12-12-06 Fed "Let The Doves Fly"?

Good Evening.

The Fed delivered a statement that was virtually word for word with its previous statement. The only differences were the insertion of the word "substantial" in reference to the cooling housing market. They also added a sentence describing the recent economic data as mixed. In essence, we believe that the Fed has given a signal to the Bond Market that it will be paying plenty of attention to the threat of recession versus what can be implied from previous Fed jawboning about inflation. Market participants have been living with a "Fed on hold" in conjunction with tough inflation talk. Suddenly, there is hope that the Fed Heads will be "chirping" with both "wings" (hands) up in the air.

This has moved the Fed into a slightly more Dovish posture. Bernanke's desire to be transparent to the Financial Markets may be setting up market participants for a cut in rates by June 2007. We believe that several months of setting the dovish stage through language and speeches would be the preferred method of choice for the Fed before it actually follows through with a rate cut. Furthermore, today's statement pointing to recent mixed economic data will give them further latitude in overlooking anything that might appear inflationary or too hot. All in all, we were happy to see this subtle shift which is a necessary ingredient for the Bulls in 2007.

Once the technology product cycle from Vista starts to kick in (slowly at first), we believe the earnings acceleration in Tech Land will become apparent around the same time the Fed actually cuts rates. Nothing would be more beautiful for the NASDAQ.

If You Hold a Taser to Our Head:
For the near future we are still playing it rather neutral with a lot of long positions in Oil and Gold and some shorts in technology stocks. Today's action in the markets can only be described as bothersome as the high beta MoMo names came under pressure not seen in several months. We are not saying that their drops were precipitous, just that the normal "buy the dip" mentality seems to be waning. We are still of the mindset that energy stocks will break out once they are through consolidating well off their lows. This will clearly send the profit protectors into action. We're still waiting for that big drop in the NAZZ before we commit aggressively to the long side.

Hope you traded well.

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