Aug

22

 The cycles are changing. The Fed cycles are switching to an accommodating and easing stance. This has many predictive implications.

The Fed has started rate-cutting programs 10 times since World War II (11 times, if you include Friday's rate reduction.) In the six-month period after the first cut, the Standard & Poor's 500-stock index advanced by an average of 11.0%, two percentage points better than the average 9.0% price increase in all years since 1945. 12 months after the first rate cut, the S&P 500 gained an average of 18.6% and posted an increase in nine of 10 cases. (source Business Week 8/21/07).

The lowered discount rate seems to have stemmed the tsunami. Just as the recent hurricane dissipated just before hitting my island, the down swing of the last month seems to have run its course, and the T and S action is back to the steady up-tick without last week's wild swings. The airdrops of liquidity are being bid after less than one percent. Bidding depth is returning along with new daily highs. Execution and trade style needs to accommodate the swing.

While volatility clusters it cannot survive too long without dissipating; like the hurricane as it is caused by imbalance. Nature abhors an imbalance. The volatility measures like the VIC are dropping fast. Weather and markets have much in common and oddly seem to correlate in time. Witness Katrina and current weather anomalies such as tornadoes and floods in Brooklyn.

Changes afoot in the yen carry with yen over .87. Perceptions about China, Europe, and real estate seem to be occurring. There must be many more signs of the changing cycles.


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