Thursday, August 16, 2007

Fed Actions

It is amazing to watch the now daily infusion of Fed capital, and the market just shrug it off.

With so much trading either computer driven or redemption driven (hedge funds needing to sell off as unhappy big money investors in their funds who expected LOW volatility vote with their feet), it appears at times the market has a mind of its own.

I have read many times that estimates are that 70% of daily volume in the domestic markets is now either hedge fund/computer driven. In times like this, it seems quite apparent. Either that or a lot of very 'smart' money (as they love to call themselves) are throwing in the towel, and running for the hills.

While a 10% correction is not that bad in the big picture (and long overdue?), the short time span it happened in, is the striking feature. Generally these type of selloffs are violent in nature and this one is no different.

Now the question becomes, what is the catalyst to inspire buying? I assume many of the retail longs are throwing in the towel right about now or moving to buy a safe drug stock or PepsiCo. Probably exactly at the wrong time. That's generally how it works. With the market seemingly ignoring the Fed's almost daily infusion of funds into the market, will they be forced to cut rates, even though Bernanke clearly does not want to. From a fundmanetal perspective the Fed should not have to - but if the emotion of the time gets too severe, they might be forced to, especially if credit markets refuse to open to good quality borrowers. When AA credit is unable to find a home, that is a problem.

This "waterfall" selling is generally a good time to be buying (in the past), so I doubt it won't be this time as well - although you need cash at the ready to do so (always a catch, eh?) :)

While these credit issues won't be going away anytime soon, it's more of a matter at this point of when the market is going to 'price' it in. At this point however, it seems more about emotion than anything else. Hence the fascination with the market - its made up of hundreds of thousands of human emotions... which generally rule in the near term. Fundamentals? Thats for those long term players :)

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