How to Play the Fed’s New Attitude

After the Fed changed its attitude and opened the discount window on Friday, there’s a whole new mindset on the Street. Cramer thinks the real impact of the discount rate cut is that it takes some of the fear away by letting people know that Bernanke is aware that there’s a problem and he’s willing to take action. Cramer thinks Uncle Ben will probably cut the federal funds rate – the rate at which banks lend to each other and the one that really matters – and that will help even more.

So how can Home Gamers play the Fed’s new bias? Cramer is looking to history and he thinks, assuming the Fed continues to ease, that the regional banks are going to be what thrive at this point in the cycle. Back in 1998 when the Fed started to cut rates, many people thought it was too late to save the regional players, Cramer said, but it turned out they were the best place to be. Cramer is betting the same thing happens this time.

Regional banks make money off “the spread,” that is, the difference between the short-rates and the long-rates. They essentially borrow money from you, the depositor, at short-rates, which are the federal funds rate that Cramer expects to get cut. Then these banks lend the money at long-rates usually to homebuyers at the regional level. They borrow at the short-rate, lend at the long-rate and pocket the difference, Cramer said, which is why the federal funds rate is so crucial to their well-being.

But there are a lot of regional banks out there. Which ones do you go with? Cramer’s actually breaking form and recommending an ETF. He likes the Keefe Bruyette regional bank ETF (KRE) because Keefe Bruyette “knows banks cold,” he said. Cramer is taking this path instead of picking the best-of-breed regional bank because there’s a good chance some of them will still have mortgage problems. There’s simply too much risk of unforeseen problems within a specific bank - even a good one - to put all your eggs in one basket. Cramer would rather spread the risk with an ETF that lets investors own banks in diverse regions of the country. He’ll happily take KRE’s 4.78% yield, too. The KRE had a nice pullback Monday, but Cramer said, as he always does, that the best way to get into any stock – including an ETF – is to get comfortable with it and wait a few days before pulling the trigger.

Bottom Line: If history is any guide, regional banks are about to come back into fashion and Cramer thinks they are the best way to play what he believes to be a coming cycle of Fed rate cuts. He would go with KRE for its diversified exposure.

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