Tuesday, August 28, 2007


The economic news this morning; lower home prices and lower consumer confidence. Long term stock market investors know that bad news is also good news. Just like there is no gain without pain, there is no good without bad.

Right now, each time there is a piece of bad economic news, the odds of an interest rate cut increases. A decrease in interest rates is to the economy like lighter fluid is to charcoal. The business economy and the housing market competes for money. The slower housing market has already resulted in lower interest rates. The long term bond rate hit around 5.4% in July of 2006 and is now below 4.9%. A half a percent interest on about 11 trillion dollars is lighter fluid for profits. The bigger move is in short rates. The 90 day t-bill currently trades well below the Fed Funds Rate. The rule of thumb is that when the t-bill trades at 10% below the Fed Funds Rate, you can expect interest rate to be cut. The second rule of thumb is that the stock market starts to move about a month before the first Fed Funds Rate Cut. After falling about 10%, the market has recovered about 5%. This recovery started about one month before the September 18 FOMC meeting.

As I have noted, I place more faith in the growing economy than in the probability of a rate cut. However, ever piece of "bad news" will increase the odds for a rate cut. RIDE THE BUCKING BRONCO! BUY BUY BUY!