Bill Gross is a fixed income market hero.  A cut of this sort would undoubtedly help his own bond positions and values.  But regardless of his being able to win, his voice (and his peers) have been able to influence markets.  24/7 Wall St.’s take on this rate cut is that if this happens too rapidly, then the Fed runs the risk of turning a troubled dollar into a currency crisis not seen in decades.  We discussed on Friday the 100% chance of a 25 basis point cut and a small chance for a 50 basis point rate cut, based upon Fed Fund Futures contracts.  Our take is that a 4% funds rate would be an adequate wait and see level, mainly because even if rates go back to 1% there are still going to be many borrowers still in trouble.

The conclusion is as follows:
"……Ben Bernanke has no such luxury. While he does have the backstop of a global economy powering on at a 4-5% annual clip, today’s U.S. IPOs were more a creation of leverage and the shadow banking system’s ability to create productivity gains through finance, as opposed to technological innovation. With banks and their shadows in retreat and modern day “world saving committees” relatively impotent, Bernanke must do some heavy lifting as opposed to the light housework required of Alan Greenspan in 1998. An increasingly recessionary looking U.S. economy will likely require 1% real short rates and 3½% Fed Funds in order to stabilize a potential growth contraction in lending not witnessed since the early 1970s or, to be honest, Roosevelt’s depressionary 1930s. We can only hope that Bernanke, Paulson, and their cohorts recognize the danger and that the music keeps playing with the lights still turned on."

• Earlier this year Gross called for higher rates, so this is not without skepticism.
• All pundits are questioning the "Super-SIV"

Gross noted Citigroup (NYSE:) and Countrywide (NYSE:CFC) specifically here.  The more active bond-related ETF is the iShares Lehman 20+ Year Treasury Bond (NYSE:TLT) is the bond ETF that traders flock to over interest rates because it tends to have the greatest price volatility from economic and market events. The other two are iShares Lehman 7-10 Year Treasury (NYSE:IEF) and iShares Lehman 10-20 Year Treasury Bond (NYSE:TLH).

Other excerpts from Gross are the following:

….If these credit conduits contract, then a Federal Reserve seekingto resurrect a faltering economy with 25 basis point cuts in interestrates may confront the same unmanageable response from the privatesector during an easing cycle, as it did during the past several yearsof steadily higher Fed funds.

….Mortgage write-offs, credit card losses, and increasing defaults onsmall business loans will squeeze bank balance sheets and incomestatements for the next several years. That pressure in turn willresult in more conservative lending practices, which will induce not acontraction in credit growth, but a noticeable slowdown.

….There’s nothing like the strong arm of new laws and/or newspaperheadlines to straighten the spine of a lender faster than you canpronounce “Barney Frank,” or “Gretchen Morgenson.” Ask Countrywide’sAngelo Mozilo how many marginal loans his company will be making nowthat he’s being publicly pilloried for personal stock sales thatallegedly got him out before public shareholders.

….So both old-fashioned banks and their derivative, conduit-fedshadow counterparts will be growing their balance sheets a lot moreslowly in future months and quarters. That rather immediatelytranslates into a slower economy and the need for government assistancein the form of lower interest rates or liquidity pushes like TreasurySecretary Paulson’s “Super SIV.” Whether Paulson’s “Committee to Savethe World – Part II” will succeed like Bob Rubin’s original during theLong Term Capital crisis is debatable. The idea, first of all, iscounterproductive because it continues to hide subprime asset prices inthe “shadows.”

Jon C. Ogg
October 31, 2007

Some stock traders claim to be spooked by the thought of higher rates.  The two consecutive negative days were partially on this, but today was the mark to watch.  The 10-Year US Treasury Note just crossed back over 5.00% for the first time since August 2006.  The yield is currently at $5.04% to 5.05%, up 0.08% from last night.

An ETF that tracks the intermediate to longer-term maturities is the iShares Lehman 20+ Year Treasury Bond (TLT), and this is down 0.8% at $84.67.  Its stated ETF price moves inversely with the direction or change of interest rates, so as rates rise its price falls and vice versa. The slightly shorter time period ETF with a lower duration is the iShares Lehman 7-10 Year Treasury (IEF), and it is trading down 0.5% at$80.61 this morning.

If anyone is still hoping for a rate cut from Bernanke & Co., the markets are beating an entirely different drum.  The 10-year note is also the key for mortgage rates, and outside of the negative news still coming out of housing stocks would help explain the 5% drop in the homebuilder stocks.  The ETF that tracks homebuilders is the iShares Dow Jones US Home Construction (ITB), and its shares are down again today by more than 1.5% at$35.32 and are now down about 5% from the close on Monday.  In fact, average mortgage rates have climbed 0.14% this week.

Rates are dragging on stocks this morning, but not as much as earlier this week.  After 45 minutes of trading, here’s where we stand today:
DJIA            13,439.42; -26.25 (-0.2%)
S&P500      1,512.52; -4.86 (-0.3%)
NASDAQ    2,580.09; -7.09 (-0.27%)

Jon C. Ogg
June 7, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.