Don’t Count the Bear out Yet!

04/29/2008 12:00 am EST

Focus: MARKETS

James Stack

President, Stack Financial Management

Although valuations look interesting, it's not yet time to rush back into the market, advises James Stack, editor of InvesTech Research.

The most bullish word on Wall Street is "Recession!" In almost all cases, by the time a recession is finally recognized in the media headlines and by financial pundits, most of the bear market damage is typically over.

There have been a couple rare exceptions-most notably when the Federal Reserve has lost control-which recession headlines have not been a good precursor of a bear market bottom. Unfortunately, this appears to be one of those times.

There are only 3 instances in history when the Federal Reserve cut the Discount Rate 8 times, and the stock market was subsequently lower than when the Fed easing began: 1929-1932, 2000-2002, and today.

There's little or no evidence that an economic bottom is at hand. In barely two years, both Housing Starts and Building Permits have fallen from 24-year highs to 17-year lows. In spite of massive liquidation sales by the country's home builders, the inventory of unsold homes continues to plague the depressed housing market.

Don't think these are unprecedented, dangerous times? Consider.

  • For the first time since the Financial Crisis of 1914, the Federal Reserve has cut the discount rate twice within 2 days. And they not only did it once, but on two separate occasions-in both January and March!
  • In the $30 billion bailout of the fifth largest US investment bank, Bear Stearns, the Fed invoked a little-known depression era law last used in 1932!
  • On the most recent rate cut (#8), the Federal Reserve reduced the discount rate by a whopping ?% pt. from 3.25% to 2.50%. In its 95-year history, the Fed has never made an aggressive cut of that size when the discount rate was already at less than 4%!

Clearly, Bernanke & Co. are pulling out every imaginable stop to halt the slide in consumer and investor confidence. And while Fed officials and bankers will always claim (to their dying breath) "the Fed does not target stock prices," you can bet your bottom dollar they're doing exactly that right now.

If Wall Street stabilizes, then Fed officials breathe easier. If Wall Street drops to new bear market lows-especially after 8 discount rate cuts now-then expect additional rate cuts and even more dramatic, confidence-restoring announcements from Bernanke and the Federal Reserve.

In the meantime, we'll continue to follow our defensive, safety-first course.

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