The Fed, Wall Street's Tool

(Stocks in this article: NYSE: SPY, NYSE: DIA, Nasdaq: QQQQ, NYSE: SDS, NYSE: QID, NYSE: BA, NYSE: CEG, NYSE: UBS, NYSE: MRK, NYSE: LM, Nasdaq: YHOO, NYSE: CCU, NYSE: EK, NYSE: KFT, NYSE: HMC, NYSE: RCL, NYSE: TOL)

Mixed data has the market still wandering ahead of the 2:15 FOMC Policy Statement. ADP offered plenty of hope with its job additions data showing 130K. Fifteen minutes later, the advanced GDP report for the fourth quarter showed a disappointing growth rate of 0.6%. Both these figures are often revised significantly, so with the data mixed, the market is without direction while leaning in favor of economic softness and hoping for a strong follow up Fed rate cut. Hope, however, is not a solid investment catalyst my friends. You should buy stocks based on the signal already received from the Fed and federal government. They will do everything they can to support the economy, and we here at The Greek are pleased with the effort so far, however late it came.

Many are perplexed today as they ponder how employment can hold up while GDP sinks. First of all, if the data is accurate, there can of course be many reasons including varying time tables. One factor is very possibly foreign demand for U.S. goods and services that are produced on international soil. Since GDP only measures goods and services produced in the U.S., while capturing exports, it misses some of what multinationals do overseas for foreign customers. This would be supportive of employment in the corporate home office, limiting middle management cuts, while also missing softening domestic demand for goods and services. Exports, however, were weaker in Q4, versus Q3, indicating perhaps a dissipating positive international influence. We're already on record here regarding our view of the importance of the American market to American multinationals and global consumption.

Q4 GDP Report (Advanced)

Real GDP rose 0.6%, short of economists' consensus expectations for a rise of 1.2%. This strengthens a growing viewpoint that the economy may already be in recession in the first quarter of '08. It looks to us like a part of the weakness came on a Q3 build in inventory that was not satisfied in Q4, both domestically and in exports, which also softened. What that says to us is that you could level Q3 down for excess and level up Q4 for failure to meet that excess, but it still points to a weakening economy.

Of the expansion that did occur, it looks as if a greater portion of it was financed through debt, probably including credit card usage. However, we expect this is common for the holiday dominated fourth quarter. Personal outlays increased 5.5% in Q4, versus 5.3% in Q3, but the savings rate came down to 0.2% from 0.6%, implying the usage of debt financing. Real personal consumption expenditures increased 2.0% in Q4, versus 2.8% in Q3, which should not surprise anyone. The price index rose 3.8% in Q4 versus 1.8% in Q3, largely on rises in energy costs including gasoline and heating oil etc. Excluding food and energy, prices still rose 2.5%, compared to a rise of 1.9% in the third quarter.

For 2007, the tally for Real GDP growth came in at 2.2%, down from 2.9% growth in 2006. Most of this change resulted from the downturn within the residential real estate market, which was down again near 24% in the fourth quarter.

Implications for FOMC Policy

In English, here's what we think this means to you and how it might impact the Fed decision. There's concern raising information here regarding inflation, and economic growth also looks in jeopardy. Therefore, Wall Street Greek anticipates a token 25 basis point rate cut when the FOMC Policy Statement is released at 2:15 p.m. EST. We say token because of the words of William Poole, in his statement accompany his nea vote regarding the emergency cut. He stated the economy and market could wait a week for the regular meeting. That seems to imply the Fed anticipated making a big move at the meeting, likely 75 BPS. It's also possible the Fed had a 100 point move in its bag and anticipated this meeting, leaving 25 to spare for later use.

The Fed now has to weigh market expectations and the possibility of a return of volatility and risk of financial market correction if it stands pat, despite the big move. Therefore, possibly against its plan (unless it's outsmarted us all) and because its own words have proven an insignificant forecasting tool, we expect it to make a token 25 BPS move now. It should also offer strong wording and encouragement that it stands ready to further act if and when necessary. If the Fed cuts by 50 points, it has effectively shown itself a market driven tool that contradicts every white paper ever written by its members.

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