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=DJ TAKING STOCK: Can't Fix Stock Mkts Until Credit Crunch Eases

03/11/08 10:59

By Palash R. Ghosh

A Dow Jones Newswires Column

NEW YORK (Dow Jones)--The Federal Reserve's $200 billion expansion of its lending program to loosen the gummed-up credit markets gets an immediate nod from stock market observers, but its longer-term impact depends on whether the economy works itself out of this credit squeeze amid the threat of recession.

European and U.S. equities rallied on news the Fed will loan Treasuries to primary dealers for a 28-day term secured by collateral including agency debt, agency mortgage-backed debt and non-agency AAA-rated residential mortgage-backed debt. But in the longer term, skeptics think the stock market is simply discounting doubt about 2008 earnings expectations, and nothing will change until those overly lofty goals are corrected.

"The problem that the markets are facing is a lack of liquidity and confidence," said Wayne Titche, chief investment officer at AMBS Investment Counsel. "The Fed is stepping in as a lender of last resort. They have expanded the collateral that they are accepting, which is also important. The size of the infusion is very large, which is also a positive."

Anton Schutz, a portfolio manager at Mendon Capital Advisors, praised the move. "Lenders need to lend, that is critical to the economy, otherwise you can't have economic growth," he said.

Noting that European stock markets soared upon news of the expanded lending facility, Schutz believes U.S. equities will react positively across the board, at least for the short term. "At the end of the day, financials providing more liquidity is good for everybody," he said.

More importantly, he added, it shows that Fed Chairman Ben Bernanke is willing to take innovative and unique steps to help improve liquidity and stimulate the economy.

"When you have crises of confidence in the financial system, it's very difficult for equities to get going," said John Buckingham, manager of the Al Frank Fund. "This new initiative is obviously a step in the right direction and the stock markets have reacted positively."

However, Buckingham noted the number of "one-day or two-day wonders" and would prefer to see a sustainable rally over a month, rather than a couple of days. "Remember that, prior to this morning's jump, we had a 6% decline in just three days."

Jon Fisher, a portfolio manager at Fifth Third Asset Management, is highly skeptical that any Fed stimuli measures can stem the steady decline of equity markets until corporate earnings improve.

"Stock weakness since last summer has been due entirely to the acknowledgement that earnings expectations for 2008 are too high," he said. That won't change until those earnings expectations are lowered. "As we approach 2009, I expect the market to remain under pressure because current expectations for 2009 are also too high."

Fisher indicated that the Fed's interest rate cuts and other lending programs to financial institutions since last September haven't prevented the stock market from falling or inflation from rising. "I would guess today's maneuvers will have no more than a short-term impact," he said.

Titche believes the Fed is primarily seeking to relieve the turmoil in credit markets, rather than provide a quick fix for ailing stock markets. "The financial system needs time to figure out the mess we are in," he said. "The Fed can't save the players who leveraged themselves too far and made too many bad investments, but they can and should try to protect the stronger players who just need time to work through their problems."

(Palash R. Ghosh has been writing about U.S. and international equity and bond markets for the past 16 years.)

-By Palash R. Ghosh, Dow Jones Newswires, 201-938-2367; palash.ghosh@dowjones.com

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(END) Dow Jones Newswires

March 11, 2008 12:59 ET (16:59 GMT)

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