A Lot of Noise and No Information:

Are We Tired of Reacting to the Fed Yet?

By Dr. Duru written for One-Twenty

May 2, 2006


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I know I am just about the last one on the planet to comment on the latest Fed drama...I have a real job that sometimes keeps me up late at night. But you know me...when it comes to the Fed, I always have something to say, and this time is certainly no exception. TraderMike already did a great job summing up the reaction from around the web to Fed Chairman Ben Bernanke's misguided, off-hand response to Maria Bartiromo's (from CNBC) questioning about the Fed's interest rate position over the weekend at some cermonial dinner. The market quickly sold-off after Maria revealed the "news" that Bernanke told her that the Fed was not a dove and that the media (emphasis mine) should not have misinterpreted his statements as indicating that the Fed was almost finished tightening. The timing of the revelation was odd coming so late in the day, but I am not here to discuss the merits of yet another SEC investigation.

Instead, I am here to proclaim a resounding "Well, no kidding"?!?! I have written here countless times how the media persists in interpreting the Fed incorrectly. I started the year off saying that you cannot believe the Fed is finished until they actually say they are finished. And what is Bernanke doing worrying about what the media says or thinks?! I am getting more than just a little annoyed now. There is all this chatter about what the Fed currently thinks, or what they might do, or who said what to whom and when. We constantly hear this pundit argue that we will get one more rate hike and that is all she wrote, and then another pundit will argue it will actually be two. Heck, make it four and call me in 2007. Enough already! The Fed has been as clear as can be about its current course! It's the data stupid. The data will determine the Fed's next steps. This means the Fed can choose to raise rates one meeting, do nothing another meeting, and, shoot, even lower rates if the mood so fits. That is it. End of story. You cannot countdown to any ending unless you have a crystal ball giving you the economic outlook for the next year.

The market's willing gyrations at the next Fed utterance or willy-nilly interpretation of Fed-speak borders on sheer madness. Again, TraderMike has often reported on the churn of the markets. Even though the major indices have actually managed new multi-year highs recently, they have attained these levels mostly reluctantly and with lots of confusing chop and churn. The market needs a gameplan. It needs guidance. And Dr. Duru has the prescription. Take this step-by-step guide, and you can make us all rich...or fools for trying:

  1. The standard playbook says "Don't Fight the Fed." When the Fed starts raising interest rates, we are supposed to sell stocks, especially cyclicals. If you buy anything, only buy the defensive plays like health care and consumer non-cyclicals.
  2. The Fed has been raising rates for what seems like eons. Given the economy generally refuses to cool down, and the stock market refuses to stay down, we have confirmed that the "Don't Fight the Fed" adage has broken down...for whatever reason.
  3. Given that we expect a peak sometime soon, just get the selling out of the way now. Yep. That's right. I said it. Sell! Why are you hanging around anyway? Look at ya. You are all jittery and heart a-twitter. Worrying about the next Fed psycho-babble. Worrying about high oil prices, the summer driving season, and another hurricance season. Worried about global political tensions. All in a huff about inflationary pressures. Disturbed by the rise in commodity prices and tight manufacturing capacity. Perturbed at the sky-high valuations of growth stocks and cyclical stocks alike. And even uncomfortable with an economy that somehow supports astronomical debts, increasing foreign ownership of that debt, constant tax cuts, non-stop government largesse, high employment levels, stagnant wages, and gargantuan executive compensation packages. And yet, you just keep on buying stocks. In spurts. Not consistently. But just enough to keep the musical chairs playing for another round. Just sell, capitulate, and get it over with already! Yes, you have my permission. Don't you have something else you can be doing anyway?
  4. Now, if you are the stubborn type, you could continue your dysfunctional behavior (even follow my advice for 2006 to buy the dips!). But how are you going to see the top coming in the financial markets with this kind of attitude? Get your mind right. Ignore the Fed. Ignore the market's gut reaction to the Fed. Keep your eye on the prizes: "sell in May", "seasonally weak period for stocks", and the nearly annual crashes and corrections in September and/or October. There are plenty of excuses for selling without ever bothering with the fundamentals!
  5. Finally, if you are truly daring, go out and start shorting the market. The bottom is falling out the housing market. Those homebuilder stocks have low P/Es...but apparently for very good reasons. Hovanian just gave you even more reasons...even fessing up to the financial weakness brought on by those incredible incentives being used to push housing inventory. Google has completely faded its last earnings euphoria. And if you do not like shorting, plenty of bears have chosen to bid up gold and silver to historic levels as an alternative method for voting their displeasure with the economy.
There you have it. I have freed you from your pain. No longer shall you suffer malnutrition in information and knowledge while trying to digest the incessant chatter about the adventures of the Federal Reserve. I have liberated you from the agony of not knowing how many more interest rate hikes Bernanke has hiding up his sleeves. No need to tip or thank me. Just sell and get out of the way.

And be careful out there! Another gut-wrenching Fed extrvaganza is right around the corner!

DrDuru, 2006