What a Week: Will the Fed Shop Abroad to Justify a Rate Cut?

SAN FRANCISCO -- It wasn't supposed to be this way. This was the week in which the long-awaited tech-led rally would emerge. The week began on cue, but ended with yet more disappointment for the wearying bulls.

Stocks stumbled across the board Friday after a profit warning from Intel (INTC Quote - Cramer on INTC - Stock Picks) Thursday evening and a Friday afternoon announcement of job cuts at Cisco (CSCO Quote - Cramer on CSCO - Stock Picks). The double dose of pain from two tech titans belied the notion that the "bad news" was already out from tech companies, or priced into shares. As if Intel and Cisco weren't enough, Friday's stronger-than-expected employment report prompted investors to worry that the Federal Reserve might not ease as aggressively as previously hoped.

Friday's big drop couldn't wipe out four days of gains for the Dow Jones Industrial Average, which ended the week up 1.7%. But the S&P 500 finished the week off 0.1%, while the Nasdaq Composite -- down more than 5% on Friday -- shed 3.1% for the week.

The latest warnings from tech bellwethers such as Intel and Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks), and by newspaper companies Dow Jones (DJ Quote - Cramer on DJ - Stock Picks) and New York Times (NYT Quote - Cramer on NYT - Stock Picks), grabbed the headlines this week. But the problems aren't just here. Cisco warned of a "worldwide" economic slowdown and perhaps the biggest story was the latest rumblings from Japan, which most investors ignored.

On Wednesday, Japanese Finance Minister (and former Prime Minister) Kiichi Miyazawa stated that Japan's financial condition was "near a state of collapse." Miyazawa later sought to mollify that view and Bank of Japan officials reiterated their support for a strong yen. That alleviated some of the damage. But the confusing statements, along with expectations that Prime Minister Yoshiro Mori will soon step down, reinforced the notion that Japan is rudderless and in disarray.

Don't forget that Japan, despite all that has ailed it for the past decade, remains one of the world's biggest economies and one of our biggest trading partners. And that raises the question: Will the Fed lower rates in an effort to aid Japan, even if economic data suggest the U.S. economy is not nearly as weak as previously feared?

Land of Falling Rates?

"No," was the initial reply of Marc Chandler, currency analyst at Mellon Bank and RealMoney.com contributor. "In general, international variables are not a big deal" in determining Fed policy unless -- as with the emerging markets' currency crises in 1997-98 -- they threaten our economy or shut down U.S. capital markets.

Despite continued pain in equities, the U.S. capital markets showed this week they are far from shuttered. Among other deals, France Telecom (FTE Quote - Cramer on FTE - Stock Picks) priced the largest corporate-bond deal in history Wednesday, while Freddie Mac (FRE Quote - Cramer on FRE - Stock Picks) priced a $10 billion deal Thursday, its largest one-day offering ever. Meanwhile, California continues preparations for a $10 billion deal that will be the largest municipal-bond offering ever. Finally, Loudcloud (LCDL Quote - Cramer on LCDL - Stock Picks) had to cut its offering price, but was able to go public Friday and managed to rise 1.6% on its first day of trading.

Thus, it seems the Fed has no extra incentive to ease from external factors.

Yet some of the Treasury market's rally before Friday's setback, and the week-long advance in precious metals, was "predicated upon the notion there could be a systemic issue here, just as there was in 1998," said Tony Crescenzi, chief bond market strategist at Miller Tabak. "Japan has not contributed to global economic growth for 10 years [so] a slight contraction there would not worry the Fed. There doesn't appear to be any systemic issue, but it is being talked about very gingerly" on trading desks.

The "Japan element" might prompt the Fed to lean more toward 50 basis points of easing on March 20 than 25, Crescenzi said, and even observers skeptical of any Japanese influence still believe the Fed will lower rates by 50 basis points. "The Fed is the world's central bank."

As such, Don Hays of Hays Advisory Group believes the Fed will lead a coordinated round of easing among the world's central banks to provide liquidity for Japan's ailing economy. Such efforts would help prevent the yen from rising at the dollar's expense, something the export-driven economy badly wants to avoid.

Hays noted that major indices in London and Germany also appear to be breaking down as prospects for European economic growth fade, boosting the case for coordinated easing. "Behind the scenes, the Fed is panicking" about the global situation as well as what's transpiring on Wall Street, he said, noting that the 13-week annualized growth rate of MZM money supply is now running over 20%.

Soaring money supply, in conjunction with today's jobs data and the first decline in wholesale inventories since April 1998 -- plus a host of other recent reports indicating the U.S. economy isn't in critical condition -- again suggest additional stimulus from monetary and fiscal policy could spur inflation's re-emergence.

"Companies borrowing today will spend tomorrow, and individuals will have additional capital" because of mortgage refinancings, Crescenzi observed. "I believe in the recovery scenario and haven't yet seen anything to change my mind. Inflation concerns will come back to the surface once the economy comes back."

Thus, he believes stocks will outperform bonds in the second half of the year and that corporate bonds will continue to outperform Treasuries, as has been the case in recent months.

On the other hand, Hays reiterated his view that central bank easing will fail to reinvigorate the world economy. He believes any signs of recovery in the U.S. will prove fleeting, and that as investors conclude the Fed is powerless to enliven the economy, they will become even more frightened of owning stocks. The real capitulation has yet to occur, in his mind, even though the Nasdaq set another 52-week low Friday and is now 59% below its peak, reached one year ago this weekend.

The "good news" for anyone worried about Hays' predictions coming to fruition is that his recent call for a short-term trading rally has not come to pass.

"The Nasdaq is weaker than I expected, I didn't expect to see more lower lows," he conceded Friday. But weakness in big-cap tech leadership is dragging down the averages and "camouflaging a little" the fact that most individual stocks aren't making lower lows, he argued. Notably, new 52-week highs bested new lows 145 to 34 in New York Stock Exchange trading Friday. While new lows outpaced new highs 199 to 56 in Nasdaq trading, the spread was far smaller than back in December.

Hays' camouflage comment recalls a point Jim Bianco, president of Bianco Research in Barrington, Ill., made Friday: That the S&P 500, excluding technology, rose 7.2% in 1999, 5.9% in 2000 and was up 4% year to date in 2001 prior to Friday's session.

Add recent strength in mid- and small-cap averages and you can make a compelling case that the bear market (to date) is indeed almost entirely centered in the big-cap techs. But given their recent popularity and huge influence on major averages, it's hard for most investors to see anything but red.