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December 13, 2005

Fed Fizzles

In yesterday's post I expressed my belief that today's Fed announcement would be followed by high volatility on the markets. My belief was that many traders (and especially hedge funds) had placed significant bets on whether FOMC jargon would herald an end to rate increases and that bets would have to be re-aligned after the result was known. I underestimated Alan Greenspan's ability to confound the markets. By simply removing a reference to accommodative policy, Sir Alan gave no clear indication of what we should expect after the January 31 meeting.

Several large news organizations posted headlines after the Fed meeting claiming the Fed had signaled an end to rate increases. Their claims are simply not true. Just because policy is no longer accommodative does not mean the Fed will stop raising rates. There is no law, or even a firm precedent, that says the Fed cannot drift into the un-accommodative realm.

The result of all this obscurity was a market that rallied weakly after the release. With the exception of financials, most of the early gains fizzled. Stocks like Washington Mutual, Countrywide Financial, and Fannie Mae all caught bids after the release and held on to them, while techs like Texas Instruments and F5 Networks gave up all their post-Fed gains.

In his final plate appearance next month, Greenspan will probably use similarly obscure language in order to leave the door open for his successor, Ben Bernanke. Although Mr. Bernanke will try to pose as the tough guy on inflation, he will flinch at the first signs of economic slowdown and fire up the printing presses.

Speaking of printing presses, Marc Faber's latest market comments, dated December 12, include the phrase "propensity to print" when describing central bank behavior. I wonder if he read my Macro Center post, entitled "Propensity to Print" which was posted on Safe Haven last week. It would be quite an honor if Dr. Faber borrowed a phrase from me. On the other hand, it could be just a coincidence…

On the earnings front, Best Buy disappointed, blaming their shortfall on unexpectedly high selling costs related to the expansion of their Geek Squad. Same store sales for November also came in weak, indicating that this holiday season may turn out to be weaker than most have hoped. I am surprised not to see other retailers down in commiseration, but then the bulls do have a tendency to interpret news as company-specific until slapped in the face. As a side note, I have interacted with the Geek Squad at my local Best Buy and found them to be of mediocre benefit. Their computer component knowledge was limited, and they were unorganized and difficult to speak with.

IBM slipped 3% today on concerns over its bookings. This revelation will come as no surprise to my readers from passed months. I expected IBM to miss on their last earnings call due to games being played with bookings, but they managed to massage their way out of it at the time. I expect more of these types of revelations in coming months. In spite of this belief and the fact that my model maintains a sell signal on Big Blue, I covered my put options today. They already had a fat profit and were of short duration. I intend to add some LEAP puts on IBM in the near future.

The metals have been putting on a show recently. Silver plunged again today and is now 78c… over 8%… off the high it set yesterday. I view this as a bout of volatility and not and end to the silver (or gold) bull market. Bull markets, and especially commodities bull markets, are full of these types of displays. I intend to sit tight with my positions and perhaps add to them if the pull-back stretches far enough.

Disclosure: Short FFIV; Long BBY Puts


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