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Fed, Gold and Markets

Published on August 6, 2008

Fed, Gold and Markets

August 6, 2008

Fed decided to keep interest rates flat, what’s the big deal? Markets staged a huge rally, Dow over 300 points; was that big deal? Gold dropped almost closed to support point $85 and Oil, metal and commodities were crushed, was that a big deal? These are not easy questions to answer but if we are invested, we need to draw hypothesis, find supporting data and move ahead for if everyone knows the answer, that is not the answer to invest in.

Commodities and metals all together have been hurt badly over the past few days, Oil is nearly 20% down. Has the demand changed that dramatically? Not so much. What’s changed? Bernanke gave his testimony in early July and indicated (that’s my take away) tough actions. It was clear he will come after oil and commodities (as well as traders aka speculators). Recession or deflation is his biggest nightmare. He can’t afford to increase rates due to fragile state of economy but that will lead to inflationary pressure. It’s a complex yet simple situation, he needs to contain inflation without increasing rates. I, at least, so far have not found any other major insight that convinces me of such a sudden correction across the board. I however, shared my bearishness on commodities on Jun 21st, just a few days before the correction started. These are oversold now and we may see short term bounce.

Attached a chart that relates FOMC announcements, Gold Prices and S&P500 movements. You’ll notice that except in one instance gold prices rose almost after every FOMC announcement and markets fell in a few days time post FOMC decision to either cut rates or keep it steady. Read my post on gold dating back in Oct’07, just before its current trend began. It is still to be seen whether or not this will happen again now as fed is done with it’s rates decision. The only other factor that may influence is earnings. So what’s my take on gold? Unless we break down to 83 or lower, or break-out to $102, gold is trading in a range no matter what the experts say.

For Markets, before you read into rallies and huge optimism, pls note we are in times when short interests are record high. The rally wasn’t an impressive one. These rallies simply can be short covering for their positions.The big names who are beating estimates, they are doing so to beat their already lowered guidances. Almost every industry bellwethers is lowering guidance for next few quarters. For more on earnings, check this out. I haven’t seen any major convincing data or trends that support a higher markets, at least for now. Agreed that we are seeing metal, commodities and oil correcting, transport refusing to break lower but here is the big picture-

  • Inflation jumping at decades high levels
  • Wages stagnating & unemployment rising
  • GDP flat or negative (Ignore stimulus checks)
  • Housing and credit crisis accelerating
  • Consumer credit card defaults are rising (AXP, MA, etc)
  • Global economy are showing sign for slowing down

AIG just reported huge losses, in fact they have lost nearly $11billions in last 3 quarter. The company said it is doing an evaluation of all of its businesses and will report its findings in September. Freddie reports losses and cut dividend and more to come.

And btw, i don’t find good reasons for strong dollar as well (at least for the moment)? Commodities exports are doing good, but a strong dollar will hurt them and so it will for the US corporations that are drawing signicant earnings from outside of US and massive spending is needed, interest rates can’t go higher for the moment. So how a strong $$ will be supported?

Now you connect the dots I mentioned above, hopefully you get the picture and can draw your own hypothesis. These are just a few points to kick start thinking and create hypothesis before you go long on equity or any other asset class.

Oh by the way, the stocks list I shared for earnings, most so far had huge movement. Congratulations to those who played for large moves and IV crash.

Trade carefully, Trade profitably, OP

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