Tuesday, December 12, 2006

BBY Spoils the Party

Before we heard from the Fed, the market put on its best bear act for some time with the Dow dropping about 60 points in a half hour.  The broader market seemed a little worried that the Fed might actually raise rates???  

Then when the Fed finally did announce, there was a bit of a relief rally which took the Dow back near the morning highs.  This didn’t play quite the same in the broader averages as they didn’t make it back to the early morning highs.  Basically, Tuesday was not the best bearish day of all times and maybe not the second best either but it was bearish.

Before the market opened, BBY (Best Buy) announced earnings that were not causing happy thoughts among its investors.  BBY ended the day down nearly 5% after trading much lower than that early on.  BBY indicated that price cuts were required to stay with the competition and their policy of meet or beat competitors’ prices kept their margins down but that they would do it again if they had to do it over.  CC (Circuit City) fell in sympathy.  

Wednesday brings retail sales for November which we somehow think will not be as robust as everyone is hoping for.  With the news from BBY being a little less than expected, the rest of the retail world probably didn’t fair so well either.  

The Fed changed its comments on the housing market to “a substantial cooling of the housing market” adding the word “substantial”.  This may not mean much to the average person but you and us it means that the housing ATM is not performing up to speed plus the normal purchases for homes will not be made if “a substantial cooling of the housing market” is going on.

We think the Fed is very much painted into a corner.  Their options are limited at best right now.  If a slowing economy doesn’t bring “core” inflation down, they will be forced to raise rates.  At least, that’s what they are saying, we don’t know if they actually can or will.  The dollar is sitting on some support right now and didn’t get crushed after the Fed news, probably because of the sheer obviousness of the decision before hand.  But, if the dollar weakens due to a weak economy, the Fed will be thinking of raising rates but it may not be able to.  Day after day, month after month, these guys are Hoping for the economy to bail them out.  The Fed is a non-event.  

Clearly, the market does not agree with the Fed’s position that it may need to raise rates.  Bill Gross even made the statement that the Fed funds rate will be a full percent lower a year from now or so.  What does he see that the Fed doesn’t?  Well, one thing is they are trying to hold up the dollar.

Steve Kaplan at the True Contrarian says that with gridlock in Washington, the chances that the dollar is going up are good.  At the same time, he thinks the precious metals are in a position to drop quite a bit.  Take a look at the link to the left.  

Dow Industrials:  12,315.58  -12.90
VIX: 10.65
QQQQ:  43.80
RYVNX:   17.29
RYAIX:  21.70
RYCWX:  36.21
TLT:  90.82
BEGBX:  14.29

No comments: