Monday, August 06, 2007

It's Fed Day

There are only a few key points to mention this evening as we look at this week's trading. The first seems to have something to do with the FOMC meeting this week. At this meeting, the Fed will try hard to decide what to do with interest rates. We don't think this is too tough a decision based on their prior resolve to hold the line on inflation.

More to the point is the stock market's optimism on what it perceives as almost a direct order from Jim Cramer that the Fed lower rates this week and as we used to say in the favorite board game Monopoly, do not pass "Go" but proceed directly to "a rate cut". Sorry to say, but the Fed does not take the advice of One guy, even if he happens to be Jim Cramer. They do tend to follow the market mostly (at least recently) and the market does not seem to believe a rate cut is quite right at this moment in time.

Ok, maybe we should clarify the last paragraph. The market wants a rate cut, so what else is new, but the actual belief in the prices is not there. Right now there is just talk and that talk is coming mostly from one guy. But, the stock market seems content to go higher on the back of a phantom rate cut that they think is possible as early as Tuesday.

It has been our position that the Fed's next move will be a rate cut, but we do not envision it on Tuesday. The market does not seem to be in too bad of shape above 13K and all and there is that inflationary pressure the Fed sees. They need to look tough in the world of currencies and the dollar has definitely been struggling as of late. We keep thinking it will turn around and move higher but it keeps on leaking. Can a Non-decision by the Fed on Tuesday give us some additional strength in the dollar? Just in case you don't remember, our position is that the Fed will cut rates this fall when the stock market drops to "unacceptable levels". And, we do expect a good rally at that time--we think that's quite a few weeks from now and also quite a few Dow points from here.

There is a more specific reason for the Fed to lower rates and that is to protect the banks from problems. This is a current issue with those banks that have invested poorly in structured credit. Now, those valuations may be hurting them but it seems that the Fed will let it go for a while. If the banks lead the stock market decline over the next few months, they will lower rates sooner rather than later.

The other item is the clear oversold nature of the market. You may not think so because the market rallied hard on Monday but the underlying technical conditions of the market do not confirm the market's advance on Monday. According to the WSJ there were well over 600 new lows on Monday and breadth was barely positive with advancers above decliners by about 200 issues, not the power of a bull move.

We have been expecting a rally from the lows and it looks like this may be it. As we mentioned in a prior post, we are looking for about 13,675 on this run and that may happen as early as tomorrow (especially if the Fed cuts...dream on).

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