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August 7, 2006

Markets Pause for Fed

Just when you though things couldn't get any less exciting, pre-Fed Monday happened. Stocks traded in a very narrow range, mostly in negative territory, as traders withheld making serious commitments ahead of the FOMC. Apart from an Alaskan oil supply disruption, the only drama in today's market was in watching to see if the S&P 500 would hold at its 10-day support line. It did, and then the market closed.

The only significant mover on my screen was F5 Networks, which got nipped for 5% after coming under renewed criticism for back-dating stock options for its executives. These types of scandals, while seemingly company-specific, are the types that can erode long-term investor confidence. Only a couple decades ago, this behavior would have landed executives in prison, if not quickly out of work, but the moral bar keeps getting lowered as we the public get numbed. I only hope that after the next bear market, when short sellers are being drug through the halls of Capitol Hill as scapegoats, that someone remembers who the real culprits are.

I imagine some readers would be interested in knowing what actions I am taking ahead of the FOMC. Personally, I do not believe that anything the Fed does or says tomorrow will matter much in the grand scheme of things. What is important is that the culture of borrowing around which this country has built itself will force the Fed to monetize debt at accelerating rates. This process will deplete the purchasing power of the U.S. Dollar, thereby driving the prices of raw materials substantially higher. U.S. stocks will suffer as well, at least in the early stages of the dollar's rapid debasement.

That said, markets could very well react tomorrow in a manner that makes the Fed seem relevant once its cards are played, and it is prudent to hedge oneself. Seeing what appears to be an ideal sell-the-news setup for a rate pause, I have continued building short positions by selling a few select tech stocks (names which have been discussed here before), as well as the S&P itself. Given this heavy short exposure, the greatest risk to my portfolio is a surprise rate cut tomorrow. Though I find such a development highly unlikely... I still see a higher probability of another hike than does the general market... it is prudent to protect oneself. While a cut could bust my shorts near-term, the act would send metals prices soaring. Therefore, I hedged myself by purchasing some calls on the miners.

Sometime in the next few weeks and months, I expect to be shifting away from short stock exposure toward long metals exposure. Hopefully, both will take place at lower prices! We'll see. Either way, I expect this fall to be very entertaining... and meaningful... for financial markets.

Disclosure: None

 

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