Insurance companies.

The single biggest cause of increases in insurance premia is lowering of interest rates.
(Not, as the politicians would suggest, huge awards in medical malpractice suits.)
Conversely, increases in interest rates lead to huge gains for insurance companies, hence,
lower premia.

I'm thinking that the answer depends on how a rate cut will affect inflation or inflation
expectations. If, after a cut, inflation is still seen as being under control, the
Financial sector would probably be best. (It would be interesting to drag up one of the
old '94-'95 studies.) But, if inflation is seen as getting worse, then maybe precious
metals would outperform. Or, if high inflation expectations caused the dollar to fall,
maybe foreign stocks would be the way to go. I'm betting on Financials with overseas
exposure.

But who am I? The only thing I have to my name in terms of rate cuts is last summer
predicting that they Fed wouldn't cut in January (lots of people were thinking they
would), and thinking they'd cut in August of '07 (which I still haven't had to change).

Thus, in the end, just do what you think... I was just giving you different views...

Last edited on: 02-19-2007 11:52 pm

However, here are some things to think about:
1. Has the market already discounted in a rate cut?
2. If the Fed holds steady (to assure steady inflation), will the market pullback a lot?
If so, maybe you might not want to buy such cyclical companies until later...
3. Interest rates target: a) the long-term employment level; and b) inflation. If the Fed
is seen as being poor "inflation fighters", this could have a very detrimental affect on
the US economy. For example, this alone will increase inflation. It will also increase the
long-term risk premium demanded on treasury yields (thus negatively affecting the economy,
as well as corporations, ebing taht their yields are tied to treasury yields... I am gonna
get more into this on another day, prolly thursday).
In the end, I think the Fed will cut, although not until July/August or so... The only way
I think it'd happen before that is if housing falls apart and the negative affect spreads
quickly throughout the economy... In other words, I think May is a little too soon

Last edited on: 02-19-2007 11:49 pm

Random side note: Each year in the US, businesses spend more than $500 billion. A slight
change in interest rates can alter business expenditures by billions of dollars. Thus, you
can see why a change in interest rates would greatly affect the well-being of those
companies that are very tied to the economy, and thus business spending, etc...

Thus, anything that is tied to that interest rate swing, you'd want to buy if you believe
the Fed is gonna cut soon.

anything cyclical (or tied to the economy) should do well. Tech, consumer spending-related
things, etc...

I don't like to rely on him but Cramer's Fed Cut Thesis seems to make sense:

http://www.thestreet.com/_tscs/markets/activetraderupdate/10339250.html

I know a lot can change until May but I am wondering how should one play this theory out.
What industries, besides Financials, should I build positions in if there is actually a
cut?