More Easy Money from the Fed,
But Do the Rate Cuts Stop Here?

Today's comment is by Mike Burnick, Senior Editor, Global Markets Analyst and editor of Market Shock Trader.

Dear A-Letter Reader,

Just as I (and most of the market) expected, the Fed made their move and cut benchmark interest rates by a quarter-percent to 4.5% yesterday. That move was in line with consensus expectations. But as always, the devil is in the details!

Explaining the 25 basis point reduction in Fed funds, the FOMC said "the pace of economic expansion will likely slow in the near term," mainly due to the "housing correction."

Some correction! Housing starts recently fell to a 14-year low and national home prices are down 5% on a year-over-year basis. This is already the worst housing bust since at least 1991 when the Savings & Loan industry blew up. I expect the sub-prime credit crunch to get worse as a result, adding to more steep losses in the financial sector.

The real nail in Wall Street's coffin however may be the Fed's growing reluctance to cut rates much further, as reflected in its official statement.

Let's get to those details...

If Economic Risks are Balanced,
No More Easing is Needed

Another part of the Fed's statement said: "After this action, the upside risks to inflation roughly balance the downside risks to growth."

Many observers believe this statement means that the Fed may be through cutting rates after yesterday's move. According to one economist quoted by Bloomberg, "The FOMC has just stated unequivocally that 'we think we are done easing.' Whether they are or not remains to be seen, but the message is loud and clear."

There was another strong indication that the Fed could be at or very near the end of the line in cutting rates. As reported in the New York Times, "the presidents of six of the Fed's 12 regional banks did not ask for a reduction in the discount rate," at yesterday's meeting.

In other words, half of the regional Fed bank chiefs think the economy is doing just fine.

Yesterday, before the Fed's announcement, the Commerce Department reported that GDP growth advanced 3.9% in the third-quarter. That's much better than forecasts. It's also the best expansion in more than a year.

Of course these numbers are often subject to large revisions, and I would not be surprised to see this data tempered in the months to come. But if the numbers do hold up, it puts the Fed in an uncomfortable position of easing monetary policy while U.S. growth is accelerating.

Economic Growth is Apparently Picking Up...

Stronger growth stokes the fears of inflation, and the Fed's statement specifically warned that higher energy and commodity prices may spur faster inflation.

Sure enough, increasing wage pressures were also evident in yesterday's GDP report. And after the Fed's quarter-point cut, December gold futures rocketed past US$800 per ounce, while crude oil closed above US$94.50 a barrel. Both of these facts are sure evidence that inflation is far from tame.

Outlook for Big Banks & Brokers Remains Grim

In spite of the Fed's valiant attempts to provide liquidity, Wall Street's big banks still have plenty of exposure to the worsening sub-prime market shock.

According to an article in the Financial Times, there has been a "sharp fall this month of a key derivative index that tracks the market" for risky sub-prime debt. In fact, this index "has fallen about 30% since the end of September."

Bonds rated BBB- are now trading at a record low of just 20 cents on the dollar, according to the article. This index's latest plunge comes after many big banks had already closed their books last quarter, indicating more losses ahead for mortgage-backed debt holders in the fourth quarter. Mortgage data also shows a "marked acceleration in late payments and defaults on mortgages."

In the current credit market environment, borrowers still face limited refinancing options even for prime-rated borrowers. And for sub-prime...Forget it! That market has pretty much shut down, since lenders can no longer package and sell new sub-prime mortgage originations.

Many sub-prime firms have gone belly-up already. Many more are headed that way. This signals a continued increase in delinquencies and loan losses ahead.

The Hits that Keep on Coming: Expect More
Wall Street Losses After Thanksgiving

It's pretty clear that the Fed's 75 basis points of easing since mid-September were aimed squarely at bailing out Wall Street. The Fed definitely didn't cut rates to lift the overall economy, which clearly doesn't need the help.

Wall Street wrote-off more than US$30 billion in sub-prime related loan losses in the third quarter. Many big Wall Street firms have a fiscal year that ends in November. This way they can close out their books well before year-end, and have more time to calculate bonuses.

But it may be a blue Christmas this year on Wall Street. That's because closing out the books at the end of this month means marking to market all of those mortgage-backed loans and derivatives of questionable value.

I see more losses and charge offs in the not too distant future for Wall Street.

MIKE BURNICK, Senior Editor & Global Markets Analyst

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The Fed Slices and Dices Away at the Rates!

Yesterday, the Fed cut the discount and the fed funds rate both by a 1/4 point.

There was a "knee jerk" reaction at first and the euro soared. But later on, stocks rallied, the dollar dropped, the euro settled down, the yen dropped, the Swiss franc rose and the Aussie dollar rose.

The rising stocks also reignited the carry-trade. Traders emerged to sell off the yen, so they could buy higher-yielding currencies once again. It was obviously not a good day for the low-yielding yen.

If you look at the USD/JPY pair, the dollar is heading higher. This tells me that the yen is being taken to the whipping post even more than the U.S. dollar.

Right now there continues to be a coupling of the Dow Jones Industrial Average and the EUR/JPY pair. They still tend to trade somewhat in tandem with each other.

So the Dow up, Yen down...Dow down, Yen up scenario lives on.

SEAN HYMAN, Currency Director

Privacy & Rights

Freeze Out Identity Thieves

Are you serious about protecting yourself from identity theft - the world's fastest growing crime?

If you are, you now have the ultimate tool at your disposal to protect your identity.

It's called a "credit freeze." Effective yesterday, Oct. 31, 2007, all three major credit bureaus will offer credit freezes. You just have to ask for one.

A credit freeze, in effect, places an electronic padlock on your credit report. No one can review your credit report until you remove the padlock.

If an identity thief tries to apply for credit in your name, he'll be in for a rude surprise. If a company can't review your credit report, they won't issue you (or any impostor) credit. That's how a credit freeze eliminates identity theft at its source - the criminal's ability to get credit fraudulently.

Let's say that an identity thief steals enough information to apply for credit in your name. That might include your name, address, birthday, and Social Security number - all easily retrievable over the Internet.

Next, the thief uses this information to obtain a driver's license or other official identity document containing your name, but his photo. Then, he visits a car dealership or other seller of "big-ticket" items. Finally, he test drives a luxury car and tells the salesman to "charge it" - to you.

If you have a credit freeze in place, the thief will be turned down cold when he goes to apply for credit! But without a credit freeze, he just might drive off the lot in a brand-new car, leaving you to pay the bill.

To freeze your credit file, send a letter via certified mail to the following addresses:

Experian Security Freeze, P.O. Box 9554, Allen, TX 75013
Equifax Security Freeze, P.O. Box 105788, Atlanta, GA 30348
Trans Union Consumer Protection Center, P.O Box 6790, Fullerton CA 92634

The letter must contain your full name, middle initial, and generation (Jr., Sr., etc.), your date of birth, your current address, and any previous addresses for the past two years.

You'll also need to include a copy of a government-issued photo ID card; a utility bill or bank statement with your name on it; and your Social Security Number. Finally, include a US$10 check or money order per credit bureau.

Each credit bureau will send you a letter confirming the credit freeze. You'll also receive a PIN code that you can use to "unfreeze" your account if you want to buy a new car, apply for a mortgage, etc. "Unfreezing" costs another US$10 per credit bureau.

Is there a downside? Yes, but it's a small one. If you lose your PIN, unfreezing your account may take as long as 10 days. (With the PIN, the unfreezing is supposed to occur in a matter of hours or even minutes). But, a 10-day delay isn't necessarily a bad thing if you're prone to making impulse buying decisions.

For hundreds more suggestions on how to protect your privacy and wealth, click here.

MARK NESTMANN, Privacy Expert & President,
The Nestmann Group
www.nestmann.com

• You've given out your SSN to anyone in the past 6 months...
• You belong to any church or organization...
• You hold 50% or more of your assets in any U.S. bank...