Battered bulls preen as Fed is their friend again
By Huw Jones
NEW YORK, Oct 23 (Reuters) - Battered bulls have a new spring in their
step thanks to recent interest rate cuts by the Federal Reserve and will
work next week to convince the bears that a stunning rebound from the
summer carnage is for real.
''If our reading of Fed policy is right, we feel increasingly confident
that a low in stock prices has been seen,'' said Peter Canelo, stock
market strategist at Morgan Stanley Dean Witter.
That does not mean stocks are headed almost straight up again. There may
be more profit-taking before another big move up, probably after the
Fed's next rate cut, analysts said.
The storm clouds from Asia, Russia and Latin America that have darkened
the outlook for the U.S. economy have lifted a bit since the Fed, the
nation's central bank, surprised everyone by cutting short-term rates
again last week, its second such move in less than three weeks.
The cut galvanized investors to put cash back to work, especially the
hitherto shunned smaller stocks.
''The small caps are outperforming the big caps and that is a sign of
confidence and speculation coming back to the market,'' said Robert
Dickey at Dain Rauscher.
In the week ended Oct. 21 which included the Fed's latest cut, $9.3
billion flowed into stock funds compared with a $3.1 billion outflow the
pior week, said TrimTabs.com, a research firm.
Many analysts expect more rate cuts ahead.
''Even after two rate reductions, we think the Fed will continue to
lower the funds rate, probably to 4.5 percent by year-end,'' Morgan
Stanley's Canelo said. The fed funds rate, which banks charge each other
for overnight loans, is 5 percent.
Arun Kumar, senior stock strategist at Lehman Bros., expects the Fed
will cut again when policy-makers meet next month. Regarding the market,
he said: ''I don't think we are off to the races yet, though I think the
worst is behind us.''
The Dow Jones industrial average fell 80.85 to 8,452.29 Friday, snapping
a seven-session winning streak that brought it to 8,533, well above its
summer low of 7,400 and just 8.6 percent below its record of 9,337.97
set in July. For the week the 30-share index rose 35.53.
Bulls have also been revived by Japan finally passing a bill to shore up
its banks, and Congress agreeing on a budget that included $18 billion
for the cash-strapped International Monetary Fund to help fragile
economies such as Brazil's.
Investors look to Brazil next week when the government unveils a
sweeping austerity plan to qualify for an expected $30 billion IMF-led
package to bolster its economy. If Brazil is forced to devalue its
currency, as some fear, it would send other Latin American countries
reeling and damage a key trading partner of the United States.
Evidence the U.S. economy is slowing, which would give the Fed more
reason to cut rates again, may be forthcoming next week. The government
reports on gross domestic product for the third quarter on Friday. Other
key data include Tuesday's consumer confidence index for October and
Thursday's closely watched employment cost index for the third quarter.
Investors are more hopeful since most of the nation's biggest companies
have reported third-quarter earnings, with most, especially closely
watched technology companies, in line or just above analysts'
scaled-back earnings forecasts.
''Now that we have a more practical view on earnings and with interest
rates down, we are on our way to 9,000 in the Dow by the end of the
year,'' said Stuart Freeman, chief stock strategist at A.G. Edwards &
Sons. biz.yahoo.com
Regards,
R.T |
