Interpreting the Fed's 'Neutral Bias': Short Big Oil, Buy Defensive Staples

You can throw everything away! I mean regarding the FOMC Policy Decision and Statement, nothing matters except a few critical words. You need only concern yourselves with two sentences, and I'm disappointed with most popular media outlets I've seen touting yesterday's activity as a catalyst for $100 oil, when in fact, it is a catalyst for $70 oil.

The sentences in question are these:

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

In common terms normal people not fluent in Fed speak can understand, this statement reads, "We are adopting a neutral bias, but we may change this depending on circumstances in the future." The Fed's words, "after this action" mean "this is the last cut you can count on folks." The word "balance" means neutral.

The market, traders and everyone seem confused, based on the stagnant response and subsequent modest rally. I think traders waited for a bomb to go off, and when none did, started buying. However, as market strategists and economists from Wall Street to Newport Beach comb through this statement today, and as Fed representatives find microphones over the coming weeks, it will become clear that we speak from wisdom.

So, the important question now is, how does a neutral bias impact stocks moving forward? Well, considering stocks (S&P 500 Index) rose 8.5% from the Fed's emergency meeting on August 16 to October 30, I would say stocks move lower now. My reasoning is simple yet invaluable. In the past (read Greenspan era), sharp initial action by the Fed to spur economic expansion has always been followed up by a string of lesser cuts. If this second reduction of the Fed Funds target rate was just telegraphed as the last, then the market has to realize that we are diverging from historic trend and it can't count on future rate cuts. Therefore, it can't bank on the catalyst it has since August. The rug is effectively pulled out from under the market and the growth hoax is pulled off.

All the cyclical and low quality sectors that had shown the beginnings of recovery, should now find question, and lose capital support. I expect biotechnology shares to give up ground, to name one industry. Also, dollar pressure is effectively removed now, allowing it to stabilize, while oil and gold should give up ground as a result. I continue to favor short positioning on big oil stocks, especially the bubblistic PetroChina (NYSE: PTR) and gold price beneficiaries like Barrick Gold (NYSE: ABX), which has risen 48% through Wednesday afternoon.

I would buy defensive names. Despite also rising since September, consumer staples like Procter & Gamble (NYSE: PG) look interesting. PG went on sale yesterday and trades at a P/E/G discount to its sector and its close peers Kimberly-Clark (NYSE: KMB) and Colgate-Palmolive (NYSE: CL).

I would be surprised if it took longer than a couple days for the market to realize the Fed has adopted a neutral bias, and I’m sticking with this gutsy call.

Comments

[Richie]

Yasou Markos,

What does it mean to the price of oil when the XOMs and CVXs of the world just cannot produce as much oil as we are consuming? Several times now, the anticipated build just evaporated.

If housing woes spread (and you aren't smart enough to say unequivocally that that cannot happen) isn't it almost certain we will need more funds cuts?

I think the FED wanted to say that in December, if it is a close call, they MAY NOT cut. This was said to keep froth levels in the market down in the event that they don't see a need to cut. ie., They don't want to see a 500+ point down day, so they are giving investors fair warning. But let's face it, this FED (as is true of most), is truly deficient in its projections. They have no more idea of how the economy will look in six weeks than you or I. So any projection they make really has no merit. In fact, if things are strong enough so that a reduction in rates is unnecessary, next month, why go into defensive mode? Emerging economies will continue to prosper and oils and minerals and all commodities will continue to command big prices --- no?