The Fed is Now on the Right Track

The Fed is now on the right track. The best evidence of this is that the financials have outperformed the overall stock market since the first of the year. The surprise .75% cut last week sent many high quality banks up 5-10%. Even after today's late-day selloff in the face of the Fed's .50% cut, Bank of America and Wells Fargo, two top quality banks, finished higher.

Bank subprime losses sent the whole market down at midyear, creating recession worries. The bottoming of strong banks is a good sign that the market now believes that the big banks have adequetly reserved for future losses, and that the Fed's rate cuts will put a floor under the economy, ensuring increased bank loan demand and better profits ahead.

The other sign for a more optimistic view on the economy is that the consumer staples have rolled over in recent weeks. We have been suggesting here recently that such a possibility was possible. If investors are selling consumer staples, which are relatively insensitive to the economy, and buying financials, which are at the heart of the problems, the beginnngs of a new bull leg may be nearer than anyone thought, even two weeks ago.

I have complained for months about the Fed's slow-footed approach to the unfolding subprime crisis. In my mind, the .75% cut last week, was the signal that they are now firmly in a sprint to solve the problems. That is good news for us all.