The Fed Fears Not

By Duru

February 14, 2004


While the rest of you are running around fearing all the potential bugaboos lurking to bite a serious chunk out of the market, the Fed remains a calm overseer over its sea of liquidity. During his semi-annual monetary policy testimony this week to the U.S. Congress, Greenie calmly stated that he fears not the fall of the dollar, fears not the current slow growth in jobs (high productivity is sure to come to a rapid end), fears not the dollar-pegged currency of China, fear snot the Chinese (or Indian) economic juggernauts that are sucking down U.S. jobs like a cheap milkshake, and, most of all, fears not the specter of rising interest rates. In fact, the only thing Greenie seems to be even a bit squeamish about is the ballooning U.S. budget deficit. He chided the political community for not yet producing a credible "constituency" that will stand up for fiscal discipline. Now, surely Bushie chaffed at such criticism as he has set forth a clear plan to cut the dear deficit in half in no time flat! (OK - if you believe THAT I have a printing press ready to make you a rich man all for a small fee…)

Why this seeming courage in the face of apparent fiscal and monetary madness? Well, as I have always stated, part of the Fed's job is to manage the psyche of the markets. And Greenie was in rare soothsaying form in giving a loose leash on future rate hikes. Let's all hope Greenie's courage is not misplaced. The market's subsequent one-day rally shows the market is still trying to keep the faith. The next two days of selling demonstrate how hard it is becoming to maintain that faith (click here to see some excellent commentary demonstrating how confused the market seems to be: selling off when the Fed changed its interest rate language and then rallying hard when it repeated this same language! Heck, note that Greenie even CLEARLY stated that rates must eventually rise to a more neutral stance and that the Fed could not remain accommodative indefinitely. I know - this stuff seems obvious, but don't tell that to the market right now.)

Here is a quasi-indicator to keep an eye on for those of you a bit technically inclined. Intel's stock is teetering on the edge of a critical support line at $30. After hitting its highs three times in the past few months, Intel is back down scraping at its low of this recent trading range. A crack here could be very bad for the Nasdaq and even the markets in general. Intel is still a tech stock bellwether and, if nothing else, a crack here will weaken the brazen confidence many have in the market's continued strength. Indeed, if Intel fails us here, it could drop for a good clip before finding the next support. Since I will stick by my 2300 target for the Nazz that I made to my buddies (=smiles=), I will try some brazen behavior and claim that Intel will make a headfake crack of support, lure some bears into committing fresh funds against tech, before sweeping them to disaster for a new up-leg. Dramatic stuff. Of course, this was my FIRST bullish prediction for a Nazz target for this entire rally, so certainly a contrarian might want to look askance at my sudden hubris. We will soon see whether the bluster is in my pen, the bull-pen, or the bear-pad.

Stay tuned and be careful out there!


Ó DrDuru, 2004