So Much for an End to Tax-Loss Selling (continued)

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Mouth(dust) Memories

Without the benefit of either a preview of the jobs report or clairvoyance, I do not think the Fed will ease prior to Jan. 30-31, for the following reasons:

• The prices-paid component of the NAPM survey rose to 61.0 last month vs. 56.6 in November.
• Heading into Friday's jobs data, average hourly wage gains were nearly 4% on an annual basis.
• Compensation costs rose 0.9% during the third quarter, according to the Employment Cost Index report, after climbing 1% in the second quarter. Wages and salaries increased 0.8% during the third quarter, following a 1% increase in the previous three-month period. Benefit costs rose 1% during the September quarter, following a 1.1% increase in the June quarter.
• Energy prices have come down from recent peaks but were still 12.5% higher for crude oil, and 151% higher for natural gas than year-ago levels at Friday's close. (Thanks to my chat partner and energy maven, Chris Edmonds.)
• Personal income increased $30.0 billion, or 0.4%, and disposable personal income increased $20.6 billion, or 0.3%, in November, according to the Bureau of Economic Analysis.
• FedEx (FDX) said last week it will raise shipping rates by an average of 4.9%. AT&T (T) announced today its cable unit will boost prices 4.8%.
• You (still) can't rent a "decent" two-bedroom apartment in San Francisco for less than $2,000 a month, unless you're very lucky or well-connected.

Point being, although the economy is clearly slowing and there may be what seems like deflation-bordering-on-depression among equities, there are persistent and powerful inflationary forces at work. (As an important aside, such factors are a big reason why estimates for fourth-quarter S&P 500 earnings growth have fallen from 16% in June to 4.5% today, according to I/B/E/S International. And why the current estimate for growth of 9.2% for all of 2001 may also prove optimistic.)

"The Fed has a dilemma here," Jones conceded. But he believes an intermeeting rate cut is possible because the central bank's bias change signaled the Fed is "more sensitive to the downside threat of excessive weakness" than worried about said inflationary forces.

But wouldn't an "emergency" rate cut signal the economy is weaker than even most pundits' current fret? I wondered. Or that the current situation is as dire as the one in the fall of 1998, when, we later learned, lending to and borrowing by Long Term Capital Management put our financial system on the brink of ruin? (Ed Yardeni, chief economist at Deutsche Bank Securities, talking on CNBC about the need for 100 basis points of easing now vs. 75 in 1998 prompted the second question.) And if that's the case, shouldn't investors be more concerned than expectant? And don't those Fed-as-savior expectations speak to the moral hazard issue?

"The Fed would view this as rate cuts doing damage control rather than causing a new bubble," thus negating the moral hazard problem, Jones replied. But the Fed is worried about conveying the impression it is panicking more over the economy than the markets are panicking, he agreed. "That's one reason it might wait."

Another reason is that because an intermeeting rate cut wouldn't be a complete shock, should it occur, the impact of such action would be dampened, Jones said. The Fed "might have more effectiveness in limiting how much further stocks go down and maintaining the soft-landing [scenario] if they wait and cut by 50 basis points" at month's end.

I've come to the same conclusion.

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