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Will The Market Get Funky With a Rate Cut?


The Fed is certainly in vogue with its constituency: They're dancing in the streets.

Feeling that should make you move
Sounds that should help you groove
Music still flashin' me, take your place
I want to take you higher, baby baby baby light my fire
Boom shaka-laka-laka boom shaka-laka-laka

- I Want To Take You Higher (Sly and the Family Stone)

On the heels of a 50 basis point cut in the discount rate and the Fed funds rate in September, the Fed is widely expected to cut U.S. interest rates when it meets this week in response to the spreading crisis in the housing market.

Will another cut take stocks even higher?

The Fed was able to squeeze the market higher prior to the open on Friday, August 17. Then, once again, Boom Boom showed us why he deserves his moniker when he surprised the Street with double-barreled rated cuts on September 18 in front of a quadruple options expiration on September 20.

While the Fed has orchestrated the market higher in the midst of a credit crunch, it strikes me that there is a substantial degree of complacency on the Street in front of this week's Fed meeting: more rate cuts are widely anticipated, probably even by little children in Tanzania. Although it is true, as sentiment goes, that these kind of things are hard to measure in absolute terms, it is fair to say I think that another ease is not only well-expected but priced in the market already. This was not the case when the Street was taken by surprise in August as to the timing and in September as to the size of the ease.

The obsession about another Boom lika-lika-lika-boom boom and another shot in the vein that will send Hoofy into orbit once again seems to be the prevalent view. Don't you think?

And who can argue with City Hall? After all, it's tough bringing a water pistol to a knife fight. In fact, Boom Boom and his side kick Hanky Panky have turned the market on its head more than on one occasion, proving how stupid it has been to bring a gun to a knife fight: the market knifed down a week ago Friday and is gunned right back up by the following Friday.

In fact, the Paulnanke trade has gotten funkadelic: it's impossible not to get out of your chair and dance. It's impossible not to take your wallet out and throw money at the bonfire of the equities. It's impossible not to want to jump in and fly from trapeze to trapeze like The Flying Wallendas because, well, the Fed has a net and a put.

There's no doubt about it--- the Fed is certainly in vogue with its constituency: They're dancing in the streets. Everyone join in: the punch bowl is spiked. We wanna take you higher, higher into the end of October (at the very least) which coincides with many funds' year end.

I'm so silly not to have seen that there was no way stocks wouldn't be safe after October 19 with many funds' year end ahead. As I wrote at the time there has never been a Black Friday with a Follow-Through Blue Monday (at least not more than an hour) in the twenty years since October 1987.

Be that as it may, there seems to be a different slant going into this week's Fed meeting versus the September. There were even absurdly bogus rumors last week as to the Fed intervening immediately with an emergency cut. I guess because the S&P had dipped below 1490-1500 support. The cause celebre of an ease is now widely applauded. Not only does there seem to be a great deal of complacency as to the Fed's stance but there also seems to be a lot of long side front running late in the week ahead of the Fed. In a nutshell, this time around the notion of a dramatic ease may be crowded trade.

Moreover, there seems to be substantial complacency about what another rate cut will solve. After all it seems to me this time is different as the credit crunch and housing morass that the prior rate tourniquets were supposed to address are still apparently poisoning the financial blood stream, if you consider the write down at Merrill (MER).

From where I sit, it feels like the body speculatum is becoming addicted to a dangerous elixir of ease----a prescription of ecstasy that is luring us to believe it can cure all ills.

This week with the cross current of earnings, the FOMC, and fiscal year end for many large funds, it will be interesting to see if the big funds dance with the names they came to the prom with into October 31 or whether they get spooked and cut and run.

But one thing is certain, volatility will continue to boom lika-lika-lika boom boom.

Beginning Tuesday, November 6th, Jeff Cooper's daily column will be moving exclusively to his subscription service, Jeff Cooper's Daily Market Report. With his service, you will also receive daily swing and day trading setups as well as follow-ups from Jeff.

With any questions, or to sign up and make sure you don't miss a column, email
Josh Sander
or call 212-991-9357.
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No positions in stocks mentioned.

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