While We Wait for the Next Fed Drama...

By Dr. Duru written for One-Twenty

June 5, 2006

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The Fed meets again on June 28th and June 29th. Oh boy. I cannot wait. For the next 4 weeks or so, we will hear endless chatter handicapping whether or not the Fed will pause or keep on jacking up interest rates. Friday's soft jobs report drop-kicked the 10-year Treasury from 5.1% to a hair under 5.0%. In sympathy, Fed Futures dropped anchor all the way from a 70% chance of another Fed hike to a 48% chance. Given the volatility of inflation-related data, 50/50 should be the best guess that anyone should dare commit. Yet, speculate, banter, and debate we will because otherwise we will be forced to watch the grueling madness of the market's knee-jerk reactions to each bit of volatile news.

There are several articles I found interesting and insightful that I thought you should take a look at while you wait out (or ride) the market's latest madness. They all happen to be from TheStreet.com:

  1. Jim Cramer, Helene Meisler, Guy Lerner, and Robert Marcin, all from TheStreet.com, opine on commodities in "360 Degrees on Commodities." Most interesting is Cramer's reminder that the sharp sell-off in commodities might convince the Fed that they are finally having an impact on the last part of the market that has reflected accelerating inflation expectations. Meisler chimes in by noting how "financial markets anticipate; humans react." We saw commodities spike into the inflation report that supposedly spooked everyone. The actual news sent commodities spiraling. Similarly, now that we have received a modest correction in the stock market, folks are now extrapolating the end of the world. Yet, just a month ago, the stock market was all too happy to soar right along with commodity prices. Meisler's charts are very telling.
  2. Fitzpatrick is often pretty good at spotting the transitions in markets. In his article "The Sweet Clatter of Falling Metal" he makes a good case demonstrating how and why institutions are rotating out of many commodity stocks. While I believe they will rotate right back if the Fed takes a break, we should still take a pause at his analysis. (Note for example that his call for shorting a lot of these plays proved to be too early).
  3. Finally, noted swing trader Alan Farley provides a convincing case arguing that the market has found a bottom in his article appropriately titled: "The Market May Have Bottomed." He continues the make the case for buying the dips in his article: "Lower Prices to Come" (subscription required). Expect the market's ascent to be extremely choppy and to reward active buyers and sellers.
For those of you not interested in watching madness unfold, I suspect this summer will be a great time to take an extended vacation from the market. The fireworks should really ignite as we approach mid-term elections. We will have political drama lacing the typical volatility that comes with the early Fall in the markets. But even more importantly, the market's true colors should finally reveal themselves - I imagine the market can only bounce up and down in manic fashion from fear of inflation to fear of recession (to hope for a soft landing?) for only so long.

However, you should note that the growing tensions over Iran's nuclear ambitions are real and drama in this region can flare at anytime to snare and consume any plans of rest and relaxation you may have for your investments. For the oil bulls, take careful note that all the folks who know keep telling us that oil inventories are building at a rapid clip. The latest note came from the Saudi oil minister himself, Ali Al-Naimi. Inventories are building so fast that the producers who are trying to take advantage of today's high prices are finally starting to have a harder time finding buyers. Add to this the potential that the Fed could finally apply the brakes to the U.S. economy (and thus crimp the global economy), and you get the very real possibility that oil prices could take a sudden and swift, albeit temporary, downward correction that will make May look like recess in an elementary school. While I suspect such a correction would mark a banner buying oppportunity, you will not be ready to buy if you come into the calamity a die-hard and stubborn believer...

In the meantime, be careful out there...!

DrDuru, 2006