Let's Give the Fed Action a Chance

As one who owns the oil stocks, I never thought I would cheer at the prospect of down commodity prices, but here we are hoping for price relief. The weekly inventory numbers just released showed an increase of 6.2 million barrels to the U.S. stockpile, and the price of crude has softened a bit. I feel this price spike has to retreat, or the dollar and the rate of inflation will become even larger problems.

The Fed's actions Tuesday were welcomed and innovative. The critics are all over the move as not enough, or too much, or ineffective, or too meddlesome. Let's give it time, but I think the move is a sea change in the battle to reliquify the markets.

By pledging AAA mortgage paper (or other stuff) for a loan of Treasuries, the investment banks can keep such AAA paper on their books since they now have an outlet for it. They can also get back to the business of buying and selling such paper, and the market has a chance to find a clearing price. All good and maybe it'll take more than 24 hours for such a move to work its way through the system. Give it a chance.

We need to get the markets liquid since, despite the fed funds cuts by the central bank, mortgage rates are actually up the past two months from an average of 5.5% for a 30-year-fixed to a little over 6%. Mortgage rates need to come down to encourage would-be buyers to enter the housing market and sop up some of the inventory.

I have said I think the market has seen its low, but it wouldn't be the first time I have been wrong. Don't be at all surprised if Tuesday's rally corrected by half in the days ahead. Moves like that are common. The risk to my view is that Tuesday was just a rally in a bear market, and such rallies are generally steep, fast and furious, only to eventually disappoint. The burden of proof is on the bulls to hold the January lows. Invest, don't trade.

My granddaughter, Lola Jane, thinks I have been much too serious lately, and I need to get off the market fixation. She is, of course, right. I am the only one who knows this, since, at 18 months of age, she doesn't talk in a language anyone else understands. But she and I communicate.

So, for diversion, let me recommend a Scottish author I came upon. Ian Rankin writes first-rate mysteries set, surprisingly, in Scotland. His protagonist is a flawed but decent detective named John Rebus. He doesn't save the world. He only tries to find the bad guy in a very real life setting. Start with his earliest work, "Knots and Crosses." It's fun to watch the character grow. Available in paperback and on Amazon.

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Bernanke Got It Right

This column originally appeared on RealMoney at 7:54 a.m. EDT.

Franklin Delano Roosevelt gave his first Fireside Chat on this date in 1933. Gentle Ben took a page from the handbook Tuesday and calmed us -- and excited the stock market -- with a surprise gift of a new way to try to introduce liquidity into the system called a "Term Securities Lending Facility."

Something new and innovative was needed. The Fed rate cuts to date have driven money out of the dollar without providing stimulus to the system due to the freeze-up of the credit markets. The Fed will take $200 billion of stuff, including AAA mortgages from investment banks and give them Treasury paper back. The Treasury paper can then be used in a bunch of ways to stir the pot and get the money flowing again.

It is a great idea.

I have written recently how the Fed needed to stop cutting the fed funds rate to help halt the attack on the dollar and get liquidity into the system where the choke points actually exist. Way to go, Ben!

Now, lower the discount rate (where banks borrow directly from the Fed) to the same level as the fed funds rate, and don't cut the fed funds rate by more than 50 basis points at the March 18 meeting. I actually hope they cut the fed funds rate by 25 basis points to show the world we are serious about defending the dollar. Any potential market disappointment with a smaller reduction in the fed funds rate can be countered with a reduction in the discount rate.

I guess the test of the January low has been passed with flying colors, at least for now. The huge move in the market was, in part, short-covering, but "up is up." I continue to believe that the lows we saw in January will prove to be the bottom.

If my guess is right that the pressure on the dollar will begin to abate, then oil prices should come down. I figure oil should retreat to around $90 in the next couple of months. That's an intuitive stab. I have no evidence that $90 is the right number. I mean it more directionally than precisely. It doesn't help as much as you would think in that the average price for 2007 was $72. And I continue to favor the oil stocks since they are trading as though the price of crude was around $65.

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Vince Farrell writes daily for RealMoney about the economy and outlook for the markets. Some stocks he has recently featured include ExxonMobilXOM, EOG ResourcesEOG and Fannie MaeFNM.