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Why Market's Placing Faith In Fed Rate Cut

Thursday, 25 Oct 2007 | 2:31 PM ET

I noted this morning that the market seems to be placing a lot of faith in a Fed rate cut. Lowry's has noted that over the past three sessions, the Dow Industrials has gained 50, 53 and 68 points, respectively, in the final hour of trading.

For a look at why traders have such faith in the Fed, look at some of the comments that have been on the Street recently. A good example is Jason Trennert and the researchers at Strategas, who noted this morning that "The Fed may cut because of housing, but what lower rates seem most likely to stimulate is business spending."

The note goes on to say that:

--Several sectors in the economy -notably exports and nonresidential construction - have been very strong;
--But to keep growing and exporting, we will need to keep equipment spending up; rate cuts will help;
--Business confidence measures have been depressed, which Fed rate cuts could help change.

What about employment?

--Unemployment claims have trended higher the past several weeks, but are still not extremely elevated.
--We've never had a recession without firing picking up substantially.
--But with the uncertainty about housing, the Fed will likely take out additional insurance.

Many on the Street believe that the Fed may even be so bold as to cut 50 bp, as well as lower the discount rate. Here's much of the basis for why the market is holding up, despite clear indications from companies that U.S. sales are, for the most part, disappointing.

Example one: Cummins . Known for its truck engines, they gave earnings and guidance below expectations. Though they blamed the weakness on changes related to emission regulations, the miss was a surprise to the Street. Cummins, analysts note, has a history of beating and raising --neither happened this quarter. Down 15%

But when international sales are amazing, they can overcome U.S. weakness. Look at Black and Decker : sales in almost every part of their North American operations decreased... but the European business posted a double-digit sales increase. Sales also increased double digits in Latin American and Asia. As a result, they beat expectations. They raise their full year guidance; stock up 5%.

Questions? Comments? tradertalk@cnbc.com

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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