How Did the Markets React to the Fed Cut?

A lot happened last week, but there were a few things in particular that I wanted to highlight for my readers.

STOCKS

Many are claiming there's a new "Bernanke Put," meaning the Fed is ready to step in with interest rate cuts to get the stock market, and careless lending institutions out of a jam. It worked well during the past week with a trading range that almost tested the top of the summer's range after the "surprise" half-point rate cut. Many banking and mortgage lending names also popped a bit.

It is amazing how that 50-week moving average as been closing support during the volatile days of the last few months. There is a good lesson to be learned there.

THE DOLLAR

Yes, the stock market loved the rate cut, but the foreign exchange, and the bond markets suffered damage.

Maybe the dollar is a bit oversold short term, but this latest leg down is an ugly reality of inflation concerns rooted both in our monetary policy, and prosperity in far away places that is creating greater demand for products that we once had a demand monopoly on.

It now takes a record $1.41 to get a euro. The European economy is no great shakes, yet the euro is being favored in the forex. That speaks volume to me about how the world perceives the buck right now. How long can that Euro strength last? The Wall Street bulls think the best thing the ECB could do for the dollar is to emulate the U.S. with a "Trichet put" that would start a round rate cutting there.

U.S. Treasury Bonds

The long end of the bond market also hated last week's rate cut. The significance of a half point (50 basis points) cut in fed funds causing the long end of the bond market to react with a rate increase on the longer end can't be understated. The bond market is worried about more than inflation. It's worried that foreigners will either shun our government paper, or demand higher yields. That's the high price the Treasury will pay (we, the taxpayers) for having the Fed run the money supply growth at a 13% annual rate, according to private estimates of M3.

GOLD

And gold? The gold market has smelled these problems and excesses for quite a while.