William -- This article captures the spirit of the gathering clouds.
Wall St.'s risky bet that Fed will come to rescue
(Updates to close)
By Pierre Belec
NEW YORK (Reuters) - Investors are making a risky bet that Federal Reserve
Chairman Alan Greenspan will come to the market's rescue when the next crisis
threatens the global economy.
But the experts say those Range Rover-driving Wall Streeters could be in for a rough ride if the Fed stays on the sidelines
and lets the market deal with a new economic storm.
Dark clouds are already forming over Latin America after Brazil, the region's biggest economy, devalued its currency, a
move that pushed the country into recession.
The contagion could hit Mexico, Argentina and even spread to Asia as they all scramble to devalue their own currencies to
compete in the export market.
Bill Meehan, chief market analyst at Cantor Fitzgerald in Darien, Conn., said Wall Street is wrong in thinking the Fed will
again come to the aid of financial markets in a bid to insulate the United States from the global economic fallout.
''The interest-rate-cutting game will not be replayed again,'' he said. ''It's a mistake for Wall Street to believe that if
another shoe drops outside of our borders, the crisis will be met automatically with rate cuts.''
In the rush to build a fire wall around the American economy and rebuild confidence in financial markets, the Fed reduced
interest rates three times between September and November by a total of three-quarters of a percentage point.
But the rate chopping lit up the stock market, and the Fed is now worried that it may have created a speculative bubble
that is waiting to burst.
''Last fall, the concern was about protecting the U.S. financial system,'' said Meehan. ''Now, Greenspan is very chagrined
at the unavoidable consequences of the three rate reductions, which caused a raging move (up) in the stock market.''
This week, Greenspan hinted in a speech on Capitol Hill that the Fed would leave rates unchanged for some time to come
and he also sounded a cautious note on the near-record level of U.S. stocks.
''The three cuts were tied to crises -- the Asian problems, the Russian devaluation and stock market plunge in the summer
-- and the irony is that every foreign crisis has led the Fed to lower interest rates and this has benefited the U.S. stock
market,'' said Richard Salsman, senior economist for H.C. Wainwright & Co., a Boston-based investment research firm.
Brazil, the world's eighth-largest economy, is now in trouble. And, the U.S. stock market still thinks that Greenspan will
again reload the slot machines to defuse the next emerging-market crisis.
''It is extraordinarily dangerous for the stock market,'' Meehan said. ''People have to change their mindset that the 'Fed is
our friend' and if anything goes wrong, then rate reductions will just follow and we can continue to bid stocks higher.''
He said the market could fall sharply on disappointment at the lack of a Fed easing.
''The market will take a big hit and the Standard & Poor's index could take out last summer's low and test 770,'' Meehan
said.
On Friday, the S&P closed at 1,225 points. During its summer swoon, the Dow Jones industrial average slumped to
7,500 points.
The experts said Brazil's economic woes are far from over and they warned that investors should consider that there is a
lot more risk in Latin America than people are allowing for.
Weakness in Latin America would have a more direct impact on the U.S. economy than Asia, whose problems have
zapped American corporate earnings during the past year.
''Brazil, by itself, is a relatively small portion of U.S. exports, accounting for just 3 percent of our sales, but Latin America
is a much bigger deal, taking 20 percent of U.S. goods,'' said Pierre Ellis, managing director and senior international
economist for Primark Decision Economics.
''So, it boils down to a question of whether the Brazilian situation propagates and pulls down all of Latin America,'' he
said.
Ellis said investors will start to loose sleep over Latin America if the contagion spreads to Mexico, the second largest
buyer of U.S. products.
For the week, the Dow Jones industrial average was down 219.88 points to 9,120.67. The Nasdaq Composite lost 9.32
at 2,338.88. And the Standard & Poor's 500 index was down 118.07 at 1,225.19. |
