Thursday, October 26, 2006

Perfect Fed

As you know by now the Fed declined to change interest rates this go around, not much surprise to anyone. We thought you might enjoy their statement, in case you haven’t or don’t read such things. Here is their statement:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

"Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.
Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

"Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

Here is ours from the last post:

The Fed will remain in a holding pattern on interest rates and they will warn that inflation could be a problem going forward but that they stand ready to fight it…blah blah blah.

Seriously, which one do you like better???

Well, the market reaction was almost a non-event. There was a little spike and drop right after the announcement but then the market just went on as if nothing had happened, pretty much the way it’s been trading for about three months. Nothing seems to affect this market negatively for long. While normally this would suggest a strong bull market, the actual trading is fairly quiet.

The volume of trading in Wednesday’s session was a bit higher than it has been in the past few months with only a few days of more volume since the July lows. We’re not sure if that really means anything but we will keep our eye on it.

The precious metals market seems to have started to come to life as the Fed warns of possible inflation and then says they won’t raise rates. This seems the perfect environment for the precious metals complex. We still believe there will be one more spike down that we will want to jump on so for now we are waiting for better prices, which may not come.

The one item we wanted to mention from the news on Wednesday is the existing home sales being down 1.9% after a drop last month of 0.5% which followed four months of declines. Said another way, the existing home sales have fallen for six months in a row. In that same report, we find that the median sales price was $220K versus a year ago’s $225K. This drop is not happiness for those people who bought in the past year or so. The good news in the report was that inventories fell 2.4% last month but those inventories still represent 7.3 months of supply at the current pace. This compares with a 4.6 month supply a year ago. So, there are still some pressures on the housing market.

[Editor’s note: Due to technical difficulties with the website, we were unable to publish our post until morning. We generally try to have the post up by 11 o’clock Central Time.]

Thursday morning: We see that Pulte Homes reports a 52% drop in quarterly earnings. They report that earnings were affected by high inventory levels and lack of buyer confidence. How do they know that?

No lack of confidence in stocks this morning as our futures are up again during the night corresponding to the European opening. We’ll see what happens but any time we have a strong opening, there remains the possibility of a reversal, maybe we should say “the” reversal.

Dow Industrials: 12,134.68 +6.80
VIX: 10.66
QQQQ: 42.43
RYVNX: 18.21
RYAIX: 22.20
RYCWX: 37.01
TLT: 87.89
BEGBX: 13.54

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