Fed Rate Cut - Cramer wins the day....

It looks like Jim Cramer's rant last week about a cut in the discount rate had some supporters not least in the Fed themselves. The rate cut today sent the Dow on a surge but, as of writing it has settled to 125 up.

The Fed recognised that turmoil in the financial markets could affect economic growth saying "financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward".

The Fed cut the discount rate (the interest rate it charges banks to borrow) 50 basis points to 5.75%. 'Discount window borrowing' is designed to provide liquidity to institutions in the event of urgently required funds. The Fed funds rate (used when banks lend to each other) has been left alone but it the Fed said it is monitoring the situation.

The rally maybe short lived, we will have to see, but major indices around the world have been hit very hard. Asia is suffering from the knock on affects of the US markets but also partly from the unravelling of carry trades (where investors have borrowed in yen at a low interest rate and invested in higher yielding investments) which has seen the Japanese yen rise to its highest against the dollar in over a year.

Some 'little rays of sunshine' in the markets are suggesting that the Fed rate cut is an indication that they believe that there could be some institutions that fail, even as early as today. It is suggested that it is unlikely to be a bank but rather "an institution that has substantial bank liabilities that may not be able to clear"...

hmmm.......shall we start a sweep stake on a hedge fund?

The rate cut, no doubt, caught out the spread betting firms who were calling a substantially lower market at the opening, those who were able to bet against this will, as I write, be pouring money into Corney and Barrows coffers in the City. It must be an odd Friday night out with those who had been talked down from window ledges getting drunk alongside those who have made a killing. I would be betting on a few punch ups if I was the manager of any City drinking establishments.

Some say that this rate cut could be "the best decision the Fed has ever made" others are seeing it as a sign that there could be some big unravelling going on. I am still is two minds. On the one hand this rally is great news and at least the Fed are being proactive. Also fundamentals are generally good although, and I quote Jim Cramer directly "I never, ever again in this period want to hear about the underlying fundamentals. They are not in control of this period. In fact, they are meaningless for the short term. Meaningless. And it is a sop to the public to talk about them. That's what I heard endlessly in the week before the October 1987 crash. It is a joke." All this leaves me with a bad 'feeling' about the coming weeks.

Its hard to put my finger on it but its like when your football team has lost 5 matches in a row and then they win the next two. You want to believe that they have turned the corner but you start thinking that it really wasn't skill that won those matches, it was the dodgy penalties the referee awarded.

If the Fed are not able to bail the markets out again, will we see our losing streak continue?