Fed Move Just One Of Many Solutions Needed To Save Sick Market
Todayâ€™s unemployment report and a slew of downgrades already had the market in
a funk prior to the opening. Couple that bad news with the rumors that the Bank
PowerRating) was being forced to finance Californiaâ€™s largest
utilities through previously issued lines of credit and you had a pretty
volatile and bearish mix. The market has not been able to overcome that
combination, as evidenced by the sharp sell-off.
While we feel the Fedâ€™s recent actions were
a welcomed tonic, they came late, and thus, the patient had slipped further into
dangerous territory. Of the available solutions, the quickest would be another
move by Alan Greenspan and his band of economic mixologists. Donâ€™t hold your
breath for that to happen right away, as the surprising 50 basis point Fed Funds
rate cut is probably all we can expect until the January 30â€”31 Fed meeting.
Our reasoning for this is simple; either this weekâ€™s Fed move was the action
of a group of frightened bankers, or a timely intervention. Either way, another
fast move would be viewed as the former and could spook an already nervous
The next likely scenario is President-elect George W. Bushâ€™s pet project — a
tax cut. Bush is already posturing for a bigger short-term impact of such a cut,
saying the legislature needs to pass a package to give taxpayers relief on an
accelerated basis (much of the tax benefits of his preliminary 10-year proposal
would have come at the end of the plan).
You will know the likelihood of such a scenario playing out if you see a number
of prominent Democrats looking for camera time and throwing their support behind
the President-elect. In any case, this weekâ€™s move is not enough to act as
more than a brief tonic to very sick market. Sustained rallies are unlikely
before we get the earnings season behind us, see additional Fed support and feel
whether President-elect Bushâ€™s tax cut will be meaningful rather than window dressing.
Bearish dollar weighted Put to Call ratios: