Post Fed Analysis

The market liked what the Fed had to say and accordingly the Financials led the way. Volume was solid however the breadth was flat to slightly negative on the NADSAQ and slightly positive on the NYSE. The poor NASDAQ breadth can be attributed to the weakness in Small Caps.

The Fed did indeed raise rates 25 bps and altered their long standing language. Specifically they referred to elevated energy prices (inflationary) and hurricane related disruptions (slower growth) in the same sentence which was their attempt of addressing concerns of stagflation. This does not seem to be a major concern for the Fed at this time. They further added "nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures". Our view is that this is the Fed's recognition that demand in the Economy is robust as labor capacity remains constrained to meet such demand. Situations like this have potential inflationary tendencies.

Perhaps the most important aspects of the Fed's press release was the deletion of the "accommodative" language in describing current Fed policy. The absence of the word accommodative clearly implies that the low end of neutrality has been established (despite Greenspan's reluctance to use the word Neutrality). In other words the Fed has signaled that the end game to this rate hike campaign is in sight.

In addition the Fed stated that "some further measured policy firming is likely to be needed". The word "SOME" has important implications for a finite amount of rate hikes left in this campaign. The argument that many Bears have put forth has been one of a more open ended Fed rate hike campaign. This flies in the face of the Bear argument.

All in all with Greenspan retiring at the end of January, we can comfortably guarantee our readers that Alan can only hike rates 1 more time (only 1 meeting left until he retires). However, we cannot guarantee what the Fed will do under the new Fed Head, Ben Bernanke ( perhaps 1-2 more hikes during his first 90 days). Though, it is good to know that the only thing that Greenspan will be hiking after January is Andrea Mitchell!

If You Held a Taser to Our Head:
Lately the market has done a very good job at whipsawing Hedge Funds. These fast triggered self proclaimed market experts often observe cracks in the internals which leads them to take defensive positions. The market has been very adept at displaying just enough cracks to force Hedge Fund selling before Spiking upward putting it in their face once again. Will today's internal weakness be more of the same or have Hedge Funds finally figured this out only to remain long and then get slammed?!

Kcap is still very net long.

Hope you did well. See you tomorrow.

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