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Nick's Picks 4/24/4


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#1 TTHQ Staff

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Posted 26 April 2004 - 09:42 AM

NICK'S PICKS A Decision Point Publication By TraderNick April 24, 2004 MARKET OVERVIEW: In the old days, some might even say the good old days, the Fed was a mystery wrapped in an enigma, and its moves came like lightening bolts out of the blue. But nowadays the FOMC takes pains to telegraph its intentions so that the stock market doesn't come unglued and throw up all over itself. The only problem is that they do this with winkens, blinkens, and nods, often so obtuse that the market comes unglued and throws up all over itself. I suppose the modern way is the better way, but I really can't see how a little simple straight talk would harm anything other than the Fed's own sense of itself as Master of the Universe. Still, the messengers were out in force last week, led by the wizened old "Man Behind The Curtain" himself, chairman Alan Greenspan, and the message was clear enough. Rate hikes are coming. When, you ask? Ahh, says the Fed, that's for you to figure out. So the market bounced up and down like a kid on a trampoline, making itself sick while it tried to figure it out. I suppose we should try, too. Let's start with a couple of premises. One premise is that the market, as demonstrated in the tape action, sees inflation out there and it wants some sort of reassurance that the Fed sees it, too; that the Fed is not falling behind the curve. The second premise is that another characteristic of today's Fed is that it likes to do things gradually whenever possible. For that reason alone I'd rule out any rate hike at the FOMC meeting on May 4, less than two weeks away. The Fed will acknowledge the market's concerns by using the May meeting to adjust the language of its policy statement, stripping away such coy modifiers as "indefinite period of time," and "patience." In other words, the neutral bias will come off and a tightening bias will go on. It will be a signal that the Fed "gets it," and is on the case. Which brings us to the June meeting. The Fed could do a rate hike then, if only to get it out of the way and side slip criticism that they're moving too slowly and might not catch up. Both the Fed and the markets have been fixated on the jobs growth picture for some time, and by then they'll have more data. If the April and May jobs reports are as strong or stonger than the blockbuster March report, the Fed will almost surely tighten in June. If not, or if the economy is showing signs of slowing in the second half, Mr. Greenspan might wait until August. The August meeting is probably the outside limit for an initial rate hike, however. After that we're deep into the presidential election campaign, and the Fed won't want to be playing rate games in a politically charged atmosphere. And by then, the economy should be clearly flashing signs of deacceleration as tax refunds and mortgage refi money generated by the prospect of higher rates will have been spent. So that's my shot at gaming the Inflation Wars. We should get a rally out this as the market sees the Fed prepping the battlefield for rate hikes. We could get it before the May meeting, but certainly on the meeting itself. After that, I would look for some sort of summer meltdown, perhaps a nasty one, especially if the election race is tight and equally nasty. (THE REMAINDER OF THIS LETTER IS RESERVED FOR SUBSCRIBERS ONLY) TRADE WELL!