Wednesday, September 20, 2006

FOMC Meeting

The Federal Open Market Committee today voted 10-1 to maintain the Fed Funds rate at 5 1/4%. This was widely anticipated and the statement accompanying the vote also provided little in the way of new information. We have been saying for some time now that the Fed is likely done with this rate tightening cycle. None of the data released recently has changed our view.

We are becoming more cautious about the stock market however. Sentiment is becoming more bullish by the day and while it is not at an extreme yet, we are increasingly uncomfortable being in the majority. Bullish sentiment in the AAII poll, which surveys individual investors, has been creeping up with the market and stood at 48% last week. Bears still represent 38.4% of those polled so we don't think sentiment is at any kind of extreme yet. If the bear percentage starts to fall down into the 20s and the bulls get over 50%, we would start to expect some kind of correction. We'll keep you posted.

The longer term picture, in our opinion, still seems fairly bright. Oil fell under $61 today and that should help the US consumer, which is still the crucial piece of the worldwide growth puzzle. Other commodities also continue to correct with natural gas back under $5/mcf and gold now well under $600/oz. We believe the money coming out of commodities will be increasingly deployed in the stock market, particularly large capitalization stocks. The dollar seems to have stabilized which may help to attract more assets from overseas to stocks (although admittedly the flow of funds data recently released indicates that last month saw less foreign interest in US assets; we think that is a short term phenomenon related to Japanese repatriation of foreign exchange). The Mortgage Bankers Association today reported that refinance activity jumped by 9.5% last week. Falling mortgage rates are obviously having an effect even if not on the purchase side.

Things seem to be going pretty much according to our script and that makes us wonder what we're missing. We have said many times that predicting the course of the economy and/or the market in the short term is basically impossible. That applies to us as well as everyone else trying to predict the future. So, while we are happy that things seem to be going our way, we are worried that our outlook is starting to gain mainstream acceptance.

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