Forget about rate cut, AIG may Crash the Stock Markets again

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Oct 30 2008
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Boy! I’m glad that I took the little profit I made scalping Apple before the Feds announcement. As expected the Federal Reserves lowered its interest rate by 50-basis points to 1 percent now, the same rate last seen five years ago in 2003 and 2004 after the Internet bubble burst. However unlike the bubble five years ago that only affected the technology stocks, this time the problem is more severe simply because the financial institutions were in the center of the problem. Going by current situation Bernanke’s boys may go even further and the interest rate could go down to “zero” percent – virtually means the bank loans are free of interest *Yippee!*.

Bernanke Another CutThe Dow did not follow through (as expected) and gave-up all the 298 points gained before erased another 74 points from the day before to close at below 9,000-level at 8,990.96. Perhaps the happiest traders of all in the current volatile situation are the future traders. It’s a normal trend nowadays for Dow to yo-yo in three-digit-figures, up or down. The Fed acknowledged that the economy had lost steam on almost every front – consumer spending, business investment, financial markets and even exports. As I’ve blogged before this latest interest rate cut, I doubted if the slash would help the stock market simply because the root of the problem was not on the rate anymore.

But I suppose the Feds has to do what it has to do. If the interest rate was the medicine to cure the current havoc, it would have worked much earlier. I’m sure the Feds and Bush administration know that the main problem is the consumers and businesses lost in confidence, so much so that they are holding back in spending. The fact that the banks and financial institutions are still fearful in lending money despite being disbursed of $600 billion by Feds is not helping the situation. It makes one wonder what could be the problem with these greedy banks hugging the monies that were supposed to be lent out. They should be grateful that taxpayers’ money was used to bail them out after they thrown the risk-management guidebook out of the windows just because these top executives need to please the boards with cool-figures in order to secure fat bonuses.

Bernanke Next Target Zero rateJapan was perhaps the only country that had experienced “zero” interest rate back in 1990s and it would be fun to see the same rate from the United States. This could be another once in a lifetime experience, mind you. Judging from how Japan struggled for years even with zero interest rate in place before the sun shines again, U.S. Feds would be silly to not have other backup plans besides the “zero” interest rate bullet. Then you would need to get ready as the investors would conclude that there could be bigger problems if Feds indeed went down to the zero. Already a scandal is about to explode, if you can call it one. American International Group Inc.’s (NYSE: AIG, stock) may crash the world stock markets once again after the recent $123 billion emergency lending provided by Feds.

US Crisis IrregularitiesGuess what! After a mere one month the staggering $123 billion is fast disappearing and rumors are spreading that AIG was having tens of billions of dollars of losses and was actually about to collapse before the $85 + $38 billion rescue came into the picture. To make matter worse AIG has declined to provide a detailed account of how it has used the Fed’s (or rather taxpayers) money and it appears the company will continue to hide any irregularities for as long as possible. Hmm, poor Warren Buffett, he was criticized for urging people to buy U.S. stocks recently. Well, I’ve wrote (read here) that you can’t simply follow blindly when the Oracle of Omaha said “don’t keep cash”. The billionaire has so much cash that he can afford to be wrong while we, the small players, can’t. Warren didn’t shout it was the bottom then so we can’t blame him now, can we?

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