Tuesday, January 22, 2008

Where is the Plunge Protection Team?

The Fed announced an emergency 3/4 percent rate cut less than an hour ago. The cut caused the futures to increase slightly before sliding. The Dow futures increased from being 480 down to 300 down after the announcement before diving to 480 down again.

Many pundits believe that the Fed move is “too-little-too-late” and also empties their bag of future ammo. The move is likely to rally the market slightly before the slide continues.

The next question is “Where is the Plunge Protection Team?’ Traditionally as part of a market oversight committee, the Fed made cash available to large banks that would then turn around and purchase into the market to prevent large scale downside events. With the majority of the banks facing low capital ratios and trying the raise cash overseas, the banks are effectively muzzled and not able to act. The Plunge Protection Team is unlikely to step in with any scale to prevent the slide of this market, especially since it is the condition of the financial sector causing most of the distress.

This down-market is likely to mirror the scale and scope of problems in your grandfather’s generation. Pundits are already talking about today being the “most important market day ever”. However this story will extend beyond a single day. The excesses in the global economy will have to be washed out, this may take months or last for years.

The recent “No Place to Hide” commentary discussed the economic conditions. The market conditions simply reflect the broader issues. Hold on for the ride.


Katie said...

Whew, Good thing I quit my job last year. Crap. ;)