The Fed Does The Expected
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The Federal Reserve did exactly what everyone expected yesterday by cutting interest rates by a quarter of a point and saying that the economy remains weak.
And the market responded with a 200-point plunge in the Dow in less than two hours, one of the steepest drops in the average in some time.
Investors want the Fed to say that there are signs that the economy is bottoming. But the Fed isn't obliging because, of all reasons, the economy isn't showing signs of a bottom. It's a strange dynamic: the Fed sees the same data as everyone else. If anything, the numbers have gotten worse since the last Fed meeting, with weakness beginning to spread from technology and manufacturing to the service sector and consumer spending.
That it takes the Fed to drive that point home shows the outsized powers that the market has attributed to the Greenspan Fed. And as one observer pointed out recently, that could be part of the problem. Everyone over invested and overspent because they thought Alan Greenspan would always save them. Risk was removed from the equation by the Greenspan magic of 1987, 1994 and 1998. And the result is corporate and consumer debt and over investment that are so high that the economy has run out of room to grow. There is no magic this time. This one will need time to work itself out.
The semiconductor equipment book-to-bill ratio came in much better than expected last night, contributing to the positive tone in the futures this morning (but not quite as positive as it appears: fair value on the Nasdaq futures is +10 points this morning, and fair value on the S&P is +3.6 points).
July was the fourth straight month that new orders rose, a positive sign for the chip sector. However, orders remain far below where they were in the first few months of the year, let alone last year's record levels. It's a sign that the bottom may be in, but that growth could be slower than expected.
Speaking of chip stocks, remember all those upgrades last month that claimed the bottom was in? The Philadelphia Semiconductor Index has fallen almost 20% since then. Investor's Business Daily reported that top mutual funds were heavy sellers of communication chip stocks last month.
They don't call them "sell side" analysts for nothing.
The CRB commodity price index closed below the important 200 level earlier this week, showing that demand remains weak. However, the index is still some distance from showing genuine deflationary pressures. According to Elaine Yager of Investec Ernst, the CRB would move from a disinflationary mode to a deflationary one on a monthly close below 173, which would wipe out an entire generation of consolidation in the index dating back to the early 1970s. Here's a link to a monthly chart of the CRB - http://www.mrci.com/pdf/cr.pdf - note the huge amount of air below the 173 level.
And finally, Warren Buffett, the greatest investor of our time, has been selling financial stocks like Citigroup
as of late. It is not known why Berkshire Hathaway is selling its sizeable financial positions, but when The Master makes a big move, it's always good to take note.