More Fed Rate Cuts? Be Careful What You Wish For

by: Jim Kingsland

I had the opportunity of opening my contact book to talk to a fine bunch of economists yesterday: Gary Schlossberg at Wells Fargo Capital (NYSE:WFC), Chris Rupkey at Bank of Tokyo-Mitsubishi and Tony Crescenzi at Miller, Tabak for my column on what's next from the Fed.

Sure, rate cuts have traditionally meant better things for the stock market, BUT (and this is a Big BUT) the sudden shift to rate cuts will mean that the Fed -- which had until 2 weeks ago eschewed the idea of rate cuts because it recognized the inflation, rate differential and moral hazard problems -- will again be bowing to crisis in the banking system which led it to do a policy-180 last week. Crisis is not a good word in the markets, even the recently euphoric stock market. The bulls should be careful of what they wish for.

Put another way, if the bulls get their inter-meeting fed funds cut (meaning Fed action before the next official FOMC meeting on 9/18), it will have come at the price of more market turmoil going into the cut.

Remember, Bill Poole, of St Louis Fed Bank fame, told us 2 days before the Fed cut the discount rate that it would take a market "calamity" for the Fed to move. Bill Poole chooses his words carefully and is no Larry Lindsey. He doesn't make stupid statements like Ben Bernanke did early on in his Fed-tificate with a certain TV reporter.

No, Poole meant what he said folks and that to me is an indication, given the Fed's recent behaviour and statements that we would most definitely be in the calamity zone should an inter-meeting fed funds rate cut appear.

Be that as it may, the bulls flocked to what they feel are bullet proof tech stocks today, giving enough juice to the Dow and Naz. As I noted over the weekend, monetary stimulus could give the stock bulls something to work with for a little while.

To belabor the point - it sure ain't business as usual. The intraday slide in yields of t-bills was nothing short of astounding today (a 20 year event) - over 100 bps drop in some yields on the short end. That basically means the credit markets are still tied up in knots.

In John Mauldin's email yesterday, he sent this excellent flow chart (Flo she does know) about the complex situation in progress.

To save the bull's butts on Tuesday - Warren Buffett!! Headlines late last night said that he may buy parts of Countrywide (CFC). From a Ben Graham (Warren's long since departed mentor) perspective, CFC has recently seen in book value hammered below 1, so perhaps Buffett is seeing some value in PARTS of the business. That might offset negative news about Capital One (NYSE:COF).