Weekly Outlook: The Fed's 3% Solution

Stimulus package? Check. Rates slashed to 3%? Check. Inflation concerns out the window? Check and double check.

With the Federal Reserve's decision this week to lower the Fed fund rate by 50 basis points to 3%, it could have not been more clearer that the Fed is nearing panic mode over the economy--or at least the stock market, which has yet to meet the Fed's aggressive rate cutting with convincing and broad-based evidence of a change in investor psychology and mood. As has been the case with rate cutting campaigns in the past, the markets have remained flat to lower as every last bit of bad news is wrung from Wall Street and, increasingly, the technology sector (see "Trouble in Techland" below).

By lowering rates to 3%--and by making clear its willingness to lower the Fed funds rate even further if necessary to avert recession--the Fed is paving the way for what some market analysts call "early stage" stocks. These are the stocks that are the most sensitive to shifts in credit availability, and include both homebuilders and retail stocks. Indeed, the homebuilder's index is up some 23% from its mid-January closing lows. The retail HOLDRS or RTH have similarly moved almost vertically over the past two weeks, gaining ten points from just under $86 to nearly $96. The problem with these stocks, of course, is that many of them were dramatically oversold over the past several weeks--many being among the companies most adversely affected by the credit-related correction that began in October 2007. This means, among other things, that many of these stocks are below their 200-day moving averages--making suspect any show of strength in these stocks, at least until they are able to close meaningfully above that 200-day line in the sand.

Nevertheless, not all retailers are suffering equally. Retailers like Abercrombie and Fitch (ANF | Quote | Chart | News | PowerRating), The Gap (GPS | Quote | Chart | News | PowerRating)and TJ Maxx (TJX | Quote | Chart | News | PowerRating) are above their 200-day moving averages, as are best-of-breed retailers like Costco (COST | Quote | Chart | News | PowerRating), Best Buy (BBY | Quote | Chart | News | PowerRating) and Wal-Mart (WMT | Quote | Chart | News | PowerRating). It is also important to remember that not every bank loaded itself with subprime mortgage debt. Particularly when the focus shifts from the larger national--and even international--banks to the smaller, more regional insitutitons, traders are more likely to find the sort of financial names that will benefit from the Fed's monetary-easing largesse, without having to spend much of that largesse digging themselves out of a self-imposed subprime hole.

Trouble in Techland?

The massive losses among some of Wall Street best and brightest are increasingly an old story. And it actually appears that we may be close to the moment when news of massive writedowns in and of itself fails to move the market. But the idea of trouble in technology is a relatively new one--and represents an interesting theme on the day that Microsoft announces its unsolicted bid for Yahoo, a bid with a premium of more than 60%. MadMoney's Jim Cramer has said that he has "thrown in the towel on technology." Why? Cramer's got a number of reasons: from played-out product cycles to poor seasonal tendencies (February to June being historically a time of underperformance in technology). But the simple fact of the matter is that even good earnings from technology companies are not being rewarded by investors bidding share prices higher, as we've seen in names from Apple (AAPL | Quote | Chart | News | PowerRating) to Microsoft (MSFT | Quote | Chart | News | PowerRating).

On a risk-reward basis, says Cramer, you are better off with the credit-sensitive stocks for which the Federal Reserve increasingly looks prepared to move heaven and Earth, than you are with many technology names. And while he sees no reason to bum rush the exits, selling into strength as good an idea when it comes to technology stocks now as it is about selling any stock, any time.

Soc Gen's Rogue Trader Beats Fraud Charge

We have reached the part of the story about the colossal trading scandal involving French bank Soceite Generale and its rogue trader, Jerome Kerviel, when we stop asking how Kerviel got away with unauthorized directional trading that cost Soc Gen about $7 billion, and start wondering how the bank did not realize what was happening sooner.

At least that it the tack that Kerviel has taken, claiming that not only were his techniques "not at all sophisticated," but also that he couldn't believe that his superiors did not know the size of the trades he was involved in. In testimony reprinted in the French newspaper, Le Monde, Kerviel said that it was "impossible" to make the kind of money he claimed with small position sizes.

According to his testimony, Kerviel first got the rogue trader bug in 2005, after the terrorist attacks in London helped his bet against the market become profitable. Kerviel has been cleared of fraud charges. But if found guilty of a charge of abuse of confidence, he could serve up to seven years in prison.

Stocks in the News

Stocks in the news this week include a number of companies with impressive earnings reports for the most recently ended quarter, as well as a surprise bid for Yahoo! by software titan Microsoft on Friday.

Halliburton (HAL | Quote | Chart | News | PowerRating) beat analyst expectations this week in terms of both net income and revenues. Sales from overseas operations grew by 27%, boosting the company's bottom line as the economy slowed in the U.S.

EMC (EMC | Quote | Chart | News | PowerRating) reported strong quarterly profit growth of more than 35%, with gains in virtually all business segments from software licensing, professional
services and systems maintenance.

Starbucks (SBUX | Quote | Chart | News | PowerRating) announced this week that it would close stores and stop selling breakfast sandwiches as part of a restructuring plan geared toward getting the gourmet coffee company back to basics.

Narrowing profit margins and a good-but-not-great revenue forecast for 2008 led investors to sell shares of Amazon (AMZN | Quote | Chart | News | PowerRating) this week.

MBIA (MBI | Quote | Chart | News | PowerRating) reported its biggest quarterly loss ever this week, informing investors that the troubled bond insurer would suffer $3.5 billion in writedowns leading to a quarterly loss of $2.3 billion.

Exxon (XOM | Quote | Chart | News | PowerRating) reported the largest quarterly profit ever for an American company this week, with news of its $40.6 billion quarter.

Microsoft (MSFT | Quote | Chart | News | PowerRating) helped put a little spark into the market on Friday with news of its unsolicited $44.6 billion dollar bid for Yahoo! (YHOO | Quote | Chart | News | PowerRating).

What to Look for Next Week

Monday: Factory Orders
Teusday: Chain Store, Retail Sales / Consumer Confidence
Wednesday: Mortgage Refinancing Index
Thursday: Initial Jobless Claims / Pending Home Sales / Bank of England, European Central Bank Announcement
Friday: Wholesale Trade

Best Performing Stocks (PR 8-10) of the Last Five Days

Here are some of the best performing, high Long Term PowerRatings stocks of the past five days. This week, all of the listed stocks have PowerRatings of 9 or 10.

Walt Disney Company (DIS@DIS | Quote | Chart | News | PowerRating). Long Term PowerRating 10
Aqua America (WTR@WTR | Quote | Chart | News | PowerRating). Long Term PowerRating 10
Wellpoint, Inc. (WLP@WLP | Quote | Chart | News | PowerRating). Long Term PowerRating 9
Medco Health Solutions (MHS@MHS | Quote | Chart | News | PowerRating). Long Term PowerRating 9
Idexx Laboratories (IDXX@IDXX | Quote | Chart | News | PowerRating). Long Term PowerRating 9

Worst Performing Stocks (PR 1-3) of the Last Five Days

Here are some of the worst performing, low Long Term PowerRatings stocks of the past five days. This week, all of the listed stocks have PowerRatings of 1 or 2.

UltraShort Basic Materials ProShares (SMN@SMN | Quote | Chart | News | PowerRating). Long Term PowerRating 2
Blockbuster, Inc. (BBI@BBI | Quote | Chart | News | PowerRating). Long Term PowerRating 2
Trina Solar Ltd. (TSL@TSL | Quote | Chart | News | PowerRating). Long Term PowerRating 1
Global Sources Ltd. (GSOL@GSOL | Quote | Chart | News | PowerRating). Long Term PowerRating 1
First Marblehead Corp. (FMD@FMD | Quote | Chart | News | PowerRating). Long Term PowerRating 1

David Penn is Senior Editor at PowerRatings.net