He Told Ya So: Today's Action Vindicates Fed Head's Comments

Once More, With Feeling

SAN FRANCISCO -- Predictably, I took a lot of heat for last night's piece in which I (uncharacteristically) defended Alan Greenspan.

The Federal Reserve may yet cut prior to March 20, but Greenspan's effort to dampen expectations for an intermeeting rate cut seems wiser still in the wake of today's stronger-than-expected National Association of Purchasing Management's survey, auto sales, and personal income reports. (Those who believe the economy is disintegrating dismiss such government reports as "backward-looking" or irrelevant, unless the data happen to support the slowdown/recession view, as did the sharp rise in jobless claims.)

Less telling than the economic data, but significant, was the market's ability to survive (albeit not thrive) without another intermeeting rate cut. Once as low as 10,302.89, the Dow Jones Industrial Average closed off 0.4% to 10,450.14. The S&P 500 closed up 0.1% at 1241.23 after trading as low as 1214.50, a level that would have put the index more than 20% below its all-time high and in bear market territory, according to some. Meanwhile, the Nasdaq Composite closed up 1.5% to 2183.28 after trading as low as 2071.

A rally by Applied Micro Circuits (AMCC Quote - Cramer on AMCC - Stock Picks), despite its warning and rumors about positive comments coming from IBM (IBM Quote - Cramer on IBM - Stock Picks), later denied by the company, were generally credited with spurring the rebound.

But, as my colleague Justin Lahart noted on RealMoney.com's Columnist Conversation, the eagerness to believe the IBM scuttlebutt and the "suspicious" number of unsubstantiated rumors of good news raises the question of whether sentiment really had reached deathly levels, as the bottom-pickers contend.

We'll have a better sense of whether sentiment has turned tomorrow, following the warning after the bell tonight from Oracle (ORCL Quote - Cramer on ORCL - Stock Picks).

Once More, With Feeling, Part 2

Back on GreenspanWatch, what's notable is that the walls seem to be closing in on the chairman's sainted status, if they haven't already crumbled. On the one side, those who believe he was responsible for the excessive speculation of 1999/early 2000 think we are now experiencing the inevitable outcome of any bubble. On the other hand, those who participated in the joy ride deride Greenspan for "popping" the bubble and for not doing more to relieve their current pain.

Clearly the market still hangs on to his every word and some still consider him the "maestro." But the rising anti-Greenspan sentiment suggests I was correct to wonder if 2001 would prove to be the end of his championship reign.

That said, I'll attempt to re-explain why Greenspan was right yesterday, today's economic data aside. It's not that the Fed shouldn't react to what's going on in the economy, but I believe intermeeting rate hikes are bad policy, most especially when they reinforce the notion that the Fed is targeting the stock market instead of the economy. If the Fed continues to make cuts designed to appease the markets, it risks becoming enslaved to them. Every time rate cuts fail to reinvigorate equities (for more than a few days/hours), the Fed risks becoming like the Bank of Japan, whose multiyear "zero interest rate" policy failed to revive consumer confidence and/or the economy, much less the Nikkei. (Yes, I know there are huge structural differences between the U.S. and Japan, but the credibility risk is the same.)

Furthermore, if the economy is tumbling into recession (or already in one), the Fed is almost powerless to stop it, and thus needs to be very judicious when and how it uses its easing "ammo," which works with a lag regardless.

Greenspan's comments yesterday support the view that "we're in a recessionary process and still have more to work through," according to Kent Engelke, capital markets strategist at Anderson & Strudwick in Richmond, Va., a NYSE member firm whose money management arm oversees more than $1.5 billion.

The point being that recessions are a process and usually take eight to 14 months to work out, he said, almost regardless of what the Fed does.

In the past, stocks have started recovering about halfway through the recession, Engelke continued, suggesting that means stocks won't make a sustainable advance until early June.

Nevertheless, Engelke -- who a year ago predicted a significant correction for tech stocks and in mid-December said Nasdaq 2000 was a real possibility -- is "getting more and more optimistic" because of the rising "wall of worry."

The strategist is getting more optimistic about small- and mid-cap financial stocks such as Resource Bank (RBKV Quote - Cramer on RBKV - Stock Picks) and First Community Bancshares (FCBC Quote - Cramer on FCBC - Stock Picks). (Anderson & Strudwick has not done underwriting for either. The firm's asset management group has a long position in Resource Bank.)

Single-A rated corporate bonds also have value, he said, believing that as interest rates fall further, the currently high spread between such credits and Treasury bonds will narrow.

However, Engelke is not optimistic about tech stocks, believing the trend of outperformance by value stocks will continue for 18 to 36 months as the rotation out of yesterday's "must-own growth issues" continues. "The simple fact of the matter is that everyone still owns large-cap growth but virtually no one owns value," he said.

Using the so-called 90-90 rule, which states there's a 90% possibility that 90% of a parabolic move in a given stock or index will be retraced, the Comp could fall to as low as 1800 near term, he said.

Once More, With Feeling, Part 3

"I think we have bottomed for the reasons I mentioned," Doug Kass, general partner at Seabreeze Partners in Palm Beach, Fla., said today. "This is meaningful, definitive, and the start of an improved environment just when fear set in. I would emphasize that it won't be explosive, but a steady climb."

At the risk of becoming central Kass-ing, I return to the hedge fund manager because it is significant that a guy who claims his fund returned more than 80%, before fees, in 1999 and 2000 largely due to well-placed shorts is now becoming bullish. (Herb Greenberg once called Kass "a bear's bear" and he has been a favorite source of Barron's Alan Abelson.) And he's becoming particularly bullish about tech stocks.

"I don't think [Jim] Cramer is right" about tech's slippery slope, he said. "Tech is the most rapidly growing sector of the economy. People will always go back and play at some point because that's where the value will be. Leading tech companies will be the leading companies in the next market advance."

In the past two days, Seabreeze Partners has taken long positions in Corning (GLW Quote - Cramer on GLW - Stock Picks), JDS Uniphase (JDSU Quote - Cramer on JDSU - Stock Picks), Nokia (NOK Quote - Cramer on NOK - Stock Picks), the Nasdaq 100 Trust (QQQ Quote - Cramer on QQQ - Stock Picks), and chipmakers Cypress Semiconductor (CY Quote - Cramer on CY - Stock Picks), Advanced Micro Devices (AMD Quote - Cramer on AMD - Stock Picks) and Micron (MU Quote - Cramer on MU - Stock Picks). Simultaneously, the hedge fund has covered a host of short positions in tech names, including IBM, Palm (PALM Quote - Cramer on PALM - Stock Picks) and Research In Motion (RIMM Quote - Cramer on RIMM - Stock Picks).

I think it's probably too early for more than anything but a trading rally in tech and suspect folks like Cramer and Engelke are right about the destructive overhang in the group. But Kass, who is far from glib about this bottom call, said "it pays to be a skeptic and a contrarian -- that's how you get outsized returns."

After steering this column against the tide on many occasions, I have to respect that.