It Was The Best of Times; It Was The Worst of Times?”

The Fed gave the stock market an early Christmas present last week in the form of an aggressive ½ point reduction in the Fed Funds rate. The news occurred at 11:15 am PST and the Dow Jones Industrials jumped 160 points in less than two minutes and a total of 330 points for the day. Wednesday added another 75 points bringing many happy Bulls out proclaiming the bottom is in.

As you may have guessed we are suspect about that surmise. The credit bubble was probably the main reason for the Fed’s assertive move, and that bubble is still somewhat of an unknown quantity breadth and depth wise. Additionally there are definite signs of a slowing domestic economy; the most recent employment number was the first negative in several years. The next key set of stats to fret over will be the October 5^th employment report and the slew of quarterly corporate earnings releases in the weeks that follow.

You may have heard a take that we tend to agree with which is that the credit bubble allowed assets to rise significantly, the sub prime issue appears to have brought about a repricing of those assets. If that is the case the rate cut may not inspire those with cash to invest it as boldly as they did the previous few years. Interestingly enough interest rates on long term bonds rose sharply after the announced cut by the Fed. This probably was due to a fear of inflation that growth oriented lower short term rates tend to bring. Traditional inflation hedges like gold, oil, and other commodities have rallied strongly also the last few days.

These are very interesting times with some of the most distinct cross currents tugging at the economy and financial system. The global economy is humming, but what will happen to that if the US falls into recession? The vigilance of the Fed has put some fast beating hearts at ease for those that hold sub prime paper (as mortgages and investment paper), but what if this spills over into the corporate and commercial paper market? Alan Greenspan has been on the book selling circuit and has said that recession has become a higher probability over the last few months, but recessions are not known to occur often while an election campaign is getting into full swing. The incumbent party will often prime the pump to prevent a recession. Maybe that is why Fed head Bernanke slashed away?

All this and the merry month of October is upon us. Many think that October is the worst month of the year for the stock market; actually September has been the worst since 1950 (according to the Stock Traders Almanac). We do have to admit that in the two decades we have been doing this October has easily been the scariest month. I have found that the scariness has usually tended to give way to strong rallies through the winter months. November starts the best three months for the market so maybe we can fast forward to Nov. 1^st?

Maybe we just end up in a trading range that leaves the Bulls and the Bears confounded? That is the scenario we think could unfold for there may be too many constructive things occurring for a severe drop and too many issues for a resumption of the Bull market. Just a thought?