We don't know and neither do they.

Fed Drops Load, Shorts soiled, Taken to cleaners, Stool flushed
Fed launches surprise attack, bulls stampede
Bears mauled, Injuries severe, many dead, wounded, MIA

Stepan N. Stool, PH &D January 3, 2001

Dr. Stepan N. Stool, Chief of Stock Proctology at Capitalstool.com himself mortally wounded, was seen hobbling through the clouds of smoke and dust, ministering to the wounded and dying on the frontlines. The plaintive pleas of the doughboys could be heard in the distance, "Dr. Stool, Dr. Stool, help us." The families of the dead cried out, "Dr. Stool, you let us down."

And Dr. Stool replied, "I warned you boys this would happen, only I too thought, not so soon, not so soon. I too have suffered the slings and arrows of outrageous fortune, of a foolhardy abandonment of caution and defensive emplacements.

Now, I have nothing to offer but blood, toil, tears, and sweat.

I have only just begun to fight.

The only thing we have to fear, is fear itself.

We shall neither fail nor falter; we shall not weaken or tire

We shall draw from the heart of suffering itself the means of inspiration and survival.

Never give in, never give in, never, never, never, never--

in nothing, great or small, large or petty--never give in except to convictions of honor and good sense.

I shall return.

No one should be surprised by the market's reaction to the Fed going into crisis management mode. The only surprise was the timing. That surprised the crap out of everybody. Here's what Dr. Stool's been saying in the last few issues of Capitalstool about the likely reaction to a Fed move:

The monkeys will do some nervous, anticipatory bottom picking (ever been to the zoo?) leading up to it. Ready, set, bang. Everybody buy! Dr. Stool guesses the market will go up about 10% in two hours when the Fed fires its blank. Then it'll churn and fail, leading to the next big wave down.

Like an asteroid dropping in the middle of the Hudson River, this move will upset the market's cyclicality.  It'll be a few days before Dr. Stool can get a handle on the longer term implications, but he believes that his original scenario will play out. He suspects, however, that this could be a precursor to the intermediate cycle up phase that he was forecasting to begin around the 20th.

Everything depends on the shape and behavior of the consolidation/pullback that follows this explosion.    

Of course the 20th is the day Shrub starts his new job, and Dr. Stool continues to believe that he will have his hands full with this collapsing economy.  

Dr. Stool still thinks that the market's going a lot lower for a lot longer. But in the very short run, say the next one to three days, the market could churn at these levels and a wee bit higher. For his outlook on the three major averages, click the links above.

The big question among the fundamentals types is whether the Fed is pushing on a string. Dr. Stool is reprinting his thoughts on those issues here.

Dr. Stool has been thinking about the consumption bubble (not just a tech bubble) we saw in 99-2000. Think about it. Did you shop till you dropped? Do you have everything you could possibly want for a few years? Do you have more debt than you'd like? Are you going to pay some of that down for a while? Guess what? You're not alone. So the corporate earnings slowdown is probably going to accelerate. This is a classic picture of a downward spiral that will be hard to stop.

Dr. Stool has also been watching this California utilities situation with mounting alarm. Today, the natural gas suppliers said no more for you, Reddy Kilowatt. Can you believe it? This is scary stuff folks. Anybody know how much of the US economy California is responsible for? 

Now, Dr. Stool is not a Fed watcher per se, and is certainly not a monetary analyst, but the proctoscope is showing some bizarre things going on in the commodities and interest rate charts, which may be connected to the California power grid. Dr. Stool is also aware of a reversal in the dollar and wonders how unstable things will get if the rest of the world decides they don't want to hold dollar assets for the time being. 

If the Fed is forced to act aggressively due to a destabilizing financial system, that could set off inflation fears, which this time would be justified. On the other hand, if they don't loosen enough, the system could implode into deflation. Keep an eye on the charts of bond yields, T-Bill rates, and commodities for clues. The charts will tell the story before the economic impact becomes clear. By then it will be too late. 

If you are interested in the precarious position of our financial system, check out Credit Bubble Bulletin over at Prudentbear.com.