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

There is more than enough bantering back and forth out there about the week’s sell-off in reaction to long-term interest rates and the Bill Gross predictions for potentially higher rates longer-term.  So, if you are a super-bull then you’d want to use the leadership stocks to pile surplus cash into thinking the world didn’t really change.  If you are a chicken-bull (want to buy but not overly aggressive and still cautious) then you want to buy defensive stocks.  If you’re a bear, well at least you get the 5% interest.  We wanted to provide at least a partial list of the bull and bear go-to picks ahead of the weekend when many will be doing extra amounts of reading.

Aggressive Bullish Picks

IF this was just an unwarranted sell-off that came because of a rate spook and if Mr. Gross is wrong, then you go hard and fast into what has been working before.  Aerospace, Infrastructure, Metals & Mining, very selective Tech.  So out of selective tech the two most obvious names are Apple (AAPL) and either Google (GOOG) or Research-in-Motion (RIMM).  In Aerospace the go-to names are Boeing (BA) and United Tech (UTX).  In metals its Allegheny Tech (ATI), Rio Tinto (RTP), and Companhia Vale do Rio Doce ‘CVRD’ (RIO).  In infrastructure the go-to names are Fluor (FLR), Shaw Group (SGR).  This week Jim Cramer gave his New Four Horsemen of Technology and booted the old ones.

Defensive Stock Plays For Chicken-Bull

Because this sell-off is for a different reason, we have eliminated the power companies because of the tie being so geared toward higher rates.  We’ve also pulled out the debt collection companies because they ran so much after the last sub-prime scare.  Here was the first line of 20 defensive stocks back in February from the mini-Asian meltdown and here was the list of second-line defensive names.   This still leaves plenty of options, and we added in a few more.

First Line Defensive Stocks: Coca-Cola (KO), PepsiCo (PEP), Anheuser-Busch (BUD), ConAgra (CAG), Heinz (HNZ), Campbell Soup (CPB), Hormel (HRL), Kellogg (K), General Mills (GIS), Kraft (KFT), McDonalds (MCD), Merck (MRK), Pfizer (PFE), P & G (PG), Colgate-Polmolive (CL), Altria (MO), Reynolds American (RAI), and Clorox (CLX).

Second-Line Defensive Stocks:  Berkshire Hathaway (BRK/a), Flowers Foods (FLO), Del Monte Foods (DLM), Novo Nordisk (NVO), Alpharma (ALO), Playtex (PYX), Home Properties (HME), Aqua America (WTR), and Senior Housing (SNH), Sunrise Senior Living (SRZ).

The Bearish Trades

If you are still bearish or are completely bearish, then you’ve got Treasuries and all of the inverse ETF funds.  Some of the negative market ETF trades that move invesrely are the SHORT QQQ PROSHARES (PSQ), SHORT DOW30 PROSHARES (DOG), ULTRA S&P500 PROSHARES (SSO), SHORT S&P500 PROSHARES (SH), and more.  For short-term rate ETF’s you have the fairly new STREETTRACKS SERIES TRUST Lehman 1-3 MO T-BILL (BIL).  The more liquid interest rate ETF’s that actually trade are the iShares Lehman 20+ Year Treas Bond (TLT), iShares Lehman 10-20 Year Treas Bond (TLH), iShares Lehman 3-7 Year T-Note (IEI), and more.

As a reminder, defensive stocks still tend to get hit when the market gets so bad that they throw out the baby with the bath water, but they usually start to fall less and less and are usually the first stocks that traders commit money to at the turns.  Defensive doesn’t mean immune.  Also, all of these are merely part of a partial list and the list could have easily been 3-times the size.   

Jon C. Ogg
June 8, 2007

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