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Stock Ideas Top Headlines By How Much will the Fed cut rates ?
Stock Ideas Top Headlines By How Much will the Fed cut rates ? 
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By Andrew Gordon Since the Fed dropped its discount rate last month, the S&P 500 has risen more than five percent. But commodities have more than doubled that rate. |
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| By How Much will the Fed cut rates ? |
| Monday, 17 September 2007 | ||||||||
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Dear Reader, The most anticipated event to hit the market for quite some time is tomorrow’s Fed meeting. Traders have been waiting for this event like a five-year old waits for Christmas - lots of excitement and anxiousness.But sometimes Christmas can be disappointing if you don’t get everything you asked for. So in this version of Christmas Story, the Fed will be playing the role of Santa Claus and traders will be playing the role of Ralphie Parker. The question is whether Ben Bernanke will play the role of the Old Man and pull out the Red Ryder BB gun and save Christmas for Ralphie, or will he be left with the bunny pajamas made by his aunt.
Here is my take on tomorrow’s highly anticipated event. As you can see, traders are anticipating a 50 basis-point cut based on this information, with an approximate 55-percent chance of the rate dropping to 4.75 percent. It also shows approximately a 37-percent chance of the rate being cut 25 basis points.Given this information and just from listening to the Fed speak over the past month, I do believe the Fed will cut rates by 25 basis points tomorrow. But that’s no big surprise. The question is how the market will react to the Fed’s action. Here is my prediction: if the Fed drops the rate to five percent, the market will fall based on this move. With so many people expecting a 50 basis-point rate cut, the 25 basis-point cut will be disappointing.Should the Fed cut the rate by 50 basis points, the market will move sharply higher, as the majority sees this as the step needed to get the economy back on track. Given the Fed’s continuous hawkish stance on inflation, I just don’t see them dropping the rate by 50 basis points in one move. Perhaps by the end of the year they will make another 25 basis-point cut.The last scenario to consider is this. What if the Fed doesn’t lower rates at all? If this were to be the case, look out below. I could see the Dow dropping 500 points within two days if the Fed doesn’t lower the rate. The Fed doesn’t answer to the market, as Mr. Bernanke has been so kind to remind us over the last few weeks. My suggestion to investors is to buy some insurance in the form of puts, especially if your portfolio is entirely on the long side. Two of the three scenarios lead to a downdraft in my opinion, and a little protection could go a long way. Good luck and good trading, Rick P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it Source : Investor's Daily Edge
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