The Week Ahead: Fed Action Reeks of a Bailout

The week ahead will offer a shortened period due to Western Christianity’s celebration of Good Friday. Speaking of good Fridays, we have had a few doozies over the past several periods. Two weeks ago, the Employment Situation Report sent markets for a spin, and then last week Bear Stearns (BSC) needed rescue when it could not find counter-parties willing to deal with it. Thank Benjamin, JP Morgan Chase (JPM) and the New York Federal Reserve played savior and kept Bear liquid, and solvent.

Unlike Eliot Spitzer, the market was having a relatively decent week until the Bear Stearns emergency. Friday morning’s Consumer Price Index for February seemed just the right fuel for a strong finish when it offered data showing no price change. However, the reporting period completely excluded the recent price rise of gasoline! Everyone who drives knows that gasoline has marked record territory recently, so it appears next month’s CPI will not be so pleasant.

As usual, the Fed’s action spurred much debate. It smells of a bailout, and that always draws the ire of free market capitalists. There’s a moral hazard to rescuing one company that fails due to its own excessive risk taking. There’s concern this might encourage haphazard risk management at other firms, since there’s an understanding that the Fed is there for rescue if necessary.

Wall Street Greek disagrees, since we view the alternative unacceptable. If not for this and recent Fed action, we expect the American economy would be well on its way now to economic depression and stock prices would be much lower.

The Week Ahead

This week offers important barometers of manufacturing sector condition and a timely meeting of the Federal Reserve. Heading into Friday, the treasury market had been forecasting a Federal Open Market Committee rate cut of 50 basis points.

More than a handful of economists would rather the Fed not cut rates this time around, considering the further damage it could do to the dollar. There’s well-founded concern that in mitigating recession, the Fed might also spur inflation that could do even more and longer-lasting economic damage. However, we agree that the Fed has to face the challenge at hand first, before looking beyond to a potential problem. The Fed is hopeful prices will naturally find suppression due to decreased domestic demand for goods and services. Globalization, however, threatens to keep the overall supply/demand equation tight, and thus prices high.

The Empire State Manufacturing Survey and Industrial Production reports on Monday, and the Philadelphia Fed Survey on Thursday, threaten to show manufacturing activity deteriorated. In their last reporting, New York and Philly area manufacturing dropped off sharply.

Monday’s Treasury International Capital Report will measure foreign demand for long-term U.S. securities, and Tuesday’s State Street Investor Confidence Index will show how Americans feel about the same topic. We expect neither group is very optimistic. Leading Economic Indicators for February is set for Thursday reporting, and will give some further indication of how likely economic contraction is for Q1.

The week’s earning schedule includes: Monday – Bear Stearns (NYSE: BSC); Tuesday – Adobe Systems (Nasdaq: ADBE), Lehman Brothers (NYSE: LEH), Tsakos Energy Navigation (NYSE: TNP); Wednesday – China Mobile (NYSE: CHL), Morgan Stanley (NYSE: MS), Nike (NYSE: NKE); Thursday – Carnival Corp. (NYSE: CCL), FedEx (NYSE: FDX) and more.