Tuesday, 18 March 2008

Markets this week: A feast in time of plague

It was quite an action today in the markets, which all started yesterday and continued in the morning in anticipation of the upcoming rate cut by the U.S. Fed. The Fed did not dissappoint most of the more rational market players, cutting its Fed Funds rate by a healthy 75 bps, which brought down the rate to a meager 2.25%. Another contributor to the crazy rally was news on better than expected earnings reports released by Lehman Bros. and Goldman Sachs, plus anticipation of the big-big-big IPO of Visa scheduled for this Wednesday. The rate cut comes on top of the earlier innovation introduced and already actively utilized by the Fed, the term auction facility program.

It was very surprising for me to observe the bold 1% cut expectations by the markets before the Fed meeting. What were those folks thinking? That the rate cuts are some fun game and you can throw them in like cheap bones to dogs? The market actions and expectations lately are becoming more and more irrational and desperate, which spells the word "trouble" all over the place. My gut feeling tells me that this borrow-and-spend nation will see the price of these crowd pleasing gestures pretty soon. Producer and consumer inflation will not go away when the new empty money enters the economy at the steadily accelerating double-digit pace.

The action will probably be huge tomorrow on Wednesday, when the humongous Visa IPO is released to the broad market. Watch out for the big V coming! We already have the big C (i.e., Citicorp), which screwd up big time lately. Now, it is the turn for Visa which, I have to admit, has fairly good prospects in the long run; however, I am not so sure about Visa's success during the next several years given all recent developments in personal credit issues, growing personal and business bankruptcies, and upcoming consumer and producer spending cuts.

The participating U.S. and Canadian banks will surely try to use this IPO release as the excellent opportunity to patch their rotten books and to apply the related proceeds against any further writedowns that most of them will release during the upcoming first and second quarters. So, it is very possible that some of the big financial-services players will pleasantly surprise the markets later during the year with "unexpected" profits, which in effect will come from Visa IPO fees.

I am currently in a small short-term trading action in the financial services sector and will tell about the outcome by the next week when the short-lived frenzy, if it happens to take place, should be more or less over and the usual Bear market sentiment comes back with another wave of poop news.

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