The Fed Is Doing a Good Job, While Goldman Might Stumble

Again, another huge pullback in the market and a bank failure just before the next Fed meeting. Coincidence? Maybe. Hard to believe though. The market has been successful each time it has tried to pressure the Fed into cutting rates so far. This time Lehman (LEH) is the victim. I can understand that Lehman was in bad shape. But the fact that traders seemed to realize this just before the Fed meeting is odd, at best. The stock traded in the $15-20 range for months, and then in just a couple of days, people realize that the stock is worth $3, trading a billion shares.

The Fed is keeping its hand strong though. Bernanke knows that if they lower the rates as the short-cutters on Wall Street want him to, the dollar will take a big hit, damaging the US consumer. Plus, from the very beginning, the Fed knew that lowering rates would not solve the problems of the US financial firms. But they had no other choice. The rates were going to be lowered at some point anyway and back then there was no point in pushing the S&P down to 900 by being stubborn. However, this time fundamentals are different. The rates are low enough that housing can bounce back.

Wall Street firms are a force to be reckoned with and they still might get what they want when the rate decision is out. However, by not backing up a possible Lehman bid, the Fed has shown that the rate cuts so far were actually aimed at propelling the economy, not investment banks. It takes some serious courage to let a bank like Lehman collapse and the Fed has shown it has what it takes to do so. After all, maybe the government knows what it’s doing, maybe it is on our side.

Lastly, I think if you already have open positions, you should not close them out yet. The market is likely to rally whatever the Fed decision is mainly because this financial debacle has come to an end with the Lehman collapse.

Goldman (GS) earnings are almost out. Don’t play the earnings. Goldman had a huge commodity exposure and it might have had a terrible quarter due to the unwinding of the commodity trades. Plus, it might reveal some unexpected exposure to the problematic hard-to-value assets. It still bugs me that it has weathered this financial storm with so little damage. It is very possible that it might have some hidden problems in its balance sheets that it hasn’t told us about yet.

Disclosure: No position in stocks mentioned.

Comments

[Andy Singh:]

Goldman stumbled and market crumbled! No one is safe and perhaps cash under your mattress is the safest investment now.

2008 Sep 16 09:54 AM

[Owen:]

John, what you are telling us is this: if the price of a stock drops precipitously, it must be in trouble, but if the price remains stable, it must be hiding the truth from us. Ignore earnings reports, and trade based on your fear of the unknown. Did I get the gist of your article right?

2008 Sep 16 11:27 AM