Wednesday, September 19, 2007

The Fed Comes to Rescue After Saying It Won't

First of all, I apologize for not posting in a while and thank those of you who have noticed. The fact is that I've been incredibly busy. On top of everything else I normally do, I'm in the process of putting the finishing touches on a book I have been writing. That process is now near completion so I hope to be posting again on a regular basis relatively soon. However, yesterday's interest rate cuts by the Fed were so over the top, I had to make some comment.

Last Friday on Kudlow & Co. I predicted the Fed would cut the fed funds rate by 25 basis points and would leave the discount rate alone. Larry was calling for much bigger cuts in both. He was right. Yesterday, the Fed announced 50 basis point cuts in both interest rates.

My take on all this is that we can now officially change the name of the "Greenspan Put" to the "Bernanke Put." This aggressive action goes a long way in convincing investors that the Fed will always come to the rescue no matter how many times it says it won't. No one cares anymore that only about a month ago Bernanke warned that the Fed would not bail out investors when they make bad financial choices. He just proved that the Fed will do exactly that.

Furthermore, the Fed would not have taken such bold action unless it was absolutely convinced that the probability of recession has risen dramatically. It is interesting to note that not one member of the FOMC dissented. The decision to cut rates received unanimous support.

Today's disappointing housing numbers indicate that recession may be nearer than we thought. The CPI indicates that inflation is under control. But the CPI is likely to jump next month especially when energy prices are taken into account. Even though gasoline prices are well off their highs, oil prices keep setting new records. This divergence can't last. Either oil prices must come down or gasoline must rise. I'm betting that in the near term the latter is more likely. In any case, I'm sure at least a few hedge fund managers are buying gasoline and shorting oil.

While it was nice to see that the rate cuts caused a strong rally in stocks, you might want to take advantage of the opportunity to trim your long positions. I suspect we are going to give up all of the recent advance.