Investors will be watching every move by the Federal Reserve for buy and sell cues after being reminded last week that more aggressive monetary policy moves can spark explosive reactions in the financial markets. Analysts say they see credit turmoil only temporarily arrested by the Federal Reserve's surprise cut in the discount rate and that more will need to be done by the Ben Bernanke led Fed.
Linda Duessel, market strategist at Federated Investors says, "we’re not prepared to say we are out of the woods yet and that we’re through with this correction. I think the fact the Fed has done what it has done says we could end up with just a correction and not a bear market."
At the worst levels last week, a variety of indices fell enough to hit a 10% decline from the late July highs marking an official "correction".
That's at the crux of the bull/bear debate -- whether the market set a bottom at the 10% 'correction' level and is set for a broader rebound, or whether more blood letting is to come. A big part of the outcome in the battle of the bulls and bears lies in large part with the Federal Reserve.
"This is not the panacea for the problems in the market, or the economy," says Ned Riley, chief executive officer of Riley Asset Management of the Fed's decision Friday morning to cut the discount rate by a-half point 5.75%. "I am very optimistic long term but the problem we have is a systemic growth problem. We’ve taken the housing market out of the equation for the consumer, values have fallen and the Fed should be more continuous in this easing process."
Richard Barone, chairman of the Ancora Group of Companies, echoes those sentiments saying "the Fed has taken baby steps. It's going to have to become more vocal on what it intends to do and that is provide liquidity throughout the system."
Barone believes the Fed could initiate "another discount rate cut in the next week or two, and maybe some more jawboning into the market that they will provide liquidity if and when needed."
Peter Schiff, chief executive of Euro Pacific Capital takes a more bearish stance. He says, "the Fed can't protect the market, they can’t stop the economy from collapsing. They made the bed under Greenspan and we’re all going to have to lie in it."
"This move is like a trial balloon," continues Schiff. "Bernanke would love to cut the Fed funds rate but he knows the dollar would collapse. Bernanke knows the economy is going into recession, but he can't tell the truth, he can't tell the truth on why he’s not cutting (the Fed funds rate).
Schiff advises investors avoid financial shares. "The financials went up because of short covering, but they're going a lot lower, they’re ticking time bombs. I remember the homebuilders , people were recommending the stocks because they were trading at low multiples, but earnings vanished and earnings will vanish in the financials."
"Any number of stocks that dropped to multi year lows, during the swoon of the last few weeks would be a very fine place to begin being a value investor," according to David Leibowitz, managing director of Burnham Securities, who didn't name specific stocks but commented on a variety market sectors he's looking at.
"The deeper the value, the more interest I have. I am looking looking at companies with diminutive debt, that raises the dividend every year -- companies that might be so cash flow positive that they are also buying their own shares. I am also looking at some stocks that have gotten beaten down because of events and whether they’ve been beaten too much."
More Rate Cuts?
If interest rate cuts are what the bulls need to push the market higher, Robert Heller, former Federal Reserve Board governor thinks we will be seeing rate cuts.
"The Federal Reserve is saving the market now, and explicitly to reduce the anxiety in the credit market and that I think they have accomplished", says Heller. "The Fed is poised to cut (rates at the next policy makers meeting in September). The Fed funds rate is very high at 5.25% compared to 90 day Treasurys selling at 3.8% That's an enormous spread, the Fed should ease up."
As the markets wait and see what happens next in the credit markets and how the Fed reacts, John O’Donoghue, head trader at Cowen & Company, sees some stability emerging into the market.
"I would tend to think we’re going to get into a level of stability for the next week, or two and see what shakes out, but I tend to think into any strength people will be net sellers."
O’Donoghue says by Friday the market could be “not to far from unchanged or up a little bit.”