Wednesday, October 08, 2008

Early Look: Fed Cuts Rates, Sparks Wild Trading

The trading so far this morning has already been fast and frenetic. The Fed announced a coordinated rate cut before the open, but stocks opened lower nonetheless. The Dow has already traded in a 400-point range in the first hour. Currently the market is flat.

The Federal Reserve, European Central Bank, Bank of England, Swiss National Bank, and the Bank of Canada made an emergency inter-meeting 50 basis point rate cut. The fed funds rate is now 1.50%. China cuts its key rate by 27 basis points. And Britain announced an $87 billion plan to bailout its banking system.

Despite the rate cuts, the credit markets remain tight this morning. These liquidity injections take some time to work usually, but I think they are a much needed step in the right direction. The Treasury also needs to move as quickly as possible to implement the TARP program and start putting some of that $700 billion to work in our markets.

September same-store sales came out this morning, and have been mostly disappointing. No big surprise there, as the slowdown and market shock of September have probably given consumers pause.

But pending new homes sales for August were surprisingly strong, coming in at +7.4% vs. consensus of -1.3%. So maybe some of that money on the sidelines is starting to find value in the decline of home prices.

Asian markets were pummeled overnight. The dollar is slightly lower this morning, while gold is higher. But oil inventories showed a big build, and that has helped push crude prices down near $88. The 10-year yield is higher to 3.57%. And the VIX remains incredibly high at 55.15. Earlier, it tested it recent highs from Monday above 58. Yesterday, I bought puts on the VIX.

I think if people weren't worried about the short-selling ban expiring tonight, the market would be up more. I actually hope they either extend the ban, or reinstate the uptick rule.

Nonetheless, markets don't often move down in a straight line like they have. As soon as everyone jumps on a trend, the market usually throws them a curve ball. As such, I would not be surprised to see a 500-1000 point Dow rally at some point.

long VIX puts


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