Vad Yazvinski
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Inflation fears or is Fed your friend!?
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"Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair" Someone famous once said "Invest in inflation. It's the only thing that is going up" and you know what- I could not agree more. In this world of fiat money one thing is guaranteed - your money will be worth less tomorrow than today. As you might have guessed from my previous posts I am not a great believer in politicians' abilities to guide/understand the economy in general, and definitely get extremely irritated when some of the most vocal and most popular of them try to give advice to the Fed. This advice usually says something like this:" I can't believe you have not reduced rates yet... What the hell is taking you so long-my constituents are suffering and you are doing nothing about it... etc." I think there should be a prize of some sort that is awarded annually to a politician that actually asks to increase rates for once- the only problem is - this prize could go unclaimed for years... Anyway, back to business. Any of you that have read my previous posts might recall that I have not been a huge fan of Bernanke's 50BP rate cut in September. Prior to that meeting I stated what I thought the most logical beneficiaries of the cut were- emerging markets and commodities and in this case my call was on target. Now since it seems like the market has spent the last few weeks trying to scare the Fed into easing more, we need to spend some time trying to analyze which sectors could benefit now if Fed makes a move again... First things first- as you might recall my investment strategy is predominately event driven, obviously Fed meetings were rates are predicted to move one way or another is the next such event. One could assume that after observing the impact of their last action (i.e. assets bubbles in commodities and emerging markets) Fed might be a bit more careful during the next meeting... But at this point market seems to disagree. Below is a chart of probabilities for the next Fed meeting as prepared by Federal Reserve Bank of Cleveland. It is based on pricing of the options on the fed funds futures and while not a slam dunk could serve as a good indicator of expectations on where we are heading with Fed Funds. The first graph shows that in the last three trading sessions the likelihood of Fed easing has climbed to over 75%. The question in traders head now seems to be simply how much will Fed cut rates- 25BP or 50BP? Do I agree with this assessment- Not at all, but am I going to fight it? - Nope, the truth of the matter is that no one can do that ... Even though it is certainly not too small of a war to matter, but it is most definitely too big of a war to win...
The next graph shows that market is currently pricing a virtually a 100% probability that rates will end the year lower. And the probability of Fed funds rate being at 4% (75BP cut from here) is now nearly 25% and rising.
So what can we make of all this? The logical answer would be that current sell off is temporary, and that higher Beta picks like Chinese ADR's, commodities, dry bulk shippers and beaten financials should outperform through the year end. What does that mean for this SLO contest?- I think that if Fed bends under pressure and makes the expected moves- then "on-steroids" portfolios will end up dominating the Top 5 and that my fund due to its lower exposure to the higher risk inflation plays potentially might even cost me the Top 10 spot. But on the other hand - assuming that Fed wakes up and hints that inflation is a significant concern, the commodities and emerging markets might under perform drastically even before the year end. In which case playing tech and airlines could be a good bet- I for example just bought some AAI and ALK in my real money account... As I said before- large cap IT is also a great place to be for the next few months and thus one could feel relatively safe with money parked safely in INTC, EBAY, EMC, YHOO, MSFT, AAPL, RIMM, GRMN and GOOG. Don't take this statement as outright agreement that these stocks are a bargain or even that they are fairly valued (I actually think most of them are not a good risk/return trade off for the long haul)- I simply expect them to hold up better then the market until December 31st 2007... Anyway trade safe and cheers, | ||
