Tuesday, October 28, 2008

Money talk. . .

Well, today was an amazing day for the Dow Jones Industrial Average. Today the Dow jumped 889.35 points to close at 9065.12. The Nasdaq and S&P 500 also did amazingly well, but why?

We all know that we are poor as hell. We all know that times are hard and that the global economy is headed toward a huge recession. Why so well today?


My thought is that since the Fed is set to cut the Federal Funds Rate from 1.50% to 1.00% tomorrow, the Dow is pricing this in. Normally, when the Fed cuts rates the Dow goes up and the US Dollar goes down. However, the market usually reacts to such news a day or two in advance. For example, the Euro rose against the Dollar today to 1.27 from a 1.245 level. Why is the Euro strengthening? My feeling is that this is due to the possible rate cut tomorrow.

If the Fed cuts to a 1.00% level, the Euro (if not over-bought) should stay at the same level or decrease against the Dollar. If the Fed cuts below 1.00% (not predicted), the Euro will gain more strength against the Dollar. Why? well, simply, when interest is low in your country, no foreign investors want to put money into your country...They want a return on their investment!

So, if this Fed Cut is 1.00% tomorrow, look to see small moves in the DJIA. If the cut takes us below 1.00%, look for another rally in DJIA...that is, if investors are paying attention to details!

So, the unfortunate part about this rate cut is this...

When the Fed Cuts rates, the DOW increases, Commodity prices increase, but the Dollar...she weakens. That means as Wall Street takes profits from the Cut, we, the consumer, suffer. High commodity prices and a weak dollar = RECESSION...big time! (We had this back in February-April).

So, anyway, tomorrow should be interesting.

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