THE most expensive? I'm not sure, but I know it's not McDonalds..
Here is an interesting article on what they think the sudden move by the fed means.
thestreet.com
The Smart Money Is Split on What the Fed Move Means
By Ian McDonald
Senior Writer
1/3/01 6:00 PM ET
An interest rate cut is good news, right?
Why Did the Fed Cut Rates Today?
How Is This Intermeeting Rate Cut Different From October '98
The Fed's Move May Be a Preemptive Strike on Friday's Jobs Reports
On Wednesday the Federal Open Market Committee shocked investors by cutting its key fed funds rate from 6.5% to 6%. That's usually good for stocks because falling or easing rates free up more money to go into the stock market. The Dow Jones Industrial Average finished the day up 300 points, or 2.8%, and the tech-laden and battered Nasdaq Composite rocketed up 325 points or 14.2% -- its biggest one-day gain ever.
But beneath this good news is a somewhat ominous message. The suddenness and scale of the Fed's rate cut, a rare "intermeeting" rate move, implies that the U.S. economy's growth is slowing much faster than expected. The idea here is that the Fed has slashed rates to avoid the dreaded "R" word -- recession -- and buoy stock prices at a time when consumer confidence and investor confidence are linked.
It's clear the cut has offered a short-term psychological boost, but it will be months before this rate cut hits the bottom lines of economic data releases and company earnings reports. So what should we make of this news now? We asked a few pros what they're making of the cut and its implications. Here's our panel and what they had to say.
Bob Turner, Turner Top 20 fund
Jeff Van Harte, Transamerica Premier Equity fund
Bill Nygren, Oakmark Select fund
Dave Ellison, FBR Financial Services fund
Tim Quinlisk, John Hancock Large Cap Value fund
Jay Mueller, economist at Strong Funds
What does the timing and severity of this rate cut say to you as an investor?
Turner: It says the Fed is willing to be proactive to make sure we don't move into a recession and maybe the economy is slowing more quickly than anyone envisioned. If you look at this cut through a skeptic's glasses, you say, "Wow, the economy must really be hurting." We're thrilled with the rate cut, but we're still going to be looking for stocks that aren't as sensitive to the economic slowdown.
Van Harte: I think the message from the Fed is that we've got a handle on this and we don't want a recession. It's a good message and it's good for the market. I think this whole year will be a run to quality names, as opposed to last year, which was a rush to lower-quality defensive plays. This may be a year where the markets are more fundamentally driven, where people realize the dot-coms aren't coming back but tech stocks like EMC (EMC:NYSE - news) are solid.
Nygren: Clearly the market reaction was hugely positive, but I think it gives you some pause. What did the Fed see in the past two weeks that made them make such a distinct change from their stance a month ago? Lower interest rates are great because they mean less of a decline in home and auto sales, but how much more telecommunications equipment gets sold?
Ellison: Clearly the Fed sees the economy in worse shape than just a few weeks ago. Maybe companies weren't being totally honest earlier last year and maybe we've been in slowdown for more quarters than we know.
Do you think the Fed is anticipating more earnings disappointments and trying to cushion the blow?
Van Harte: I think so. I think the Fed thinks bad earnings could lead to a recession. They see a lot of weakness and they're trying to head it off.
Ellison: I think they're trying to take the sting out of earnings that are going to be lousy and I think they're going to keep going. Then again, maybe it's something else like a big bankruptcy or loan default out there that we don't know about.
Turner: I don't think they're seeing weak earnings specifically. I think they saw auto sales and, according to our analyst, those were just really horrible. I think they're just seeing manufacturing coming to a screeching halt here. There was some speculation that maybe they're seeing some big bankruptcy out there, but I don't think they're seeing a big crisis. Instead, I think they see a sharp slowdown in the manufacturing sector, which spills into the consumer sector. Don't forget it's the consumer that drives the economy and all the cocktail party talk over the holiday was about just how miserable the stock market was.
What industry sectors do you see benefiting from this rate cut longer term?
Turner: Without a doubt, technology. Over time, tech will be the best performing sector because of its growth, but now it's also pretty beaten down. Tech stocks will be the ones that move up most quickly. That said, you have to be very careful. We still think only five or six stocks that really outperform in an industry over time. This morning we had a little bit of room to maneuver and the stocks I gravitated to were Cisco Systems (CSCO:Nasdaq - news), Ciena (CIEN:Nasdaq - news), JDS Uniphase (JDSU:Nasdaq - news) and Qualcomm (QCOM:Nasdaq - news). At their current valuations we think they'll be the first ones to go up.
Nygren: I think the biggest beneficiaries are financial-services shops because all the loans on their balance sheets got cheaper. Next would be cyclicals like automakers and building materials companies. I think the benefit of lower interest rates helps tech stocks because lower rates justify higher price-to-earnings multiples, but it's not as impacted as other sectors.
Van Harte: I think it'll be a good environment for financials and not just banks, but all the financials. I think they'll all do well, like banks, insurers and asset management companies. I think it'll be good for a lot of the steady growth businesses, like transaction processors like First Data (FD:NYSE - news). I think tech will come back but it will take a quarter or two. I just think short-term the tech fundamentals are really weak.
Mueller: I think it should benefit corporate bonds vs. Treasury bonds. There really was a lot of indiscriminate Treasury buying with people seeking safe harbor. Now corporate debt should start to do better than Treasury debt. In the stock market there's been so much anticipation already that a lot of this is priced in like banking names. I don't know how much more room they have. I think cyclical issues benefit too from the Fed being a little quicker on the trigger.
Some say if rising rates didn't hurt tech stocks in late 1999 and early 2000, why would falling rates help them now?
Ellison: Is Cisco going to sell more routers because rates are lower? I don't see the economy getting better right away and if anything we're still in an uncertain economy. It's too simple. It's too cute.
Van Harte: Tech did weather rate hikes in late 1999, but part of the high demand was a function of Y2K and a hot IPO market. Ultimately, tech was impacted and they bridged that gap by financing through the equity markets. Ultimately, I think the rate drop will be good for tech spending.
Quinlisk: There was a denial for a certain time that tech was immune to economic slowing, but we now know that isn't true. Tech is a cyclical industry and some sectors will be helped by a rate cut, like those that deal with consumers like Dell (DELL:Nasdaq - news) and Microsoft (MSFT:Nasdaq - news). Then there's Cisco and nonquality names like Lucent Technologies (LU:NYSE - news) that could be helped, too. Then in media there's Viacom (VIA:NYSE - news) and Clear Channel Communications (CCU:NYSE - news) that will benefit from a rise in advertising.
In the past few months we've all heard about rising cash stakes in stock fund portfolios. Will this cut bring that money off the sidelines and into the market, pushing stocks up?
Van Harte: It's a start, yes. But the market is still going to spend a lot of time trying to figure out how bad earnings will be. I think now if you see a fund manager with 10% in cash, he or she will put 2% in the market today and hold the rest back until they see some idea of where earnings are going.
Quinlisk: Yes, to now see some very attractive valuations and declining interest rates, it's much harder to keep cash out of the market.
Nygren: I just don't know. I've been a skeptic on the argument of fund cash levels as an indicator, but you do wonder where the resources came from to fuel this rally. |
