Let's Dissect the Fed. 3-28-06

Good Evening.

According to the Fed, "The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors." This can only be viewed as Hawkish, surely to disappoint the inverted yield curve freaks.

The next key sentence, "Eeconomic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace." Hawkish with a little light at the end of the tunnel most likely leaving room for two more hikes before the second half of 2006.

Another key sentence, "As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained." A clearly Dovish statement, the only problem is that it is rear view mirror.

The next sentence and we believe most key, "Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures." There is an expression, "the truth starts after BUT". Traders should revise that expression to read: "the truth starts after STILL".

All in all, the Fed has indicated that at least two more hikes are in the cards. Since this market is very overbought, the ammunition from the Fed for a sustainable upside move in the market does not seem evident at this juncture. In other words, we are probably still in a trading range and near the upper end at that.

If You Held a Taser to Our Head:
Kcap is only selectively net long and carrying a large cash hoard to be deployed when we get to the lower end of the trading range (NASDAQ 2240-2250).

Hope you traded well. See you tomorrow.

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