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January 22, 2008 - 4:35 PM
End of The Innocence
The Fed cut 75 bps before the markets opened today and stocks prices ended the day lower. For anyone that paid attention to things during the Greenspan era, this is one of the most ominous news stories in more than 20-years (To be fair, today’s Fed rate cut arrived after world markets were already crumbling, and the argument could be made that thanks to Bernanke U.S. stocks avoided a dip into the abyss).
Realizing that Bernanke’s rate cut was not pumping the markets as effectively as hoped, the White House suggested shortly after the open that it may be able to go higher than $150 Billion and, later in the day, it was announced that Bush was meeting with ‘top lawmakers’ to try and speed up the government stimulus package. For his part, Treasury Secretary Paulson gave a timely speech that focused on why any stimulus effort must be timely (bolds added to points):
“I spent much of last week and this weekend talking with Republican and Democratic congressional leadership and members of Congress from across the nation. These positive discussions have revealed broad agreement on the need to quickly enact a temporary plan that boosts our economy this year.
Time is of the essence, and the President stands ready to work on a bipartisan basis to enact economic growth legislation as soon as possible.
I am optimistic that we can find common ground and get this done long before winter turns to spring.
It must be swift. The legislation must be enacted quickly, and the elements of the legislation must have immediate impact. If we miss this, we miss the mark.
To move quickly through the legislative process, we should keep this proposal simple. Debates over favorite programs will inevitably bog down the process. We want to act in time to help families get through a tough economic time.
I am confident that Congress and the Administration share a sense of urgency and will work together to address the economy's short-term needs. I look forward to engaging intensely with the Congress to get money into our economy quickly.”
Investors already spooked by the global meltdown in stocks this week obviously didn’t read Paulson’s speech. If they had they would be left wondering what Mr. Paulson sees that most of Wall Street does not. To be sure, the Fed is cutting interest rates aggressively, the economic statistics are not entirely terrible, and there are still many analysts that believe a recession and/or bear market is not in the cards. Given Paulson’s relaxed approach to forming a SIV bailout fund and mortgage plan, why the need for such urgency floating another scheme today?
Perhaps there politics are at work. Perhaps also Mr. Paulson has read Bernanke’s great depression studies and concluded that policy makers may only have a brief window of opportunity to effectively stimulate and get some multipliers multiplying. Whatever the case, no one is playing their cards closer to their vest any longer. Rather, U.S. policy makers are going to throw everything possible at the U.S. slow down, letting the chips fall were they may. The Fed may even cut again next week.
As the media mindlessly pounds out headlines like, ‘Fed isn't finished on rate cuts by a long shot, economists agree’, the average investor is left to pull out their calculator and punch in 350 (bps). Depending on how you slice it, that is not a lot of rate cut ammo. To be sure, if things cool off and Bernanke can enter a 25 bps rate cutting trance (at every meeting left in 2008), my calculator says a Federal Funds rate of 1.5% by year end. Under this scenario should things not improve by 2009 the threat of a zero bound interest rates could come to haunt Bernanke.
There was a time when Bernanke was seen as an innocent bystander trying to clean-up Greenspan’s mess. With other central bankers watching their markets decline this week and doing nothing, Bernanke’s pre-emptive rate cut action ensures that he will take more of the blamed if things go terribly wrong…
Stock watch: Shares in Brown-Forman plunged to a new 52-week low this morning, pushing the implied forward yield on the stock smartly above 2%. Despite keen interest in the company, the trigger was not pulled. Many other companies monitored performed surprisingly well today, with notable contrarian prospect, Home Depot, rallying by more than 7%, and others like SWM and HRP trading higher for most of the day. Clearly this was not the day when investor capitulation opens up many new opportunities, although continued weakness in utilities could see some undervaluation appear. After mentioning some quality covered called candidates before, LMC has turned out to be a poor covered call candidate.
Wish List Watch: Despite some cyclical threats in the list (LAKE and LEG) it is unlikely that any current Wish List holdings will be changed solely because of the market volatility and/or economic recession.
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