The Big Game

Like fans at a big game, the constant chant on Wall Street has been rising like a storm …

One and done! One and done!

The power pin-stripers are rooting for the real “monsters of the midway,” the hippest of hip hoopsters … the Fed. As the Fed's Open Market Committee meets today and tomorrow, investors and traders are hoping that as Ben Bernanke brings his team down court in the final drive to revive the ailing economy, they cut interest rates one last time.

Since summer, the central bank has incrementally reduced the key federal funds rate by 3 percentage points to 2.25 percent from 5.25 percent. On top of rate cuts, the Fed has been lending more money to banks, while the government is preparing to send out tax rebates.

What difference six weeks makes. Prior to the last Fed meeting, the markets were anxious about the implosion of global banks. Now, the “Wizards” are betting that the credit markets are on the mend, and that they can get back to business as usual. Are they daft or just deluded?

A quarter or even a half point cut by the Fed is not going to significantly alter conditions that have precipitated the current market malaise. The S&P’s Case-Shiller Index is reporting that home values have dropped 12.7 percent from a year earlier and foreclosure rates have doubled over the same period. To make matters worse, consumer confidence is at a five year low, fueled by mounting job losses, and soaring gasoline and food prices. Federal Reserve policy-makers may cut interest rates again in an attempt to shore up the financial markets and boost consumer spending. But cutting interest rates at this point may be like trying to cap a well fire with a thimble.

In a recent interview at the Milken Institute in Beverly Hills, Eli Broad, co-founder of KB Homes, the nation’s fifth largest homebuilder, said that he believed that home prices would likely decline another 20%. “I don’t think we’re anywhere near the bottom,” warned Broad. He went on to say that he believed that it may take 3 to 4 years before the market can clear out the huge and growing volume of unsold and unoccupied homes.

The economy lost 80,000 jobs in March, the most in five years. Consumer spending which accounts for two thirds of the economy rose only .07 percent, the slowest pace since 1991. Although government rebates are now being sent out, it’s not likely that this cash infusion combined with another rate cut will be enough to overcome the current consumer caution. The greater concern should be the impact that this action will have on rising inflation.

Historically, it’s not uncommon for consumer prices to flare early in a recession, only to settle back on slack demand as the economy weakens. But considering the prices of basics such as wheat, corn, rice and gasoline, discretionary consumer spending could be dampened until there is a significant shift in commodity prices. During this past week, crude oil surged near $120 per barrel and prices at the pump reacted accordingly.

Unlike past recessionary cycles, however, commodity prices are not simply governed by U.S. demand, but by the global appetite for oil and other raw materials. While Asian countries such as China and India are dependent on U.S. consumer behavior, their thirst for raw materials has not abated. Apparently, they’ve got a wad of cash burning a hole in their collective pockets, and they’ve got a hankering to spend it.

Even the high flyers are feeling the pinch. In a sign of the times, expense accounts for employees at some of the world’s largest investment banks have been drastically curtailed. Last month in a memo to its employees, Goldman-Sachs issued an edict that tabs for business lunches were not to exceed $100 per person without prior approval and that first class air travel only would be permitted for flights over 90 minutes. In further evidence of this clamp down, Deutche Bank told its employees that it would not longer approve the use of company credit cards for adult entertainment or brothels. Ouch!

In point of fact, there appears to be a real disconnect between Wall Street and world. Although the Fed has been a valiant foil for President Bush and his cadre of crack advisors, another rate cut will do little to soften the body blows to U.S economy. The recession must run its course. Cutting interest rates may boost Wall Street’s confidence, but it will do little to bolster the most important component of the economy … the American consumer.

None and done … None and done!



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.