I Think the Fed Will Hold Rates Steady

by: Keith Lenger

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.