Today trading resumes after the sell off on Friday after the job numbers disappointed. It is being discussed on Wall St of a sure Fed Funds rate cut of at least 25 basis points, with a high range of 50 basis points.
As we have discussed in several earlier posts we do not believe the rate cuts will have an immediate effect on the “economy”. We think if there is any immediate effect it will be on the financial sector of the economy, i.e., Wall St. and the large financial services providers.
Systemically, the economy is crippled wounded by the crisis in the subprime mortgage market. Essentially, aggregate demand (consumer purchasing power) has declined relative to aggregate supply (industrial production) in the housing sector which due to the multiplier effect, has a disproportional impact on the economy.
A Fed Funds interest rate cut even of 100 basis points will not increase aggregate demand where the excess capacity currently exists, the housing sector. The housing sector is so saturated with over priced current inventory; there will be no demand for loans even at the lower interest rate.
Because there will be no increase in demand for the lower interest rate loans, industrial production will not increase, no new workers will be hired and consumer consumption will remain flat due to the lack of any “new wealth” effect created by the increase in house equity.
Corporate profits will decrease due to the decrease in consumer spending causing earnings to decrease, causing stock equity prices to decrease, causing the stock market to decrease.
Global Equity Market Decrease:
Because the US is 30% of the global import market, any decrease in US consumer spending will decrease imports causing global markets to decrease for the major exporting nations.
Stocks we are watching for short term trades:
We are watching stocks that have exposure to international consumer staple or discretionary markets and technology that is not sensitive to interest rate gyrations.
We see MCD, KO, PEP, INTC, CSCO as good opportunities for short term trading profits. We will take positions in some of these on the opening.
We see Sony, Honda and the major Japanese exporters for short plays.