New Record Highs Again

Is the stock market now on borrowed time now? With a vertical rise over the period following the Fed's rate cut, there needs to be a point where the market at least takes a breather. Today's market action looks like that may be a possibility. The Dow and the SP 500 both moved to record highs and the NASDAQ indexes moved to relative highs. The price move in the Dow was a little stronger than the rest and provides some confidence, ok not much, but some confidence of an over extended move right here.

As we look at the trading day especially in the Dow, you can see a feeding frenzy occurring with about 3 hours to go. You could line this up pretty closely with the release of the Fed minutes from their last meeting. We were pretty much shocked by the revelation of these minutes. We have been giving the Fed some credit for maybe seeing the problems in the economy and making some adjustments to policy to ease the credit conditions.

After reading the minutes, we wonder what is going on over there. We jump into the notes (the bold is our emphasis):

"...to date, initial claims for unemployment insurance did not indicate a substantial and widespread weakening in labor demand, and labor markets across the country generally remained fairly tight, with several participants citing continued reports of shortages of labor from their contacts in some sectors.

Participants thought that the most likely prospect was for consumer expenditures to continue to expand at a moderate pace on average over coming quarters, supported by growth in employment and income. However, some participants saw indications of a possible weakening of consumer spending. Sales of automobiles and building materials had flagged of late, and survey measures suggested that consumer confidence had been adversely affected by the recent financial market developments. Also, a further tightening of terms for home equity lines of credit and second mortgages seemed possible, which could weigh on consumer spending, especially for consumer durables.

Participants reported that recent financial market developments generally appeared to have had limited effects to date on business capital spending plans and expected that business investment was likely to remain healthy in coming quarters. The access of investment-grade corporate borrowers to credit so far remained unimpeded, and rates on investment-grade bonds had declined in recent weeks."

So, the conclusions were reached and the published statement was based on this...

"The Committee agreed that the statement to be released after the meeting should indicate that the outlook for economic growth had shifted appreciably since the Committee's last regular meeting but that the 50 basis point easing in policy should help to promote moderate growth over time. They also agreed that the inflation situation seemed to have improved slightly and judged that it was no longer appropriate to indicate that a sustained moderation in inflation pressures had yet to be shown. Nonetheless, all agreed that some inflation risks remained and that the statement should indicate that the Committee would continue to monitor inflation developments carefully. Given the heightened uncertainty about the economic outlook, the Committee decided to refrain from providing an explicit assessment of the balance of risks, as such a characterization could give the mistaken impression that the Committee was more certain about the economic outlook than was in fact the case. Future actions would depend on how economic prospects were affected by evolving market developments and by other factors."

Now, we apologize for letting the Fed write our blog this evening but please help us understand what they are thinking. The stock market must think they are puppets not central bankers.

We saw an opinion from John Crudele that emphasizes the point.

Our point is and always has been that the residential real estate market is in trouble and will not allow people to continue spending more than they earn. This will put the economy into a recession. For now, the stock market thinks the Fed (see above arguments to the contrary) is smart enough to avert any problems. Oh my.