Monday's (August 20, 2007) news highlighted the slowing down of sales
because of apprehension over anticipated actions by the Fed.
(Ironically, there was an increase in buying before a quiet closing,"
not my words.) There had been rumors the Fed was going to cut the
discount rate. If so, there would have been increase in desire for
future expansion. This translates into more faith in stocks' upward
movements.
Well, the Fed didn't make the expected announcement. Like most
monkeys, you pull their chain, and you see an immediate reaction. One
would think that those active running around in the stock market would
take a little time out to learn just a little economics. Then they
wouldn't jump next time someone tries to get their goat..
The stock market doesn't seem to have learned from history. Let's
break it down. The market watchers, I prefer to call them crystal ball
gazers, were all set for a Fed announcement that would instill more
confidence in the credit markets. If you pay attention to the news,
then you will know the worries are currently centered around the
mortgage market.
The money markets react to announcements according to their
preordained way of looking at things. The problem is their usual
reaction is wrong. If you understand their errors, you can make better
investment decisions for yourself personally and for your company.
If the Fed had dropped the discount rate, it would have been a sign
that getting loans would be a little easier and that the Fed was
taking a stand against higher interest rates. However, the point is
that all economic decisions have time lags built in. (The only
immediate action is what the buyers do on the stock market that day.)
Once the Fed lowers the discount rate, the banks usually start
lowering their rate. What is never mentioned is exactly what the
discount rate is. It is only relevant to short term loans, not
mortgages. The discount rate is the best rate a bank will offer to a
customer with good credit he has never seen before. It isn't the rate
everyone gets. It is a bench mark, however, that serves as a
guideline for other rates. Even so, it will be awhile before this
action will be reflected in other types of loans.
The lesson here is to understand that most crazy days on the stock
market are just that, crazy. Those folks seem to enjoy running around
like a chicken with their head cut off. If you are in the market,
and are enough of a risk taker, there is always a chance you can make
some good money by doing exactly the opposite of what the market is
doing for the time being. This would require ongoing diligence to
ensure that you had a chance to change your bets as soon as the market
swung back the other way.
When it comes to making wise economic decisions, the daily stock
market is the last place on earth to find answers.
Laura Bell
writer@[EMAIL PROTECTED]
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