Day Ain't Over Yet

Remember the movie City Slickers? Billy Crystal asks Jack Palance if he had killed anybody yet that day. Palance answers, "Day ain't over yet". Word came yesterday from the UK that the Royal Bank of Scotland (RBS - commentary - Trade Now) (better drop the Royal part), among others, needs another $50 billion or so, making it the most expensive bank rescue program yet. I hope I don't hear the boys at Citigroup (C - commentary - Trade Now) saying the day ain't over yet and they want some more time. I have no idea if they are on firm enough footing, but I worry that a lot of people have the same concern, and some of them are supposed to know.

All eyes will be on the Fed's announcement Wednesday afternoon. Interest rates will not be changed, but the language will be watched. "Economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period" is the touchstone. You could argue a change to that phrase is needed to give the Fed the flexibility in future to adjust rates. But with the heightened focus on every detail, the reality the Fed has to live with is that such a change would be interpreted as a first step on the road to tightening. Strong-dollar advocates would applaud such a move by the Fed, but dollar defense is not part of the Fed's mandate. The job of the Fed is to promote full employment and price stability. The other phrase to look for is, "Economic activity is likely to remain weak for a time". That could be tinkered with, but I expect the FOMC will pass on any change.

We get the employment report this Friday, and we will actually get another jobs report before the next Fed meeting in December. The moderates on the board should have no trouble convincing the hawks that two jobs reports in the next six weeks should provide a lot more information as to whether to change language or not. There is currently a considerable output gap (the difference between what the economy could produce and what it is actually churning out), tight credit conditions (especially for small businesses), high and rising unemployment (and the Fed usually stays "easy" until unemployment peaks), and sluggish wage growth. Former Fed Chair Arthur Burns said it was the job of the Fed to take away the punch bowl just when the party got started -- but not this early. The Fed is also in the midst of its almost $1.5 trillion purchase of mortgage-backed bonds and agency paper. My partner, Carole Berger of Soleil/Luna Analytics, told me they are not quite to $1 trillion in total purchases. It wouldn't make sense to be in the market buying paper, which is a de facto easing move, and then turn around and say you are going to contemplate raising rates.

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Vincent Farrell Jr. is chief investment officer for Soleil Securities Group and a regular guest on CNBC and other national print and broadcast media.

Prior to joining Soleil in August 2008, Farrell was a principal of Scotsman Capital Management. Before that, he was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.