Greenie Raises Rates, and All Is Well

By Duru

December 15, 2004


Is anyone else amazed by the absolute contrary movements in the markets in response to the steady hike in short-term rates? Back in November of 2003, I suspected that just as the market did not move according to historical patterns when the Fed first began lowering rates, the market would behave differently from history as the Fed began to hike rates. But the current contrary moves are getting out of hand…aren't they? As expected, the Fed raised short-term rates another quarter point at yesterday's meeting. There was also no material change in the economic outlook. But after the dust settled on the day after, we find ourselves with a weaker dollar, a strong housing index, and lower long-term interest rates! I have posted the charts of this amazing combo below.


What gives? Well, I know a series of homebuilders, like HOV and LEN, have reported excellent earnings and even better guidance. Analysts have also been singing lovely songs about the sector. That news alone is enough to get the housing bears growling and re-inflate the supposed housing bubble. The dollar is under-going a secular decline, so any decrease in the dollar is consistent with the prevailing trend. No surprise there. The recent brief pop in the dollar was certainly a reaction bounce in anticipation of the well-anticipated Fed move. But I am truly confounded by the decrease in long-term rates. I suppose the bond market is waiting for the Fed to declare a robust recovery has finally begun and inflation must be battled now. Without such language, I suppose the bond players remain skeptical about the long-term health of this economic recovery. These lower long-term rates of course continue to help buoy the housing markets.

And the sum of all this seems to be that the market continues to remain comfortable with its current lofty levels. The NASDAQ finally made some new 52-week highs and is now poised for another quick spurt to either end this year or begin the new year. I will not show charts here, but all other indices seem poised for greatness. It is collectively an incredible sight.

I will close with two charts. If you are still one of the doubters that are hating on the American consumer, the important stock charts of Nike (NKE) and Best Buy (BBY) demonstrate that the market, at least, is quite confident in the general health of the American consumer. Nike has finally broken free from an EIGHT year trading range. This trading range was certainly wide, but a range nonetheless. The current break-out speaks volumes about the market's expectations. Best Buy is America's major electronics store, and it now appears ready to break out of its long-standing trading range of almost six years. They released earnings today that were treated quite favorably by the market saving the stock (for now?) from a breakdown below the 50DMA.

*Note well that Nike will be announcing earnings on Dec 16th!



All in all, it seems to still be all systems go for the market. I will continue to look to the Presidential Inauguration as the next real pivot point for the markets.

In the meantime, be careful out there!


© DrDuru, 2004