Rosenberg says any Fed easing at this point will be pushing on a string, and we find that hard to refute. Think about it. In an economy that is 70% consumption, any Fed stimulus boils down to one goal: getting consumers to spend. But how, now that the “wealth effect” of soaring home prices has moved very sharply in the opposite direction?  Indeed, if you are a typical homeowner, your property has lost about 7 percent of its values in the last twelve months alone.  If the house appraised for $350,000 the last time you refinanced, that means it would currently fetch only $325,000 on the market. You would be “under water,” so to speak, and it would take a price rebound of nearly 8% just to bring you back to even.

We seriously doubt Joe Homeowner will be in a spending mood at that point, since he would not be feeling anything like a “wealth effect” – only a sense of relief, perhaps, from not having drowned financially.  That is hardly cause to celebrate with the purchase of a big-ticket item, even in binge-besotted America. Actually, given the sobering – and for many, scary -- condition of the residential real estate market right now, we think it would take a swelling to something like $400,000+  to fully rekindle Joe’s lust for consumer goods that he could never quite afford to begin with.

The Dollar Problem

And that would entail pumping up the housing market, not with a rolling start as occurred when the country was emerging from the dot-com bust six years ago, home prices largely unaffected, but in the midst of today’s near-crash in real estate. Think of a weightlifter trying to heft 300 pounds above his head. If he can get the bar to his chin and then jerk it the rest of the way with one neat thrust, no problem. But let all that weight cause the strongman’s arms to buckle even slightly before they reach full extension, and the task becomes nearly impossible.  That is exactly where the housing market is now: needing not merely a little easing to turn things around, but a credit stimulus more powerful, even, than the one applied post-9/11 – a stimulus that saw the Federal Funds rate fall from 6.5 percent to 1 percent in less than two years.

Problem is, the dollar was quite strong when this unusually bold spate of easing began. But the buck has depreciated by a third since, with a corresponding fall in the dollar index to a recent 80 from the post-9/11 high just above 120 (see chart).  To begin easing aggressively now would risk sending the dollar into oblivion. Yet, nothing less than that will suffice to re-ignite a housing boom.

Investors appeared nonetheless to have breathed a sigh of relief on word Friday that the Fed had lowered the rate it charges banks to borrow by 50 basis points. As a result, the Dow Average ended the week 500 points above its recent lows, returning to the plus column for the year.  But we seriously doubt the euphoria will last for more than another day or two. Should the stupidity persist beyond that, we have no plans to fight the tape. But that doesn’t mean we’ll march with all the lemmings over the cliff. 

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Online Seminar: Last Call

Six students are on board so far for the August 25-26 online Hidden Pivot Seminar, so if small class-size appeals to you, this will be an ideal session to attend.  For the convenience in particular of participants from the U.K., the class will begin on both days at 4 p.m. London time (11 a.m. EDT), allowing students a leisurely Saturday and Sunday, as well as dinner on Saturday night at a fashionable hour. 

If you've ever wanted to forecast stock and commodity prices as accurately as many gurus who do it for a living. this may be the best opportunity you will have to pursue that goal. To reserve a seat, simply click here, then on the “Upcoming” tab.  Detailed information about the course itself and the Hidden Pivot Method can be obtained by clicking here. All who do so will also receive a free Hidden Pivot calculator.

Free to All Graduates

Incidentally, all seminar grads now have free access at all hours of the day to a recorded version of the seminar, as well as to the Q&A forums held in conjunction with each class. In addition, I am in the process of creating an advanced tutorial built around some especially difficult charts. It will be available to seminar grads for a nominal fee. 

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Below is an interesting note on all the craziness from the persepctive of Larry McMillan, an options expert's expert.  If you're interested in his Daily Volume Alerts, call 800 724-1817 for details.

"Speaking of the Fed, you may recall that in Friday's letter (written late Thursday night – before we knew about the Fed's action), we stated that "the S&P futures closed with a zany premium," almost 10 points above fair value. In retrospect, it's pretty obvious that someone was tipped off. In fact, the big stock rally on Thursday – that arose right out of the middle of a sharp decline in mid-afternoon – now seems to have been partly inspired by inside information as well. Unfortunately, no one told the Asian traders who trashed their markets for over a 5% loss on Thursday night.

"Finally, I think it is reprehensible that the Fed announced their rate decision just prior to an option expiration.Some traders think Bernanke is so out of it that he didn't really even know that his rate cuts would have such a devastating effect on some traders – mostly $SPX market makers. Others, including Jim Cramer, seemed gleeful about the prospect. Either way, what is the purpose in putting some small option market makers out of business? And causing larger market makers (many of whom are the same banks and brokerages the Fed was supposed to be helping) some very large losses? The Fed could have made their announcement at any other time and allowed traders some leeway to move out of positions, but to cause a spike opening minutes before an "a.m. settlement" of $SPX options is irresponsible. All this will accomplish is to dry up the market for out of the money calls.

"Lest you think this is sour grapes, please note that I did not personally have, nor did any of our newsletter recommendations or managed accounts have short August $SPX call options going into expiration."