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Strategies & Market Trends : IPO and Other Stock Plays -- Ignore unavailable to you. Want to Upgrade?

To: david777 who wrote (12759)	6/2/2005 12:00:21 AM
From: david777	Read Replies (1) \| Respond to of 13331

THE ECONOMY: One member of the Fed gives the market a gift. Dallas Fed president Fisher was very open on CNBC Wednesday morning when he analogized to a baseball game in describing where the Fed was in the rate hiking scheme. He said the Fed was in the eighth inning of a game where each inning saw a 25 basis point rate hike, and that the ninth inning was in late June (the next FOMC meeting). The implications were clear: the Fed is going to hike once more and maybe another hike as Fisher said there could be some 'extra innings' in the fight against inflation. The message he got across was another hike or so and then the Fed would wait and see the lay of the land after that. Fisher was immediately called a 'rookie' and was panned for his statements being his own and not representative of the Fed. He is a voting member, however, so there is at least one vote that feels this way. Later in the day Fisher was interviewed by the Wall Street Journal, and his comments were identical; in short, if there was a call from Greenspan or one of the Fed governors to back off, Fisher did not do it. Yield curve steeper on the news. Bonds exploded on the move with the 10 year falling to 3.91% by the close. It was just a week back that it bounced higher off of 4%. What a turn. Now this large drop in the yield would make one very nervous, anticipating a flattening yield curve. But no. The anticipated cessation of Fed action caused the short end to rally as well, and thus the yield curve actually steepened on the news. A steeper yield curve represents a healthier economy down the road, and it is just about 100% accurate. What more could you want to demonstrate the economy without the Fed threatening to reign in prosperity is ready to continue to expand and try to recover the lost ground the last time the Fed got scared of its shadow and hiked us into recession? We are huge believers in the wisdom of markets, and the bond market has a sterling record. The message to the Fed is clear: with more rate hikes beyond 3.5% the economy is going to contract; stop here or up to 3.5% and the economy is going to continue expanding and create jobs and rebuild retirement accounts decimated when you crashed the market in 2000. Is Fisher a lone wolf out howling at the moon? Some were saying that, but he has the market on his side. The Fed Funds Futures contract shows 50 more basis points in hikes, 25 at the next two meetings. A third hike was problematical, and it was buried Wednesday, moving from a 58% probability to just 6%. Thus Fisher suggesting the Fed would be done in June with perhaps an 'extra inning' that saw another 25 BP hike is not far off the reservation at all. He talked of 'hard fastballs' and that indicates the Fed won't stop here, something most think would not happen anyway. No, Fisher is talking right in line with the Fed and the bond market, but some just did not want to hear plain talk. We applaud Fisher. We argued when the Fed was starting this last round of hikes that it should let everyone know what its assessment of neutral was, raise rates all at once to just below that level, see what happens, and go from there. That way there is certainty as opposed to the slow water torture the market at best languishes under. Business can plan, financial institutions can figure out how to handle their portfolios, you and I can do the same. Now THAT is transparency, far from what the Fed calls transparency as we play the will it or won't it, only the Fed chairman knows game. Thus Fisher's candid comments were what we need. National ISM looking wobbly. The ISM is a sentiment survey just as the consumer confidence report is a sentiment survey. It is not some reading of actual numbers, but what purchasing managers think their companies are going to do. Thus they are given to the same fears and hopes that drive sentiment, and it is thus a weighing of emotion as to what businesses think they are going to do. What is the importance of that distinction? The hard numbers coming in show that the soft spot from late Q1 is over, but the key element of this recovery, the business side, is uncertain moving forward. What is the major reason for that uncertainty? What the Fed is going to do to the money supply and availability of funds. For the past several months there has been a worry that the Fed would overdo it once more and send the economy into recession. Thus sentiment in the business sector is fading. The numbers from May show a clear trend. Overall ISM fell to 51.4 from the 52.2 expected and 53.3 in April. That was the lowest reading in 2 years and puts it on the brink of the expansion/contraction demarcation point. This reading was the lowest since June 2003 when the manufacturing expansion really got underway. In short the 24 month manufacturing expansion (the longest in 16 years; the power of supply side incentives again demonstrated) is close to fading to flat and starting to contract. Employment fell to 48.8, breaking an 18 month streak of expansion. On the positive side, prices paid tumbled the most, dropping to 58.0 from 71.0. At least the inflationary pressures on the manufacturing end are easing. Of course that is not unusual when an expansion losses steam. Again, these numbers show what the bond market shows: the economy is in good shape with inflation under control absent a Fed that ends up going too far and upsetting the expansion. Business sentiment is lower as reflected in the ISM and as reflected in the recent CEO roundtable because of uncertainty. The Fed stopping its rate hikes gets rid of that uncertainty, and thus Fisher's comments Wednesday were well received. Beware of oil, the silent killer. After last week's inventory report showed oil stocks lower than expected and the Saudi king checked into the hospital, oil started a climb that has taken it back to $54/bbl. With the weekly inventory report delayed until Thursday due to the shortened week, the additional tension has added a bit more to the upside of price. Thursday may see that bubble break, but oil has done anything but close up shop and slip away into the night. Indeed, with all of the focus on what the Fed is going to do oil has slipped up on the market. When the Fed issue dies down a bit investors will turn around and see $55/bbl oil staring them in the face again. With the Fed out of the way the economy may be able to handle oil in the fifties; if the Fed were to keep going it would be a real problem, that old one-two punch that has plagued stocks all 2005, at least until the past month when oil fell and the market guessed the Fed was close to the end. This is something to note now that we have enjoyed a nice run up to NASDAQ 2100. In late 2004 the market figured the Fed was close to finished and oil looked ready to fade. The market posted a strong rally into the end of the year (a LOW volume, strong price rally). When oil bounced back and the Fed started talking very tough, the gains were jettisoned. Right now the market has rallied sharply off the April lows and has returned near the highs for the year in some instances as oil has declined and the perception of a tamer Fed once again provided impetus to rally. If the rest of the Fed comes out and squashes what Fisher said Wednesday and oil continues its march higher, the old one-two punch is right back in the game. Time to be careful and watch to see if any real distribution creeps back into the market as NASDAQ tests 2100 and SP500 tests 1200.