Stocks Fall on Worries about Banks
Source: Business Week - January 28, 2008
January 2008

SCM Advisors' Chief Strategist Maxwell Bublitz was quoted extensively in a Business Week article by David Bogoslaw about the possibilities of recession amid renewed worries about weakness in the the global financial sector.

Quoted from Business Week:

If the unemployment rate can hold at or below 5.5%, the likelihood of a recession is small, said Max Bublitz, chief strategist at SCM Advisors in San Francisco. Unemployment ticked up to 5.0% in December from 4.7% in November.

Consumer confidence is deteriorating rapidly as people watch the value of their real estate and stock assets decline, he said. Workers may keep their jobs but without meanningful hikes in wages, it will be hard for them to keep up their spending, he added.

Since the news about Societe Generale's unwinding of fraudulent trades, the Fed has been criticized for over-reacting to the sharp drop in stock markets outide the U.S. on Monday, with some people claiming a 75-basis-point interest arte cut was unncessary. Fed officials say they were spurred to act less by Monday's market moves than by the cumulative decline in stocks through January, as well as ratings downgrades on bond insurers that cause more loan defaults and ongoing deterioration in home and other asset prices and consumer confidence.

Bublitz said he doesn't doubt the 75-point cut was needed and is calling for an additional easing by 50 points next week and a reduction in the Fed funds rate to 2.5% by June. But he does believe that the central bank has lost credibility because of its poor communication skills after undersized rate cuts in the fall, along with persistent statements about inflation risks.

He sees a repeating pattern of the market freaking out, the Fed lurching into a response and the market ticking up on that response and then calming down.

"To a certain extent, that is the pattern of a bear market and I'm not sure its been broken," Bublitz said. "The Fed needs to impact psychology more than anything. It's psychology that can cause earnings forecasts to go down, that causes forced selling and flights to quality."

If Bernanke & Co. can become "more sober in their analysis of whats going on, then I think theyve done their job," he said.

While he agrees that the 75-point cut on Tuesday was warranted, McCain at Key Private Bank said it will be difficult for the Fed to get out of cutting rates by another 50 points since that's the market expectation. Given the remaining crisis of confidence, it's better for the Fed to risk going too far and dropping rates by too much with an understanding they it can take the cuts back in a reasonably short time span if the economy stabilizes, he said.

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