ETF Expert

Fed Chairman Bernanke didn’t mince words. He put forward the notion that the Board stands ready to take "substantive additional action."

Further easing is not only likely, but we’re probably going to get a more assertive 50 point cut this time around, taking the Fed Funds rate down to 3.75%. Additional liquidity-loosening efforts through the discount rate, the rate at which banks may borrow directly from the Federal window, may also be chipped away at as well.

Am I jumping the gun? Will the Fed make a tired, limp 0.25% cut and a comment or two about inflation yet again? I think not. And here’s why:

In my early posts at this web log, I gave my own probability estimates on the likelihood of a recession. And they are dramatically higher than than the predictable 50/50 call by the National Bureau of Economic Research President Martin Goldstein. He believes a recession may be slightly higher than a 50% possibility, while Goldman Sachs recently said it’s a "done deal.")

If you split the middle between these two hallowed organizations, the probability is roughly 75%. I pegged it at 80% on the Fed’s favorite indicators, most of which point to 2 consecutive quarters of negative growth.

Here’s why the Fed can no longer afford to be "behind the 8 ball" any longer: One of the most revered stats that monetary policymakers follow is the Purchaser’s Managing Index, or PMI. It has "receded" every month since June of 2007, finally falling below 50 in December 2007. Specifically, the 47.7 reading is perilously close to the dreaded 47, consistent with the arrival of negative economic growth.

If you couple the above facts with clear indication of rising unemployment (4.6% mid-year, 5.0% today), the Fed has all of the ammunition needed to cut 1/2 of a point. And, of course, the Fed’s desire to avoid political criticism and investor disgust.

Keep in mind, the rate cutting direction does not mean that stocks will hit new highs anytime soon. Nor has the Fed actually cut rates, so we will have to wait to see how much the Fed Reserve follows through. Indeed, if they make the same mistake of effectively calling a 50 point easing "the last cut," any hopes for a rally would be dashed promptly.

If the playbook goes according to expectation, however, there’s a floor in place. Downside risk is capped on the old saying, "Don’t Fight the Fed!"

Meanwhile, with broad indexes 10% off their peaks, and many segments in 20% bear market losses (e.g., financials, retail, semiconductors, homebuilders, small cap, micro cap, consumer cyclicals), the upside for beaten-down names and momentum gainers alike appear to have potential on the tailwind of Fed activity.

I wouldn’t jump into the weakest areas just yet, mind you. I would stick with the winners until the smoke finally clears. They include:

1. The iShares Global Consumer Staples Fund (KXI). I have been with it throughout 2007. And I see no reason to abandon Coca-Cola (KO), Altria (MO), Nestle or Unilever today either.

2. The Market Vectors Agribusiness Index Fund (MOO). It’s expensive on valuations, perhaps. But the gorwth story remains compelling. Investors are willing to pay for proven growth, and there’s no better story than the "food creation" sector. (See previous columns on MOO here.)

3. The iShares S&P Global Materials Fund (MXI). Global Materials had been whacked by roughly 9%, which is not much better than the S&P 500 SPDRTrust (SPY). There is a big difference, however. MXI is still comfortably 6% above its long-term trend whereas SPY is 5% below it.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.