lovevictoria

It used to be that, market would look for support from the Fed in a turbulant time like this. And people would always be wondering if the Fed WILL save them. That implies that, they believed the Fed had the power to save the market.

Now, things are getting so bad and the Fed has lost so much credit that, what people should be asking instead today is, "CAN the Fed save the market?". Fundamentally, we all know that, there is not much left in the tank for Fed to use.

Personally, I think any change in the rate will do more harm than calm to the market. Fed's best strategy is, stay put and let the market work its way out. Raising rate is out of the formula at this point. It's suicidel to the economy that badly needs cash. Cutting rate would pretty much tell the world that, the Fed has lied to them time and time again about the true economic situation. Any further rate cutting will only be interpreted as a desperate act of the Fed instead of a helping hand from the Fed.

We all know the disaster in the financial sector these days. However, I don't believe we are seeing the worst yet. As I have mentioned through the months in my previous posts that, Fed's intervention will only slow down and delay the imminent collaspe in the banking system, but will not prevent it from happening. Unforunately, the momentum of the destruction is so powerful that, even Fed's buying time strategy failed. Worst yet, it back fired now. All the assurances and the unrealistic economic data not only did not solve the problem, but also jeopardized Fed's credibility. The public is at the verge of losing total trust to the Fed.

Short term, the market is close to the climax of reaching a bottom. However, for those who expect a powerful rally, they could be disappointed. Unlike the previous 2000 bear market which had a housing bubble bailing it out, this bear at this point lacks the fundamental support for a huge counter rally. Fianancial has so much weight in the US economy in general that, its collapse(or so called correction) has enormous effect to the rest of the economy. The bankruptcy of LEH not only caused huge loss of stock holders, but also caused huge loss of LEH's bond holders and a lot of bond funds will be affected. This nerve breaking bear will affect babyboomers who are approaching their retirement and a large number of them will not follow the so called conventional wisdom, and they will sell, sell and sell. And guess what the funds will sell? They will not sell those junk stocks that do not worth much anymore, they will sell good quality companies that can provide them more cash. This domino effect will certainly prevent the market from substaining a strong rally. It's ironic that, the once cash rich country now, all of a sudden found itself cash trapped. AIG's being cutting to junk officially cut off the life support of AIG and it could signal that, AIG's days are numbered.

The last couple of weeks have demonstrated one more time the danger of trying to catch a bottom in a big bear market. I am not ruling out that before this bear market is finally over, we will see some powerful rallies. However, as long as the housing picture is unclear, as long as the financial system is not being overhauled, those rallies can only be treated as selling opportunities, not buying. These couple of days are dark days, but they are not the darkest yet.

Let's preserve our capitals so that we can have the power to go shopping when the darkest days arrive. This bear market would come out to be one of the life time opportunity for those who survive with buying powers. Whoever laughs at the end, will come out a much richer person.