The Federal Reserve cut interest rates last week and the market boomed. I did not foresee this outc
ome, and I’m still trying to understand the Fed’s thinking.

In the Strategy Lab Open competition,
StocksRider
pointed out that Wall Street and the media did a masterful job of painting a disaster if the Fed di
d not reduce rates. The Fed’s decision was not an easy one. I think
dishwasher
summed it up nicely as a tradeoff of style vs. principles.

But, now that the Fed has acted, it is more important to focus on the consequences of the Fed's act
ion rather than the reasons. As
Bobtheinvestor
posted, “we have been dealt a deck of cards by the Fed - not exactly what we wanted but that does n
ot mean that the world is over.”

The good news is that the immediate crisis looks to be over. Of course that was the intended effect
. But in my experience, it’s the examination of the unintended consequences that often leads to good
investment ideas.

For example, if other countries do not lower their interest rates, it is hard to escape the conclus
ion that the dollar is going to weaken – clearly an unintended consequence. In fact, during the past
week, the dollar has set new lows against the euro, the Canadian dollar traded at parity to the U.S
. dollar for the first time in over a decade, and the price of gold hit a 27 year high.

All else being equal, this improves the prospects for every other country relative to the U.S. maki
ng it important that we look globally for the best returns.

U.S. Global Investors (nasdaq: GROW) should benefit from this unintended consequence. U.S. Global r
uns many of the top-performing mutual funds over the past 5 years. GROW’s mutual funds invest in Eas
tern Europe, Emerging Markets and Natural Resources – all areas that should benefit from a weaker do
llar.

The Fed is pushing the accelerator at a time when there is little slack in the economy. This means
that another unintended consequence is that the shortage of refining capacity will get worse. This i
s good news for Valero (nyse: VLO), another one of my top holdings. Valero has suffered recently bec
ause Wall Street fanned the fear that a recession was just around the corner.

I see basically two ways that the refining capacity shortage can be resolved. Either new refineries
are put online, or there is a recession. I don’t see any prospects for any new refineries to be put
online in the next 2 years. I don’t even think the Federal and State agencies that would need to is
sue permits before construction would begin could act within a 2 year horizon. Therefore the only re
al threat I see to refining margins is a recession because that would reduce demand.

But with the Fed pressing on the economic accelerator, I think the chances of a recession have gone
down. Valero has not fully recovered from the August correction. If I were not already fully invest
ed, I would buy more.

Elan (nyse: ELN) is the other big position I have and I don’t think the Fed’s decision will have an
y impact on their future. Elan’s stock price is driven by sales of Tysabri, a multiple sclerosis dru
g. I don’t think any MS patients will change their treatment decisions one way or the other as a res
ult of the Fed’s decision. After all, when you are sick, you want the best drug right now. You’re no
t going to wait until interest rates fall.

As with last week’s discussion on Apple, I'd like to invite you to join this discussion by posting
your thoughts in a forum we've set up at Marketocracy. By sharing your insights hopefully we can mak
e better decisions about how to respond to the Fed’s decision than we each would have made on our ow
n. I will keep you updated as new posts add insights that affect my view.