Sunday, December 10, 2006

Fed Meeting Right Around the Corner

The jobs report turned out a Goldilocks’ type number with a few extra jobs thrown in to make the porridge just right.  The numbers from the prior months were revised upward so as to confuse the markets.  For the first hour we saw some see-saw motion and then like a shot, we took off.  What was the reason for that?  Well, apparently the new Treasury Secretary felt he would give the markets something to think about.  His comments were that the dollar needs to be strong and that China needs to let its currency rise against the dollar.  Huh?  How can both currencies get stronger?  Maybe the rest of the world’s currencies have to get cheaper versus the two strong ones, here and in China.  Ok.

That confusion gave the stock market ample room to rally hard for about an hour to the highs of the day but failed to get up to Thursday’s high.  Stocks ground lower the rest of the day but did manage to go out higher than Thursday.  

The big news of the upcoming week is the Fed meeting on Tuesday and this should be a nonevent due to the Fed likely leaving rates alone this time around.  You know how we feel about this.  The Fed should raise rates just to save face and gain some credibility with the markets but we both know that is just not going to happen.  They have been out talking about how the Fed didn’t ever say it would lower rates and is instead thinking of raising them.  Now is their chance to make good on those Idle words.  The Can Not raise rates this week.  What can their statement be?  Well, we looked at the current economic conditions and decided that it doesn’t warrant an increase in rates at this time.  But, we are certainly going to be hard on inflation if it should occur.

Let us be clear on this point.  The Fed is not concerned about inflation.  It is allowing much credit to be generated all around the financial system.  This is to keep the economy going.  These policies have given the extreme liquidity required to keep the stock and bond markets up.  With cheap credit, the markets can stay afloat but we don’t think the path of least resistance is up, quite the opposite.  The problem is that the Fed has created a highly debt laden economy and has little room to help the economy if it should need it in the next year.  

Be careful out there.

Dow Industrials:  12,307.49  +29.08
VIX: 12.07
QQQQ:  43.90
RYVNX:   17.19
RYAIX:  21.64
RYCWX:  36.24
TLT:  90.24
BEGBX:  14.24  (possibility the dollar has bottomed)

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