The Bernanke put.

by Larry Levin

Bernanke & Co. gave the market what it demanded, a .50-basis point cut in the fed funds rate. Like a summer Olympics 4x400 relay team passing the baton, the "Greenspan put" has been successfully handed to Ben Bernanke. If stocks go down, cut rates - period. Today's move makes a 1.25-point mega-slash in just 10-days. Nuff said.

Before the FOMC decision was announced, there was other interesting news from UBS, Merrill Lynch, and the GDP data.

This morning's GDP report showed the US growth slowed to its weakest pace since the end of the 2002 recession. The data showed 4th quarter growth of just .15%, or .6% annualized, which was far below the expectations of 1.1%. The final growth rate of 2007 was 2.2%, again the slowest since 2002.

"Even if fourth-quarter GDP growth was not negative, it was weak, and prospects for the first quarter are not materially better," said Ken Mayland, chief economist for ClearView Economics. "It may not be 'recession,' but growth at this level is not acceptable. The Fed needs to buy some insurance." In this light, cutting rates makes sense...if rates were already high.

"Buying some insurance" is the way it looks on the surface, but what about under the hood? GDP data also includes an inflation component: PCI. The core personal consumption price index rose at a 2.7% annual rate in the quarter, far above the Fed's goal of 1% to 2% and the fastest pace of inflation seen in six quarters. But of course this is the core, a fantasy inflation rate. Surely the headline-PCI rate is somewhere near 5.0%. In this light, cutting rates does not make sense...but when has that mattered?

But this whole GDP exercise may be a moot point; today's data will be massaged by the government masseuse three times. Today's release was the first kneading of the data - two more are on the way that could reveal dramatically different outcomes.

On the financial front, I have to say I was starting to believe the rhetoric that the low may be in. In time that may prove to be true, but today's news gives me serious pause. Analyst Meredith Whitney of Oppenheimer downgraded shares of Merrill Lynch to underperform, saying bond insurer problems could be the next shoe to drop, prompting at least another $100-billion of bank write downs. Have the ratings agencies spoken to the Fed, thereby guaranteeing the 50-bps cut?

"Among the myriad of negatives that surround financial stocks today, we see no issue more critical than the fate of the monoline [bond] insurers," Ms. Whitney wrote in a research note. "The fate of the monoline insurers is of paramount importance to financial stocks, as further downgrades of major monoline insurers by the rating agencies could put another $100 billion in assets held by banks in jeopardy of further write-downs," she said.

European firms are not immune. Two of Europe's largest banks revealed fresh problems stemming from the U.S. housing downturn this morning. UBS extended its latest write-down to $14 billion and France's BNP Paribas said its quarterly profit will slump over 40%! UBS said the loss reflects 4th-quarter write-downs of $14 billion, including $12 billion related to subprime mortgages and the rest from "other positions" linked to the U.S. CDO-scam.

Uh-O...this just in. Standard & Poor's just said (after the close of course) that it downgraded more mortgage-related securities because delinquencies and foreclosures continue to increase on the underlying home loans. I don't have all the facts yet, but it looks like S&P just downgraded $270-billion in CDO debt and warned that another $230-billion downgrade could be coming. Stocks futures are getting hammered after the bell on this news.

Real Time Trading Signals*for

Trade Date: 1/30/08

E-Mini S&P Trades*
(before fees and commissions):


10:!3 OTF Buy 60.50 = -1.00 all

10:26 VA BUy 58.50 = +.75, b/e

2:12 FT BUy 80.00 = +.75, +1.50, b/e

2:31 OTF BUy 72.75 = -1.75 all

2:51 VA Sell 64.25 = +.75, +4.25, +9.75

E-Mini Russell Trades*
(before fees and commissions):


1) Sell @ 8:43am at 701.4 = b/e (1 lot)

2) Sell @ 8:54am at 703.5 = +.5 (1 lot)

3) Buy @ 9:16am at 704.6 = +.5 & +1.7

4) Buy @ 9:59am at 705.6 = -1.2 (1 lot)

5) Buy @ 10:17am at 703.4 = -1.3 (1 lot)

6) Buy @ 1:20pm at 709.4 = -1.2 (1 lot)

7) Buy @ 1:29pm at 714.0 = -1.1 (1 lot)

8) Buy @ 1:56pm at 710.3 = +1.0 (1 lot)

9) Sell @ 2:22pm at 712.2 = b/e & +2.9

10) Sell @ 2:32pm at 712.0 = +6.0 (1 lot)

11) Sell @ 2:50pm at 703.3 = +1.0 & +10.0…+$1,880.00


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