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The jolt from Tuesday's big rate cut is already starting to wear off.



gave markets a two-day boost Tuesday with its unexpected 50-basis-point fed funds rate cut. But like sugar cereal, the rate cut created a high that was short-lived, and Thursday saw investors readjusting their outlook for a Fed-sanctioned combo of weak economic growth and potentially higher inflation.

"The Fed was wrong," writes Axel Merk, manager of the Merk Hard Currency Fund. "The Fed's decision boosts inflation. Oil above $80 is a clear indication, so is gold soaring, and the dollar dropping."

The dollar sank like a stone Thursday. It traded at par with the Canadian dollar, of all things, for the first time in 30 years, while also hitting new lows against the euro and the British pound. The trade-weighted dollar index fell to a new 15-year low, while gold soared $10.50 to close at $739.90 per ounce. Oil surged to a new record high, closing at $83.32 per barrel.

Several mining stocks approached their 52-week highs.


(FCX) - Get Freeport-McMoRan Inc. Report

gained nearly 2% and

Barrick Gold


rose 5.6%.

Shares of

Newmont Mining

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Southern Copper


also gained as the


and the

S&P 500

fell modestly.

Typically, the Dow Jones Transportation index rallies along with cyclically sensitive sectors like metals and basic materials. But Thursday,


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earnings warning stoked U.S. recession fears and pushed the transports down 1.9%. FedEx dropped 2.5% on the day.

Likewise, the yield curve grew steeper as investors in the bond market sold longer-duration bonds, which caused yields to jump, in anticipation of higher inflation. A higher yield on the 30-year Treasury bond threatens to negate the helpfulness of any mortgage-refinancing efforts for cash-strapped homeowners -- the day's hot topic on Capitol Hill, where Fed Chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson testified. Often refinancing means borrowers switch from an adjustable rate mortgage to a fixed-rate loan, which is based off of the U.S. 30-year bond yield.

The 30-year Treasury bond now yields 4.97%, up 26 basis points since Monday. The 10-year Treasury yield has risen 23 basis points since Monday.

Bernanke himself said Thursday that the economy cannot be "healthy" or "stable" if "inflation is out of control."

But it's hard to know what that means for Fed policy after a year of similar anti-inflation browbeating gave way this month to a dramatic rate cut.

"The only consistency here in policy is that the Fed's made clear anyone short the stock market is probably going to get whacked," says Merk. "All this rate cut has done is help sophisticated investors."

Indeed, Wall Street brokerage firms are trying to capitalize on the cut's confidence boost. They want to cast losses in a hopeful light and drum up a sense of urgency about taking advantage of "opportunities" to sell LBO-related loans at bargain prices. The firms have more than $200 billion of backlogged loans to sell.

The $13 billion of loans tied to

First Data's

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$29 billion buyout by Kohlberg Kravis and Roberts are expected to price Tuesday, but at a significant discount and with teaser side dishes like inexpensive leverage included.

Goldman Sachs

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posted a strong profit, but

Bear Stearns



Lehman Brothers



Morgan Stanley

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showed greater weakness.

Bear Stearns' CFO said it's losing business amid a reputation crisis sparked when two of its hedge funds wound up worthless. Lehman Brothers, Morgan Stanley and Bear executives insisted that the worst of the credit crisis is over, but noted substantial losses from markdowns of loans and mortgage-related products left in their inventory and on their balance sheets.

They closeout sale comes as debate rages on Wall Street about whether or not the accounting and valuation for all these assets and hedges against them is reliable, given that so much is left to management's best guesses.

"There is squishiness because fair value accounting isn't an exact science," says David Merkel, an investment consultant and contributor at


investment-ideas site. "Values are hard to calculate in a sparse market even if you're honest."

At a loan market conference in New York Wednesday, panelists from J.P. Morgan Chase and Goldman Sachs attempted to gin up investor interest by promoting the idea that the so-called smart money is hunting to buy the LBO loans, and that traditional investors balking at the deals are missing out. The sales pitch came amid ratings agency presentations that all highlighted the default rate under "recessionary scenarios."

Mark DeNatale, managing director in loan trading at Goldman Sachs, described the new players in the market as a smattering of "Forbes 100" list members or private equity firms buying loans of buyouts they didn't participate in. DeNatale even tried to put a positive spin on Goldman having to hold onto the some of the much maligned loans sold to finance Cerberus' buyout of Chrysler.

If this stuff was so great, and the banks weren't concerned about corporate defaults rising they wouldn't seem so desperate to get rid of it, says one fund manager who speaks only on the condition of anonymity.

Confidence, schmonfidence.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click


to send her an email.