Tuesday, January 29, 2008

Looking to the Fed (Again)

The markets have quietly advanced for the last week. I say quietly because the media can't figure out why, so they don't report it. It is mostly because stocks were oversold based on the data available. The emergency rate cut by the Fed appeared to avert what could have been a large global equity sell-off. Although most world markets have declined, the US hasn't faced the sharp drops like others have.

Investors are also anticipating another cut by the Fed tomorrow. I wouldn't get too excited about this one. The last couple of rate cuts have triggered selling on Wall Street. I'm not sure what Bernanke will say that he didn't say last week. The economy is facing more risks ahead, and the downside risks outweigh inflationary pressures, so they cut rates. I think we haven't seen enough data to indicate major economic problems. They key for the Fed is managing stability in the market while we figure out how bad (or not so bad) the economy truly is.

I still think we could be in a bull market correction rather than a bear market. If the markets hold together for the first couple of quarters this year, I think confidence in the credit markets will be restored, and banks will be in good shape. Rates are attractive. Lenders have just become much more strict with who they are lending to.

But its difficult to lean one way or another because its tough to know how the markets will respond. This January is a perfect example. People will sell equities based on fear more than any other motive.

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