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Five Things You Need to Know: Main Street Feels What Wall Street Has Yet to Acknowledge


Interest rate cuts are not making their way through to the economy.


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. We Are Living in Interesting Times

We are living in interesting times today, and not in the good way. But there's still an air of excitement on Wall Street this morning, largely because of expectations that the Federal Reserve will cut interest rates by the most since 1984.

Fed Fund Futures are fully pricing in a 100 basis point cut today - it's doubtful Chairman Ben Bernanke will disappoint - but is that really supposed to make us feel good?

In October 1984, then-Fed Chairman Paul Volcker slashed the Fed Funds rate from 11.75% to 10%, a 175 basis point move. A 100 basis point move today would be the most since Volcker's cut, but the gravity of the two situations couldn't be more different. Volcker's cut reduced the Fed Funds rate by a mere 15%. A 100 basis point cut today would slash it by 33%. The magnitude speaks volumes.

Pay close attention to the statement today. It is likely we will see some interesting language and additional actions from the Federal Reserve. This is far from over.

2. Main Street Feels What Wall Street Has Yet to Acknowledge

If Wall Street is excited by the prospects of a rate cut, Main Street is decidedly less enthusiastic. Why? Probably because Main Street feels what Wall Street has yet to acknowledge - that these interest rate cuts are not making their way through to the economy as the Federal Reserve has been hoping they would.

A USA Today poll shows 76% of those polled believe the economy is in a recession. Presumably, the other 24% are either employees of the Federal Reserve's 12 district banks, or economists.

Interestingly, 59% of those polled said they believed we could slip into a depression lasting several years. The sample must have included a large representation of history buffs, because not since the Great Depression have so many economic policy tools and credit-boosting acronyms been utilized by the Federal Reserve.

3. Bond Losses Continue to Spread

An article on Bloomberg this morning highlighted a nearly 10% decline this month in a $4.9 billion alternative money market fund managed by Charles Schwab (SCHW). The Schwab YieldPlus Fund fell 9.9% this month and is down 11% this year, according to Bloomberg.

Ultra-short bond funds were marketed to investors as a higher-yielding alternative to money-market funds, the article noted. These funds buy short-term debt, including some subprime securities.

The Schwab fund reportedly was 38% invested in non-subprime mortgage securities that were not guaranteed by Fannie Mae (FNM) and Freddie Mac (FRE), with about 9% in subprime loan bonds. According to Bloomberg, 34% was invested in corporate bonds.

As if to highlight precisely what Ben Bernanke and the Federal Reserve are facing as they meet today, Kim Daifotis, chief investment officer of fixed income at Schwab's fund unit, and Randall Merk, executive vice president, wrote in a shareholder letter dated March 10 that, "The fixed-income markets continue to suffer from a lack of buyers for many types of securities."

4. Oh, the Irony

While all eyes are on the Fed today, we'll be watching the Visa (V) initial public offering planned for today. The $17 billion offering could potentially be the biggest in U.S. history, eclipsing the AT&T Wireless Group's (T) $10.6 billion offering in 2000. Yes, 2000. Good timing, eh?

The irony of the world's largest a credit card network debuting on the same day that the Federal Reserve Open Market Committee is meeting to try and stave off the largest debt crisis since the Great Depression with what may be the largest interest rate cut in more than 20 years is not lost on us.


Bear Stearns (BSC) stock is up more than 50% as we write this, above $7 a share, far higher than the $2 price JP Morgan (JPM) is being bankrolled by the Fed to pay for the company. What gives?

We've heard all the usual suspects; short covering, bondholders racing to buy the debt to protect themselves from common shareholders balking at the deal, etc. etc. But perhaps something else is afoot? While bidding on a $6 Million Dollar Man action doll on Ebay this morning we noticed this:

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No positions in stocks mentioned.

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