Taking a Swing at Rate Cut Opportunities

By Keith Fitz-Gerald
Contributing Editor

Some days you’re the bug and some days you’re the windshield.

Yesterday (Tuesday), there were a whole lot of bugs in the guise of the short-sellers who got squashed on Ben Bernanke’s windshield; they covered their positions at any cost and then limped into the hills to hide.

Trading volume was huge and the rise of the major indices meteoric. But what’s not clear is whether this stunning rally is strong enough to go the full nine innings.

History suggests that Fed-related ‘market bottoms,’ or low points, can serve as the launching pads for powerful rallies. So I won’t rule out the possibility that yesterday’s big stock-price rally – which included the biggest one-day gain by the Dow Jones Industrial Average in nearly five years – will turn into a high-scoring affair.

[For a full news report on yesterday’s Federal Reserve decision, and the surge in stock prices that resulted, click here. For some investment ideas from Martin Hutchinson, our director of global investing research, based on the Fed’s decision yesterday, please click here.]

Even so, I find that I’ve got a bit of a cynical feeling about yesterday’s market action, if for no other reason than similar rate cuts did essentially nothing for stocks in 2001 and 2002 under very similar “bubble-like” conditions.

Nor did big rate cuts help Japan much, either, not even when that country’s central bank slashed interest rates all the way back – to 1%  – and that country fell into a 15-year recession. Talk about a shutout!

Therefore, the question in my mind – and the one that I think most people need to be asking themselves over the next couple of days – is this: What does the Fed know about how bad things really are that Bernanke had to go to the central bank’s bullpen, and pull out a rate reduction of a full half a percentage point?

In other words, are we dealing with a bona fide slugger, a true legend-in-the-making, like “Hammerin’ Hank” Aaron? Or is our Fed chairman more of a likable, good-natured duffer like Bob Uecker?

Either way, I think Team Bernanke brought in the heavy artillery much earlier than seemed necessary, and perhaps wasted a shot in the process.

Here is the view from the bleachers, at least as I see it:

  • One: The Fed has spent the past month injecting tens of billions of dollars in liquidity into the U.S. financial system just to help bail out a group of folks who could be the poster boys of subprime-mortgage mismanagement. There should already be a copious amount of liquidity out in the financial system, without having to also lower interest rates. Assuming this is true, there shouldn’t have been the need for such a dramatic cut this early in the game. That’s ‘Strike One.’
  • Two: The job rolls are falling, gold is rising and oil traded at more than $80 a barrel last week – the first time it eclipsed that price level. Other commodities are up as much as 80% in the last five months. These are classic signs of inflation, and they aren’t going away. Against such inflationary pressures, a hefty rate cut is more like a Rip Sewell ‘Eephus’ pitch, than a Roger Clemens fastball. The rate reduction doesn’t help us much, and with the wrong timing, it may get ‘taken downtown’ for an inflation inducing grand-slammer. That’s ‘Strike Two.’
  • Three: The dollar has fallen below the capital markets ‘Mendoza Line,’ and the greenback continued to fall today – even in the midst of the biggest single day U.S. stocks have enjoyed since October 2002. This makes the dollar an even-less appealing holding for overseas investors, and it may well have opened the door for our biggest debt-holders (China, Japan and Korea), to start dumping dollars, which would be catastrophic for this country’s economy on a variety of fronts. That’s … Juuuusssst a bit outside ‘Ball One.’

What? No strike? Didn’t the ump “ring us up” with a called third strike?

Nope. As bad as a weaker dollar is in global terms, it’s actually great for investors who own what I like to call the “Global Titans.” You’ve heard me talk about these before. These are globally diversified companies, and most of them have nice businesses in Asia, and in China in particular, where the economy is growing at a 12% annual clip. They’re great stocks to hold anytime, but during periods of severe uncertainty (especially uncertainty caused by interest-rate stress), there’s almost nothing better to own on the equity side of the ledger.

An easy way to get in the game is to pick up the SPDR DJ Global Titans (DGT), which is traded both in Frankfurt and New York. It’s a quick way to snap up dividends and draw support from the world’s biggest brands at the same time.

All in all, I think yesterday’s rally was a gift.

On one hand, the Fed got its way. On the other, it highlighted just how fragile the U.S. economy is at a time when the global markets are actually gathering steam.

Batter up!

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About the Author

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

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