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August 20, 2007 (9:15 AM)
Ben And Coke
Asia rebounded smartly overnight, Europe is trading higher, and futures are pointing to a positive open on Wall Street. As if this news were not pleasant enough to start the week, the price of gold is behaving itself, the Yen is broadly lower, and no new hedge fund debacle has crossed the wires (since Sentinel last Friday). Perhaps the last couple weeks have simply been a bad dream?
Unfortunately this is not the case. Rather, while last Friday’s cut has provided some timely relief, it has done nothing to erase the bad debt problems that plague many market participants and markets. Expect more hedge fund blowups, more forgotten M&A deals, more earnings warnings from retailers, and – dare I say it – some bad news from cyclicals in the weeks and months ahead (If some bad news on the global economy front is not around the corner, cyclical stocks like Alcoa have considerable upside from current price levels).
As for a Discount instead of a Federal Funds cut, whether or not anyone steps up and actually utilizes the window is irrelevant - market psychology is what it is all about!
In short, Ben offered the financial world a stiff drink last week because investors started to sober up and see the reality that is a fragile America. We were told that when the stuff hit the fan U.S. stocks would outperform emerging markets, that China would crash, and that commodity based economies would blowup. Instead financial market volatility simply sent investors swarming for US Treasuries (not US equities), emerging markets held up extremely well, China didn’t crash, and the downdraft in commodity based economies was not happening very rapidly.
With this in mind, is part of Bernanke’s plan to get investors drunk enough to remember the days when any economic/financial market weakness in the US was a precursor to severe weakness in the global economy? Perhaps. After all, the last thing the Fed wants to do is throw a central bank bear market gathering and look around to see that it is nearly all alone…
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