More Rate Cuts Expected by Market.OK, investors, what now? Has the Fed ignited a new bull market, despite its shaky start? Or are we being head-faked? Maybe the market is wickedly sucking us in, so we can lose even more money in another dive. No one knows for sure. But I'm interested in the thinking of investment analyst James Bianco of Barrington, Ill. His strategy turns on a particular market-based clue. That clue is encouraging him to buy certain stock and bond groups, aggressively. Bianco keeps his eagle eye on a market you probably haven't heard of-the futures contracts Futures Contract An exchange traded agreement to buy or sell a particular type and grade of commodity for delivery at an agreed upon place and time in the future. Futures contracts are transferable between parties. for federal funds Federal Funds Funds deposited to regional Federal Reserve Banks by commercial banks, including funds in excess of reserve requirements. Notes: These non-interest bearing deposits are lent out at the Fed funds rate to other banks unable to meet overnight reserve on the Chicago Board of Trade Chicago Board of Trade (CBOT) The second largest futures exchange in the US, and a pioneer in the development of financial futures and options. . Speculators buy and sell these contracts based on what they think the Fed is going to do about interest rates. In an echo effect, the Fed is believed to pay close attention to this market when making its decisions. Since September, the futures market futures market, a commodity exchange where contracts for the future delivery of grain, livestock, and precious metals are bought and sold. Speculation in futures serves to protect both the developers and the users of the commodities from unfavorable and unpredictable has expected the Fed to lower rates. What's more, last week's half-point cut in short-term rates is only the start, Bianco believes. At the moment, the federal funds market Federal funds market The market in which banks can borrow or lend reserves, allowing banks temporarily short of their required reserves to borrow reserves from banks that have excess reserves. is projecting another 0.5 percent drop at the Fed's Jan; 31 meeting; and another 0.25 percent cut by early March. Even if the rate cut doesn't go that far, the Fed clearly hopes to cushion the slowing economy, make it easier for companies to borrow money and beat back any recession risk. In a special study for The Leuthold Group, an investment firm in Minneapolis, Bianco looked at the industry groups that respond the most when the Fed is expected to cut rates. His top picks: aerospace and defense, apparel, data processing data processing or information processing, operations (e.g., handling, merging, sorting, and computing) performed upon data in accordance with strictly defined procedures, such as recording and summarizing the financial transactions of a services, distillers, HMOs, pharmaceuticals, retail drugs and retail food. "These stock groups started to gain in mid-September, when the fed funds fed funds See federal funds. market first started predicting that the Fed was going to ease," Bianco says. "Since then, they're up more than 35 percent." Note that the market moves on expectations. These stocks rose when the general market looked weak, in anticipation of a cut in interest rates. With even lower rates expected, however, Bianco thinks they will rise again. Any rise could be quick, wrapping up the bull market in a couple of weeks. On the other hand, maybe not. |
|
||||||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion