Stocks Fall on Worries about Banks

Since the news about Societe Generale's unwinding of fraudulent trades, the Fed has been criticized for over-reacting to the sharp drop in stock markets outide the U.S. on Monday, with some people claiming a 75-basis-point interest arte cut was unncessary. Fed officials say they were spurred to act less by Monday's market moves than by the cumulative decline in stocks through January, as well as ratings downgrades on bond insurers that cause more loan defaults and ongoing deterioration in home and other asset prices and consumer confidence.

Bublitz said he doesn't doubt the 75-point cut was needed and is calling for an additional easing by 50 points next week and a reduction in the Fed funds rate to 2.5% by June. But he does believe that the central bank has lost credibility because of its poor communication skills after undersized rate cuts in the fall, along with persistent statements about inflation risks.

He sees a repeating pattern of the market freaking out, the Fed lurching into a response and the market ticking up on that response and then calming down.

"To a certain extent, that is the pattern of a bear market and I'm not sure it’s been broken," Bublitz said. "The Fed needs to impact psychology more than anything. It's psychology that can cause earnings forecasts to go down, that causes forced selling and flights to quality."

If Bernanke & Co. can become "more sober in their analysis of what’s going on, then I think they’ve done their job," he said.

While he agrees that the 75-point cut on Tuesday was warranted, McCain at Key Private Bank said it will be difficult for the Fed to get out of cutting rates by another 50 points since that's the market expectation. Given the remaining crisis of confidence, it's better for the Fed to risk going too far and dropping rates by too much with an understanding they it can take the cuts back in a reasonably short time span if the economy stabilizes, he said.

Oil prices lost some upward momentum after the equities rally fizzled, but traders seem to be taking their cues more from economic news than from slightly bearish inventory reports, which showed a 2.3 million barrel build in U.S. crude supplies last week. On NYMEX, the March crude contract settled $1.30 higher at $90.71.

A week ahead of the Feb. 1 meeting of the Organization of the Petroleum Exporting Countries, Iraq's oil minister said that oil markets were well supplied and that OPEC won't need to boost production levels, in line with sentiments expressed by other OPEC members earlier this week.

Among other stocks in the news Friday, Eastman Chemical (EMN) shares climbed 7.6% on news that it expects its strategic initiatives to double profits to $10.00 per share by 2012. The company said it expects to increase earnings per share each year from 2008 to 2012, with 2009 earnings expected to be 10% to 15% higher than in 2008.