Saturday, February 20, 2010

Op-Ex Crash Didn't Happen. Now What?

The alarming drop in the stock futures overnight didn't result in a huge drop in the regular hours Friday. After the initial drop, all major indices recovered into positive territories. And just like so many Op-Ex (option expiration) day, the market ended basically flat - killing both puts and calls but more puts than calls.

So what was the point of this Fed's exercise of announcing the discount rate hike on Thursday after hours, other than letting Goldman Sachs make a ton of money from fearful investors in the fter hours futures market (I'm guessing, of course)?

As soon as the rate hike was announced, the financial media, particularly CNBC, went on overdrive to spin it positive. It was unreal. Here's one from CNBC, in early Friday morning before the market opened:

Who's Afraid of the Fed? Market Actually Wants Rate Hikes
(Jeff Cox, 2/19/2010 CNBC)

"Forget the cosmetic move of raising the discount rate—the day the Federal Reserve really decides to start putting the brakes on growth could actually be a happy occasion for the stock market.

"Raising interest rates and stemming the flow of liquidity to the economy might otherwise be considered a barrier for stock market growth, but many investors are in fact eagerly anticipating that the move will add another level to investor confidence.

"Though the Fed announced a surprise hike in the discount rate that it charges banks to borrow money, the central bank continues to indicate that its more significant funds rates will stay near zero for the foreseeable future.

""Most people assume that the day the Fed starts tightening, the market goes down. That might be the short-term reaction," says Uri Landesman, head of global growth strategies for ING Investment Management. "I'm going to be happy because it's going to suggest to me that things are starting to get better.""

The article continues, so you can click the link above and be happy that everything will be alright.

I have a hard time swallowing the line. I don't see "the flow of liquidity into the economy", as this CNBC writer clearly does see. If he is defining "the economy" as Wall Street economy, then he may be right. But on Main Street, outside the big corporations, money and credit are not there. Banks continue their utmost effort not to lend to businesses and home buyers. They continue to cut back on credit to consumers. And they continue to prosper.

That's all the Federal Reserve cares, I'm afraid; that its member banks, particularly the big ones, continue to prosper. The Federal Reserve probably couldn't care less about Main Street economy, even if that's supposed to be part of their mandate. Of course they don't say that; instead they say the Federal Reserve must remain "independent" - meaning "independent of the fiscal policies of the government that includes economic well-being of the nation".


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