Reading Greenie's Tea Leaves

SAN FRANCISCO -- By dampening expectations for an intermeeting rate cut, and then waiting for the stock market to rally on its own before doing the deed, the Federal Reserve sought to get the most bang out of its 50-basis-point bomb today.

Clearly, the Fed's guile worked to perfection. The Dow Jones Industrial Average rose 399.10, or 3.9% today, its third-biggest point gain -- although not similarly historic on a percentage basis. The Nasdaq Composite soared 156.22, or 8.1%, notching its fourth-largest percentage gain ever. Elsewhere, the S&P 500 climbed 3.9%, the Russell 2000 rose 2.4%, and the Wilshire 5000 Total Market Index gained 3.8%.

All in all, it was a good day for equities, and I'm certainly glad to have been positively disposed (i.e. "long") heading into the session. When that positive bias was adopted on March 22, one of the "reasons to be bullish" I submitted was the overriding negativity that prevailed at the time. In the wake of market and Fed action today, the bearish sentiment is likely to be shaken, if not largely eradicated.

In perhaps the first crack in the negativity, Jim Rohrbach of Investment Models in Orlando, Fla., issued a "buy" signal for the Nasdaq after the close tonight, reversing a sell call made on Feb. 9. Rohrbach's NYSE Composite model is still flashing a "sell" recommendation, as it has done since Feb. 23.

As previously reported, Rohrbach's models are not designed to identify exact tops or bottoms (a good thing, considering what's transpired in the Nasdaq of late). The call tonight suggests he thinks there's more room for the index to run.

Clearly, "the trend is your friend" and "don't fight the Fed" apply, and there was a lot of talk about indices crossing critical technical breakouts today. But unless you believe economic woes and the inventory overhang/debt troubles in technology have suddenly been erased -- not to mention the slowdowns in Europe and Japan -- logic dictates there's some risk to equity prices, at least short-term.

In addition to the aforementioned return of enthusiasm, note the Dow is up 13% since March 22, while the S&P is up 12%, the Nasdaq higher by nearly 27% and the Philadelphia Stock Exchange Semiconductor Index up a whopping 38% since their recent lows on April 4.

That doesn't mean I'm suggesting it's time to start thinking of "reasons to be bearish," because the economy appears on the mend (or at least out of the depths) and Fed rate cuts are very likely to rekindle growth. But perhaps it is time to starting thinking of reasons to be cautious.

Longer term, one reason for caution is the prospect of inflation's re-emergence, as reported earlier today. Omitted from that story was the fact the Fed's statement did not include any reference to inflation, nor did the central bank's statement after the March meeting.

"Maybe the Fed can't say 'inflation is not a problem' with a straight face, so they ignored it," mused Jim Bianco at Bianco Research in Barrington, Ill., who suggested Alan Greenspan is willing to risk future inflation because it's more politically palatable and easier to manage than a recession.

Perhaps the inflationary potential explains why the 30-year and 10-year Treasury bonds sport lower prices and higher yields then on the final trading day of 2000, "despite all the talk of recession and easing," he mused. The long end of the bond market "sees the inflation threat."

Hazard Lights Are Blinking

Finally, the earlier piece about inflation alluded to the moral hazard issue.

Give kudos to the Fed for not cutting rates between meetings when the market was plummeting in March, nor earlier this month after the weak employment report got the "Fed cut now" crowd in a frenzy. But it's overly optimistic to believe the Fed learned its lesson from Jan. 3, when its apparent -- or actual -- efforts to use monetary policy to target equity prices proved a fleeting success.

One risk to today's move is that it ultimately will meet the same fate as the intermeeting rate cut on Jan. 3: After being eagerly embraced at first, that ease was subsequently perceived by many investors as a sign the Fed was frightened about the economy and/or worried about some systemic risk. (Such sentiments were heard today, although mainly in hushed tones.)

A more directly pessimistic spin is that the Fed is still targeting stock prices; they've just gotten savvier about to how to do it. A commonly heard refrain on Wall Street was that the Fed's action today was Rubinesque, as in the former Treasury Secretary, not the Flemish painter.

"All this was about the stock market," said Bianco. The longtime Fed critic noted the Fed's statement directly addressed the so-called reverse wealth effect and concerns about capital spending, which are both direct allusions to the stock market.

The Fed's move today caught the Fed funds futures market completely off-guard, a change from recent history, Bianco conceded. But "what end does it serve the Fed to be completely mysterious?" he wondered. "I think they were better off letting the market anticipate, so Fed moves don't create this kind of excitement. Unless [the Fed] wanted to get everyone excited about stocks again."

Also, what damage did Fed governors do to their credibility with the drumbeat of positive comments about the economy in recent weeks. In retrospect, they now seem geared merely to get investors to discount today's surprise move. Will Wall Street allow Fed officials to "cry wolf" going forward?

Finally, as someone publicly critical of Greenspan before it was fashionable, it's been fascinating to watch the mainstream press more recently come to the realization the Fed chairman doesn't walk on water. It will be interesting (and telling) to see whether investors can rediscover the faith in the coming weeks and months.

Kibbles and Tid-Bits

Many readers dismissed criticism of Cisco's (CSCO) John Chambers last night because the source, Jeff Brotman, is an academic, and "those that can't do, teach," as one emailer suggested with gleeful disdain.

Please note: Brotman is a part-time professor (note the word "adjunct" in his title) and full-time managing partner of Ledgewood Law Firm in Philadelphia, which represents public and private companies in a variety of financial and related transactions.

The point of the story was not to fault Chambers for being human, as none of us is perfect. The intent was to caution investors of the dangers of putting blind faith in anyone, no matter what their reputation or standing.

Those still convinced of Chambers' managerial prowess should read the withering page-one story in today's Wall Street Journal.

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