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Key News

• Fed Cuts Discount Rate, Lends More to Avert Meltdown (Bloomberg)
• JPMorgan Agrees to Buy Bear Stearns for $240 Million (Bloomberg)

Key Reports Due (WSJ):

• 8:30a.m. Mar NY Fed Manufacturing Report. Expected: -7.4. Previous: -11.72.
• 8:30a.m. 4Q Current Account Balance. Expected: -$184B. Previous: -$178.5B.
• 9:00a.m. Jan Treasury International Capital Flows. Previous: $45.2B.
• 9:15a.m. Feb Industrial Production. Expected: -0.1%. Previous: +0.1%.
• 9:15a.m. Feb Capacity Utilization. Expected: 81.3%. Previous: 81.5%.
• 12:00p.m. Jan Chicago Fed Midwest Mfg Index. Previous: +0.1%.
• 1:00p.m. Mar NAHB Housing Market Index. Previous: 20.

Quotable

"Holy Cow!"

Harry Caray

FX Trading - Things are Heating Up!

I hope you’ve strapped on your body armor. Even though it’s only Monday I’d be willing to bet we’re in for quite a battle as the week pushes on.

The Fed got the pushing and shoving started with its weekend festivities. Just last night they decided to cut their Discount rate by 25 basis points. Their hope: make it easier for commercial banks to borrow money, shore up balance sheets and become more willing to lend.

This action comes on the heels of Friday’s Bear Stearns news. Basically, the Fed agreed to help ($30 billion worth of help) JPMorgan Chase buyout Bear Stearns who was nearing collapse.

The Fed’s ultimate goal is to stabilize markets and revive the flow of liquidity. They seem very determined, and I suspect the measures they’re taking will eventually achieve this end. But right now fear is dominating market sentiment.

Despite the rescue efforts, the Fed is helping us to realize just how concerned they are about the economy and the markets. They’re accepting serious liability with the Bear Stearns bailout. The $200 billion being offered in its Term Securities Lending Facility is another form of this. They’re taking on many forms of collateral in exchange for their funds.

Granted arrangements such as these aren’t completely new. The Term Auction Facility they instituted back in December was a similar plan. But with each additional step they take in cleansing the market of the "bad stuff" and getting commercial banks and other firms back on their feet, the Fed reigniting investors’ fears. In doing so they may be unable to avoid some of the adverse reaction they’re intent on preventing.

Adverse Reaction

The risk-taking assets are most in danger of panic sell-off. I’m not saying we’re in panic mode yet, at least not on the whole, but these investments definitely are feeling the pressure. Equities have become a good barometer for risk. They do well when risk-taking is prevalent; they do poorly when risk-aversion dominates.

In the currency arena it’s the ComDols that get smacked around - specifically the high-yielding Australian and New Zealand dollars whose values rise when investors dump borrowed money in their direction. Risk-aversion, however, sucks these borrowed funds right back out and impacts these currencies’ value in the other direction.

And let’s not forget about the U.S. dollar. It’s continually being beaten up for the opposite reason. The Fed, with all its economy-saving tactics in play, is undermining the buck. Each downward adjustment in the Fed Funds rate is like another shot at the dollar’s knees. Since August that rate has been cut down from 5.25% all the way to 3%. The widening yield-differential is a huge disadvantage for the buck and has become the primary reason for its record-breaking descent.

Unfortunately, tomorrow the Fed Funds rate might stand closer to 2% than 3% when the FOMC wraps up this month’s monetary policy meeting.

So where do investors go at a time like this? I think you’d have to agree that much of their money is going to the few "safe-haven" plays still available - think Japanese yen and Swiss franc. Money is also flooding into assets that will help counteract the negative impact of inflation - think crude oil and commodities.

But you know as well as I do that there’s one such investment that typically satisfies both criteria. I’m talking about gold. I don’t have too much else to say about the yellow metal except look at this chart, it tells the story.

It’s tough to say when the current market dynamic shifts, or when the dollar finally changes course. But keep your ears open for talk about central bank intervention - a combined effort to buy dollars. That may be the only thing to slowdown the dollar’s decline.

Jack Crooks
Black Swan Capital
http://www.blackswantrading.com

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