The Fed’s surprise rate cut of 75 basis points stunned investors on Tuesday.  Coming on the heels of an overseas sell off when Wall Street was closed for trading on Monday, it still couldn’t stop the market from falling sharply as investors worried that this move only confirms their worst fears, that a recession is on the horizon.

After taking a couple of days to digest the move the market rebounded with financial stocks leading the way.  On early trading yesterday the Dow Jones was down over 300 points before making a 600 point rally to finish the day up 300.  The rebound may have taken longer to materialize due to the troubling news on the tech front as both Apple and Motorola are expecting lower earnings this year. 

There is still concern though because European Central Banks are not following suit with their own rate cut.  You can expect exchange rates to fall even further in the near future because of the imbalalance in interest rates.

Is this a panic move by the Fed?

I don’t believe so, one would think they would have made the move anyway after their regularly scheduled meeting later this week.  However, due to turbulence in the global markets they must have felt that initiating the rate cut early would help mute its effects.

I believe it was a smart move on the Fed’s part.  If they had waited until after the meetings, who knows how much the market would be down by then.  At that point many would have considered the 75 basis point cut as a panic move.

President Bush has unveiled a $140 Billion economic stimulus package in attempt to forestall an economic downturn. However Wall Street reacted negatively to the news as stocks fell sharply.

Many investment analysts criticized the move as being to small to have any appreciable affect in the short run. Some also believe that when it finally does take effect the economy may already be in a recession.

The economy has been plagued by the triple whammy of a slumping housing market, tight credit market, and soaring energy and commodity prices. A weak holiday season has also renewed fears that consumer spending is falling.

Many investors are calling for the Federal Reserve to do more and believe that it is monetary policy rather than fiscal policy that will determine the fate of the economy. It is believed that rates must fall by at least another full percent in the upcoming months.

This may not keep the country out of recession but it may shorten the recovery time immeasurably. While the economy has been quite resilient thus far amidst the gloomy news in recent months, many feel that it won’t last much longer.

The recent news that Bank of America has offered to buyout struggling mortgage giant Countrywide Financial could be signaling a period of consolidation in the banking sector.  As I wrote in a previous article, financial stocks are going through a rough period right now but could be potential bargains when the sector does recover.

Many of the larger financial institutions after suffering large losses last quarter have been re-capitalized with new investment.  This doesn’t mean the credit crunch will end anytime soon though.  Still stung by the mortgage meltdown, companies are still reluctant to lend out funds.

Awash with new money and unwilling to lend it out, larger companies could be seeking to gobble up their smaller brethren while stock prices are still down.  Financial stocks are trading at way below their historical PE ratios currently.  What would be a smart buy for a single investor is even more so for these companies but on a much larger scale in this case.

It may take a few years but the mortgage industry will eventually recover.  People will always need a place to live.  The industry was a solid profit maker before this mortgage mess started and will be again in the future.

Smart investing has always been about taking the long run approach.  If you start seeing more news about mergers and acquisitions, it means it’s time to jump back on the bandwagon.