Tuesday, April 18, 2006

Oil is at $71, gas is racing to $3.20 and the market is up 200 pts??? Huh?

Ok, so let's backtrack and cover the perverse logic of the Neanderthal/jock hedge fund traders that control a huge chunk of the market action now.

Fed stop raising rates = stocks more attractive vs. Treasuries.

Hmmm, true, but the Fed will only stop raising rates when it sees that the economy is COOLING OFF (read: earnings are likely to start falling) and thus multiples and prices for stocks should come down. There have been some pretty good studies done that show this logical assumption - when the Fed stops raising rates it is because the economy is weakening and that should be bad for stocks - is the correct assumption, but most big money managers think of 1999 as ancient history so there is no reason to preach reality to them.

So today, the market ignored bad data all around to get giddy b/c the Fed might be almost done raising rates. Possible, but I'm still a believer that troubled waters lie ahead. I think we're facing a situation where inflation dictates that the Fed HAS to keep raising rates DESPITE a weaker US economy.

I'm not sure everyone is really prepared for just how weak the economy could get over the next couple of years. With 20-40% of new employment in some markets coming from the residential/commercial real estate industry which is poised clearly at the edge of a very deep ravine, there is a potential for the impact to be dramatic. Coupled with inflation on every corner - gas, food, entertainment, etc - I think you have the makings of an interesting 2008.

I'm still a believer that the perma-bulls have enough gas to get the market up another 200pts or so, but I'm definitely nibbling on short side here and I'll build this position through Memorial Day.

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