Navellier: It’s Off to the Races

09/27/2007 12:00 am EST

Focus: MARKETS

Louis Navellier

Editor, Blue Chip Growth and Emerging Growth

Louis Navellier, chairman and CEO of Navellier & Associates, says the Fed’s rate cut was just what the doctor ordered for the market.

Just as we thought: the Federal Reserve cut interest rates 0.5%, sparking an incredible market rally.

The Fed's rate cut decision was a bold statement that it's aggressively addressing the credit crisis. And the best news is, there's more to come. The Fed released a statement after their meeting and indicated that more cuts are on the way.

A big interest-rate cut may not completely fix the housing troubles, but at least it will give some much-needed relief to the battered subprime real estate market. Homeowners will be able to refinance at more attractive mortgages rates, and it should also prevent any more housing fallout from affecting the economy.

[After the rate cut], investors should feel a lot more optimistic about the economy. I'd say that [September 18th] was the most important day of Fed chairman Ben Bernanke's career so far, and I believe he hit a home run. The markets celebrated, with the Dow closing up 335.97 points and the NASDAQ Composite Index closing 70 points higher.

All the ingredients were in place for the Fed to cut. Inflation has been contained, which was evident in the better-than-expected trade deficit report. The price of imported goods fell 0.3% last month, while economists expected an increase of 0.4%. This was the first drop in import prices since January.

Plus, the US current account deficit, the broadest measure of international flows of goods and capital in and out of the country, narrowed to $190.8 billion in the second quarter. The current-account deficit now stands at 5.5% of GDP, which is the lowest level since the third quarter of 2005. Compare that to last year, when the current-account deficit represented 6.6% of GDP, and you can see how well we're doing on the inflation front.

The latest retail sales report was another reason for the Fed to step in and make a rate cut. Sales fell 0.4% in August (excluding vehicle sales), compared with a 0.7% rise in July. Economists were expecting a 0.1% increase.

The final reason the Fed needed to step in was the proof that the housing market's woes have spilled over into the financial sector. Lehman Brothers’ [earnings report gave] us a concrete example of how badly the financial sector was hit in August.

The good news is, things aren't quite as bad as analysts' worst-case scenarios. Analysts had made dire predictions that LEH would earn $1.47 per share on $4.23 billion of revenue, so at least the results weren't as bad as they could have been.

As you can see, the Fed has stepped in at exactly the right time. Their rate cut will help shore up the housing and credit markets before matters get any worse.

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