet here we are, with the Dow 65 points below our last Fed day, having run up 1,000 points in 10 sessions just so we could get right back where we started from.

The high of the day on Halloween was 13,990.65, anything less than that today is likely to be viewed as a spectacular failure. The dollar’s in the same place, oil is in the same place, gold is in the same place, the Nasdaq is 141 points lower, the S&P is 34 points lower, the Russell is 37 points lower, the NYSE is 311 points lower, the SOX are 31 points lower. I’m sure Larry Kudlow would say "This is great, look how much room Goldilocks has left to run!" but, as a normal, thinking, human being from this dimension, I have to say that I have some concerns. I hope I’m wrong and, if I am, we’ve got a long run ahead of us to ride the Nasdaq to the moon but, for now, I’m rolling up the index puts and staying mainly in cash because there’s something disturbingly familiar about all this…