Why hasn't the stock market responded to a Fed rate cut

The markets are continuing their downslide from the recent top of 5383 to sub 5100 levels. in the intermittent time US Fed has cut its rates twice by 75 and 50 basis points respectively. The Fed discount rate has reduced to 3% overall. The move by Fed is largely seen as an act to prevent US from falling into recession and to boost consumer spending across the board. This magnitude of cuts would have usually been seen as a double delight for emerging markets given the excess liquidity flows that would flow into these geographies. However post sub prime mess with increasing defaults by consumers/borrowers, foreclosures and bankruptcy claims of various hedge funds and write offs by investment banks on Asset backed securities, the crisis situation has become an albatross around the neck of the US economy. The unanticipated 75 basis points cut announced last week instead of bringing cheers has taken the world by surprise and struck a cautionary note . Analysts across the globe have started forecasting a large and looming crisis for global markets that would result from a recession in the US economy. FII's all across the emerging markets who have made stellar returns over the last 4-5 years of Bull run have started booking profits even on their long term investments. They are only offsetting the losses made from the sub prime fiasco that was orchestrated by them. In this kind of scenario, money isnt flowing into countries like India and China as most investors prefer to sit on cash. As we all know, liquidity is the mother's milk for all bull markets and in its absence, bears definitely have an upper hand atleast for the moment.
As a note of caution for the FED, they would be prudent enough to know that it was bad credit under the Greenspan regime conjugated with unscrupulous lending practices to consumers with lax credit standards, that led to this collapse. Now by cutting the lending rates, more bad money is going to flow into and out of the US economy. As more bad money flows behind existing bad money, problems only get compounded. Wouldnt it have been more prudent to take the hit, take the losses, suffer write offs, get into recession,face the problems and after having weeded out the excesses in the economy, a prudent call to revive the economy should have been deliberated upon.

Impact of Fed rate cuts:
* Every time the fed rate is cut, the dollar is going to crash even further and as a result crude oil
will shoot up to unprecedented levels. As CLSA has pointed out crude oil at $200 doesnt seem
far away if Fed keeps cutting rates frequently.
* Gold prices, already at life time highs, will inch up even further from current levels as
whenever the OPEC countries feel rich and smell of surplus money, the same flows into gold.
* For Emerging markets like India that were trading at reasonable valuation 4 months ago at
15000-16000 valuations (Nifty 4600 approx), it was the first Fed rate cut by 50 basis points
in October'07 that led to the flow of "hot and speculative" money into India which propelled
the Sensex to the overstreched zone of 21000. Its this excess money that has flown out of the
market within a couple of days on Black Monday and Terrible Tuesday of Jan 21 and 22. Fine
the excesses have been removed or washed away from the bourses but not before sucking
out a lot of blood on Dalal street. Investor's wealth estimated at 7,00,000 crore have been
completely wiped out and traders with positions in 'F n O' (Futures and Options) are still
smarting from their losses. It will take atleast six months or more than a considerable amount
of time for them to recover and get back to their trading terminals. Its more of an emotional
shock rather than monetary losses. Over the past two weeks, the stress levels of traders have
heightened to unexampled levels, so much so that a famous lake in Gujarat has been sealed for
two months to prevent investor suicides.

Its indeed quite understandable as to how difficult it is to be a Fed governor. But Ben Bernanke is purely playing to the gallery at the moment without realising the impact of his actions on the global financial stability.