Tuesday, December 11, 2007
Stocks Falling into Final Hour on 25 Basis Point Fed Rate Cuts
Posted by Gary .....at 3:18 PM
BOTTOM LINE: The Portfolio is lower into the final hour on losses in my Internet longs, Computer longs, Biotech longs and Retail longs. I added to my (EEM) short and added (IWM)/(QQQQ) hedges today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is substantially lower, most sectors are falling and volume is about average. Investor anxiety is slightly above average. Today’s overall market action is bearish. The Fed did not cut the discount rate 50 basis points as I had expected. As well, the tone of their language in the ensuing policy statement was a bit more hawkish than expected. The Fed said energy, commodity prices may push inflation up. I continue to believe high energy prices are having a much more negative impact on the broad
stock market than is commonly perceived. Fed fund futures now imply a 21.3% chance for a 50 basis point fed funds rate cut and a 65.4% chance for another 25 basis point fed funds rate cut at the January 30 meeting. The US dollar is strengthening on the news, which is pressuring most commodity prices. The 10-year yield is dropping 19 basis points to 3.97%. The Fed’s actions will likely result in even greater outperformance by true “growth” stocks over “value” stocks over the coming months. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and bargain-hunting.