Fed Funds

The new debate over the QE “taper” erupted at the same time that a long-reliable Fed-tracking tool is telling us it’s time to ease.

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An orderly decline of the dollar is not necessarily a big concern. On the other hand, a sudden collapse of the dollar, in conjunction with spiking U.S. interest rates, would be a terrible thing. So far this has not been the case.

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In trying to assess how far the Fed may ultimately be forced to cut rates, the price action in short term Treasuries and historical yield relationships may offer some clues.

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Stocks can go up, when interest rates go up. Rates are expected to rise over the second half of 2003, but stocks have proven they can go up in environment of rising rates.

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Is the Fed ready to buy Ten Year Treasuries to stimulate the economy? This could certainly lead to another housing/refi boom. But are lower rates really necessary to boost business spending?

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Assessing Market Risk. We see minor or minimal risk from the economy, inflation, and earnings. But, terrorist attacks and valuations could be more significant risk. Iraq is a moderate short term risk.

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In today’s environment, portfolio managers are forced to sell best stocks, as style police enforce tighter restrictions. Also, why a Fed Funds rate below 3% is bad for the economy.

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A look at market performance over five different rising interest rate periods. Results are somewhat surprising.

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Two trading days into 2001, and the first day delivered the second-worst-ever, first day trading loss in the S&P 500 (the worst-ever being the first day of 1932!). Day Two: A surprise, 50 basis point Fed rate cut, brought an upside explosion.

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Special reprint of Steve Leuthold, Byron Wien and Charley Maxwell conference call from early April.

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Favorite stock groups now “inflation and interest rate proof”?

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Recent 25 basis point bump-up by Fed will not be the last. More tightening seems likely but T-bonds now look to be in the high end of a buying zone.

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Despite proclamation of a “neutral” bias toward future interest rate shifts, expect the Fed to raise short rates at least 25 basis points more.

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Strong likelihood the Fed will tighten in next few months, but today’s market rates may already factor in future 25-50 basis point Fed bump up in short rates.

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My current view towards long bonds from an institutional investor's point of view is to sell some now and sell some more when longer term momentum slows.

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June was a rather steady dull month in the bond market but there was a pre-4th of July explosion on the upside as bond market grave dancers cheered the stunning jump in unemployment.  

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