Have you ever asked yourself why the Dow Jones Industrial Average contains non-industrial stocks? Why such a large weighting is given to financial companies such as American Express (AXP), Bank of America (BAC), Citigroup (C), (JPM) and [[AIG]] (before its removal)? After all, you wouldn’t expect to see General Motors (GM) included in the healthcare index or Goldman Sachs (GS) in the home builder index.

The Wikipedia entry for the Dow Jones Industrial Average states that:

Nearly half of US online adults (45%) plan to spend less money on gifts this holiday season than last because of the state of the economy, and one in five plan to spend significantly less, according to a Harris Interactive survey commissioned by RetailMeNot.com.

Fully 89% of online adults think coupons are a great way to save money, and about a third (35%) of those who will be spending less money on gifts this holiday season will use coupons, the study found.

Despite Amazon.com (AMZN) Music’s phenomenal showing in its first year and RealNetworks' Rhapsody’s (RNWK) gains in part due to expanded advertising and partnerships, iTunes remains the best fee-based digital music destination according to Ipsos’s fifth annual TEMPO Digital Music Brandscape study (via Retailer Daily).

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The Fed’s Move

Amid pressure of growing concerns of a recession, and contrary to every public comment he has made, Ben Bernanke stepped in to bail out Wall Street at the expense of higher inflation and a declining US dollar. His 50/50 bps cut on the fed funds and discount rates sent stock prices and commodities flying while the US dollar reached new all time lows against major currencies.

I’ve mentioned, on many occasions, that the fed can not cut interest rates ate the current dollar levels without causing a currency crisis and massive inflation. Inflation can be loosely defined as a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money. In other words, when there are too many dollars floating around, the value of it is diminished. It takes more dollars to buy the same goods.

The “Bull Market” in stocks which began in 2002 and ended in March of this year was an illusion caused by a weakened U.S. dollar, massive price inflation (ie real estate, stocks, commodities) and historically low interest rates which caused a sea of cash and liquidity to drive up asset prices.

If the inflation-fighting Federal Reserve were to keep rates unchanged to contain price growth — instead of cutting by 1 percentage point in the second half of 2007 as Merrill expects — then this would put the probability of an outright recession in the second half at very close to 100 percent….But if we do end up seeing a recession, then it’s game over: the historical record shows that the average decline in the S&P 500 is 34 percent and the average duration is 37 weeks - more than double the magnitude and triple the duration of classic non-recessionary correction. (March 15, 2007 Reuters)

While I do agree with Merrill that a major decline is on the horizon, I don’t believe that the fed has the power to prevent it. Its true that lowering interest rates encourage borrowing and spending which gives rise to the economy but it is also true that the U.S. is dependent upon foreign countries buying our treasuries and financing our overconsumption and debt. The already weakened dollar would not be able to bear another declining rate environment at current levels. Lowering interest rates puts downward pressure on the dollar and discourages foreigners from buying our treasuries as it erodes their returns.