RD's Picks

"So let the Fed watch begin. .... What do you expect? And what changes are you making to your SLO portfolio?"

With all the conflicting economic news, I honestly don't know what the Fed is going to do next week. High oil prices, a weak dollar and rising gold prices are sending inflationary signals, which would argue against a rate cut. The jobs reports over the last two weeks are somewhat in conflict. Last week's report was much weaker than expected, but today's unemployment claims report was better than expected, although still not great. Mortgage rates are down slightly from last week. A Yahoo poll had 59% believing the Fed will cut....

No doubt the Fed doesn't want to be seen as bailing out investors burned by the credit markets, but now they could use the weak job numbers and risk of recession as the rationale for a cut.

Meanwhile, the talking heads are reporting that a cut is a foregone conclusion and the only question is whether it'll be 25 or 50 bps. But are bank stocks telling a different story? I've got Bank of America and Wells Fargo in my SLO portfolio and they may hold a clue to the market's expectations. When the Fed cut the discount rate on Aug 17th, both banks shot up with BAC closing at 51.11 then reaching a high of 51.22 on the 24th adjusted for a dividend. WFC closed the 17th at 37.24 and reached a high of 37.37 on the 21st. Today, BAC and WFC have drifted down from those highs to 49.86 and 35.81 respectively. Similarly, the BKX closed Aug 17th at 110.17 and closed today at 104.29. While the banks fell over that time span, the S&P 500 was up from 1446 to 1484.

If the market was counting on a rate cut, the banks should trade higher leading up to the Fed meeting. So far, they've jumped on the discount rate cut and then pulled back. My plan had been to sell part of my position into a run-up before the Fed meeting, then buy back lower if there was no cut. As it stands now, there hasn't been a run-up, so perhaps the market isn't as sure there'll be a rate cut as the talking heads are reporting.

If there are no significant changes between now and the 18th, I'm not going to make any substantial changes, but will look to raise a little cash to hedge and be ready for some bargain hunting should the opportunity arise.

Sidebar - Vad dishwasher - if you're reading this, in your 'Style vs. Principle' blog entry of 12 Sep (worth reading for those who haven't seen it) you state "So in short the data for a significant series of rate cuts is not there ( I do anticipate that recession is likely to occur in the next 12-18 months one way or another)." That comment seems to be in conflict since, if data is forecasting a likely recession, a rate cut would be in order. I was hoping you could comment on why you think there'll be a recession, but the data doesn't support rate cuts.

Comments have been switched on!!! What indicators are you looking at for insight to the Fed's action? Or do you just ignore the noise since you can't really predict it anyway?

Disclosure: At time of writing I own shares of WFC.

Comments: View Comments |  Friday September 14, 2007