I Think the Fed Will Hold Rates Steady

Where do we begin today?

We have been publishing posts on this site for 4 months. It has been a fascinating journey into marketing oneself, spelling and grammar corrections by others and serious hesitations about publishing market comments. One of the bi-products of running a financial blog is seeing the stats being produced. It is some real big-brother-1984-style monitoring.

This month's stats are very interesting, as traffic at the start of the month was low and then spiked like hell on the 14th, 15th and 16th. As more time goes on, it will be interesting to run a regression analysis of the data. Both with the S&P 500 and the VIX. Could this be another potential indicator?

Bernanke is looking like a natural. This recent upset is an extremely important milestone in understanding a bit more about the Bernanke Fed. We still chuckle over Maria Bartiromo's airing comments he made to her privately at a gathering they had attended together. At this point it is anyone’s guess what the Fed will do. Our take is that Bernanke will hold rates this round. This is in the very small minority of opinion. The bedrock of the economy still seems to be holding up and the lack of credit still needs time to work through the market and economic numbers. However, we think it is just a function of time.

The markets this week have been very skittish. It is a bit like the aftershocks from an earth quake. The real question at hand is the other potential leg down. Technicians are always talking about the 'double bottom' confirmation. However, if you subscribe to WSJ, we would suggest reading (Lessons of Past May Offer Clues To Market’s Fate). We have provided a few excerpts below.

"Those two periods — the stock-market crash of 1987 and the downdraft of 1998 — bear striking similarities to the present. They also provide insight into the role of the Federal Reserve, which bolstered markets Friday, sparking a rally.

In both 1987 and 1998, stocks fell sharply starting in July or August and, although markets seemed to stabilize by September, they abruptly plunged again, and didn’t come out of their tailspins fully until October…

In the previous two cases and again this time around, market downturns turned into routs as computer-based stock-trading models blew up in the faces of the investors who used them…

To be sure, there are also some big differences. One is what analysts call valuation — stock prices compared to the company’s underlying value. Valuation looked excessive in 1987, with stocks trading at more than 20 times corporate profits. Price/earnings ratios were similarly high in 1998. This time around, the ratios remain in the teens, close to the post-1945 average of about 16."

We would seriously encourage those to read the full article, as it brings out a few more market nuances occurring in this market cycle. From our perspective, we are still happy to sit on our dry powder. We are still looking at commodities as a source of funds. We’ll keep our eyes open for another hurricane in the gulf.

Comments

[Carl leason:]

Hi Keith, You are a prolific writer, for sure ! I subscribe to this site because it gives me a lot of "think time", from others who are in the financial markets. But some of the comments I read on Alpha are so full of it ,...not usually yours, but already some people are forecasting another huge drop in housing prices and frankly, I simply can't see that big a drop coming. Some additional drop may necessary but it will be a state by state situation , not across the board. The one thing that will prevent a huge drop in R.E. prices, is the drop in the value of our currency. It's fast approaching an exchange rate that will make US Real Estate appear like a bargain as compared to prices in other countries, primarily Canada and Europe. Forget about China for now,...it's still an unknown.
The only thing holding people back now is their opinion how long to wait before the "Bottom" arrives ! Then a look at Return on Investment will set the new floor on prices. I don't see the bottom that far off, perhaps a year or so but not a long wait. Some investors will always jump back into a market sooner than others , depending on their anticipated and accepted, return on investment. And, some sellers simply can't hang on much longer. but property is still a very safe investment for foreigners because of the stability of our country. LC

2007 Aug 23 04:47 PM

[keith:]

Lee- I appreciate your comments. What people don't get is that a drop in the dollar is actually a good thing given our current economic state. I live in Norway and Florida. There are a lot of foreigners really thinking about buying that ideal vacation property in the states right now. My father in-law is very close to buying hte 2nd home. The amazing thing is R.E. in Norway is still going through the roof. This european growth will help soften the global slow down.

2007 Aug 24 06:50 AM