Wednesday Sep 20, 2006

Fed Takes A Seat

Taipan Group's Dynamic Market Alert

-- Fed Takes A Seat
-- Bloodless coup in Thailand, buying opportunity presents itself

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Fed Takes A Seat

by Todd M. Schoenberger, Diligent Investor

The love-fest drama taking place between Presidents Bush and Ahmadinejad at the United Nations this week may be dominating the headlines, but the group of twelve, known as the FOMC, is busy at work in Washington to either send the U.S. economy soaring or drive it into a ditch.

Economists and media pundits will tell you that today’s meeting will result in the same outcome as last month’s meeting: no change.  But, for some astute economists, the feeling is that the current Alan Greenspan/Ben Bernanke rate cycle is finished and any dialogue about additional rate hikes is pure hyperbole.

The primary concern for this Fed has been inflation as U.S. consumers had to deal with record-high energy prices and shrinking discretionary incomes.  Now, energy prices are dropping, the economy is growing at a healthy rate (revised second-quarter GDP was 2.9%) and short-term interest rates are starting to settle down.

Economists can only forecast future economic events by reviewing history; and, history tells us that this current cycle is done, and an easing cycle should begin by the late March or early May FOMC meetings.  The basis for this theory is the very little probability of high inflation, stagflation or recession.  And, as long as all three issues remain stable, the Fed will remain on the sidelines for now.

But, what really matters the most isn’t the action by the Fed, but what they say afterwards that really counts.  Any mention, no matter how benign, of rate hikes at the October or December meetings will make traders very nervous and put pressure on stock values.

So with this in mind, Diligent Investor thought it would be a good idea to see what the Fed said when it stood pat back in the 1999-2000 cycle.  This excerpt is from the press release following the August 22, 2000 FOMC meeting:

“Recent data have indicated that the expansion of aggregate demand is moderating toward a pace closer to the rate of growth of the economy’s potential to produce.  The data also have indicated that more rapid advances in productivity have been raising that potential growth rate as well as containing costs and holding down underlying price pressures.  Nonetheless, the Committee remains concerned about the risk of a continuing gap between the growth of demand and potential supply at a time when the utilization of the pool of available workers remains at an unusually high level.  Against the background of its long-term goals of price stability and sustainable economic growth and of the information currently available, the Committee believes the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.”

So, what was the result?  Well as you read, the threat of more rate hikes was intact, but in reality, the next move was an actual rate cut less than five months later.

This is just one example, but the Fed has a tendency to repeat itself, and this time is no different.  Look for similar language from today’s release following the Fed’s decision and judge for yourself.  Once you review and analyze, you’ll realize the Fed is done and the focus will be on when the next rate cycle will begin.

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Earnings Announcements for Wednesday, September 20, 2006

AAR Corporation, Apogee Enterprises Inc, Bed Bath & Beyond Inc, Biomet Inc, Circuit City Stores Inc, Darden Restaurants, Morgan Stanley, and Steelcase Inc are releasing earnings.

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Unlock Dates for September 2006

9/20/06 – Clayton Holdings Inc is unlocking 7.5 million shares.
9/20/06 – Tim Hortons Inc is unlocking 29 million shares. 
9/27/06 – Himax Technologies is unlocking 52 million shares.

Keep an eye on Tim Hortons Inc. and Himax Technologies for significant sell-offs.  You may want to short shares or buy puts on these two positions.

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Upgrades and Downgrades

Burlington Resources downgraded by UBS from Buy to Neutral.

Progress Software downgraded by JMP Securities from Market Perform to Market Underperform.

Reynolds American downgraded by Citigroup from Buy to Hold.

Ethan Allen upgraded by Matrix Research from Hold to Buy.

Gevity upgraded by Matrix Research from Sell to Hold.

Hershey Foods upgraded by Prudential from Underweight to Neutral.

LM Ericsson upgraded by Citigroup from Hold to Buy.

Oralce upgraded by Citigroup from Hold to Buy.

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Quote of the Day

“Moral indignation is jealousy with a halo.”

- H. G. Wells (1866-1946)

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