As always, RealMoney's bloggers were all over the market action this week, and we'd like to share the best of their recent commentary with readers of TheStreet.com. These posts best capture the intent of these blogs, which is to provide intelligent discussion on the issues each writer sees as most pressing that day.
Let's take a look at
on whether the
move is more than a temporary fix and
on the Fed's rate-cut timing.
Click here for information on
, where you can see all the blogs -- and readers' comments -- in real time.
Rev Shark's Blog: Be Flexible and Make Money in Any Market
Originally published on 8/17/2007 at 8:33 a.m. EDT
I am a man of fixed and unbending principles, the first of which is to be flexible at all times.
-- Everett M. Dirksen
As we contemplate the recent market volatility, one thing that becomes very clear is that there are an awful lot of market participants who need the market to always go up. Instead of welcoming volatility as a great opportunity, it is decried by these inflexible folks as a horror that will destroy the financial system and doom us to an eternity of financial hell.
The truth of the matter is that if you are a small, flexible, fast-moving individual, this wild action will create great opportunity for you. You just need to be patient, make sure you have plenty of cash on hand and have cut your losses. Great opportunities don't come when the market is going straight up for months. They come when we have big shakeouts and when emotions are high. Even if you are suffering some losses in the near term, you should be welcoming the possibilities that will eventually emerge.
A big part of this inflexibility on the part of individual investors is due to the cheerleaders in the media. There seems to be some rule that they must have the attitude that up is always good and down is always bad. If you look back at the euphoria in the media as the
hit 14,000, it is sickening to see the damage that it eventually did to many who were caught up in the celebration.
However, investment advisers and money managers who always need the market to go up tend to cause the most trouble for individual investors. They have to have a bullish bias and they will inevitably tell us to stay the course and not to worry. They want us to forgo our ability to be flexible and react to market conditions because they need the emotional support of other investors who will help them cheer the market back up.
Smart individual investors, who stay flexible, quite often find themselves doing just the opposite. They root for volatility and further market corrections because they know that out of chaos will come opportunity.
It is tremendously liberating not to have a strong allegiance to a particular market direction. The ability to be open-minded and to adjust as conditions develop empowers you. We may have no idea where this market is headed, but we can be confident that we can profit it from it if we are ready to adapt as things change.
And adapt we must. After the strong finish last night, a little carryover of momentum seemed like a good possibility, but Asian markets were pounded as the yen continues to rise, killing exporters and the carry trade. That has caused stocks in Europe to reverse sharply to the downside after being positive to start the day.
We have option expiration today, which is likely to lead to some volatile and random action. There is a lot of talk about how the unwinding of various strategies may cause some downward pressure. We'll have to see how that plays out, but we are very likely to see some more big swings today.
Steven Smith's Blog: Market Passes Through Looking Glass
Originally published on 8/17/2007 at 9:55 p.m. EDT
Today is set to be a wild one with this surprise move by the
, cutting its discount window rate to 5.75% from 6.25%. The
index futures rallied 3.5% in a matter of minutes following the announcement.
But beyond the immediate reaction, this move raises some questions as to whether this is a temporary fix; does it address the deeper-rooted, longer-term issue in the credit and housing markets?
And will the resulting bounce this session, which seems to avert what looked like it could be a massive options expiration meltdown day, have any lasting effect? The technical picture is still negative and it seems too picture-perfect for the market to simply stop going down on the day it hits the 10% correction mark, simply resuming a new leg of a bull market.
One thing this move does for sure is keep volatility running at six-year highs. And for active traders, that is a good thing.
Let's wait and see how this day plays out. It should be a good one.
Tony Crescenzi's Blog: The Fed's Timing Is Exceptional
Originally published on 8/17/2007 at 10:58 a.m. EDT
The timing of the
surprise discount rate cut was exceptional, occurring at a time when speculators would arguably have significant difficulties reversing their short positions in numerous asset classes. The Federal Reserve is likely to lower the fed funds rate by at least a quarter-point by the Sept. 18 FOMC meeting.
The cut in the discount rate will impart almost no direct benefit on the U.S. economy given that the discount window is rarely used. In fact, only $187 million was borrowed on average each day for the past year.
Moreover, most debt obligations are tied to the fed funds rate, which is why it is imperative that the Fed validate this largely symbolic but important action with a cut in the fed funds rate.
The idea that the need for a cut in the fed funds rate is now reduced is weakened substantially by the puny economic benefit that the cut in the discount rate will impart, and, more importantly, by the fragile state of investor confidence.
The discount window is open to depository institutions but it is also available "in unusual and exigent circumstances" to individuals,partnerships and corporations that are not depository institutions if, in the judgment of a Federal Reserve Bank, credit is not available from other sources and failure to obtain such credit would adversely affect the economy. Such credit has not been used since the 1930s.
Although new Federal Reserve rules were changed in 2003, in part to reduce the stigma of borrowing from the discount window, a stigma probably still exists. The Fed's Reserve Banks do not disclose the names of borrowers from the discount window, but inferences might still be drawn from the location of the Reserve Bank that receives the request for a loan from the discount window. Moreover, there is always the risk that information leaks out, even though it would be improper.
The stigma of being seen as having to ask the Fed for money instead of the markets acts as a deterrence against its use. Only to prevent insolvency or to sustain the viability of operations would a company likely seek substantial amounts of credit from the Federal Reserve.
Nevertheless, the cut in the primary lending rate to 5.75% closes the gap to the 5.25% fed funds rate, which should help reduce the stigma a bit. It is likely that the Fed will restore the percentage-point spread between the primary lending rate and the fed funds rate when credit conditions stabilize. Doing so would be a symbolic act signaling increased confidence in a return to normalcy in the financial system.