Why Wall St. Regrets Its Fed Sell-Off

Please give us back those shares we sold yesterday after the Fed announced that it would only cut rates a quarter point. The Dow dropped 294 points. Some financial stocks like Citgroup (C) and JP Morgan (JPM) dropped as much as 4%.

The stock market wanted the Fed to fix its problems. Credit is too tight so people won’t buy cars. Companies won’t buy new technology. Home prices keep falling. Banks are near failure.

The Fed’s response was simple. Things are bad, but not as bad as Wall St. thinks. We are going to give the credit markets a little relief than step back and see what happens.

The stock market spit on that thinking, and wounded itself without hearing what other plans the central bank might have in store.

Word then began to come out that the Fed did know exactly how tough the core credit markets were and had been working on a plan to help the banking systems all along. Stories in The Wall Street Journal and the FT  say that plan could be unveiled within days.

According to the FT: "The overhaul, which could be announced as early as Wednesday, is likely to take the shape of a new liquidity facility that will auction loans to banks. This would allow the Fed to provide liquidity directly to a large number of financial institutions against a wide range of collateral without the stigma of its existing discount window loans."

The market knows that most of its losses this year are because stock in some major financial companies have lost half of their value. Investment banks, brokerages, and money center banks are dying. If the shares in those companies were tracking the rest of the market, the Dow would probably be up 12% or 13% instead of just 8%.

But, the market was impatient as it often is. The Fed planned to fix things all along, just not in the way Wall St expected.

Investors can’t get back the shares they sold on the Fed news. But, they should not have sold them in the first place.

Douglas A. McIntyre