Pre-Fed Analysis 12-13-05

Good Afternoon.

Well the market has been hanging flat to slightly down so far today. The big news of course will be the FOMC announcement at 2:15pm. Your friendly neighborhood Kcap Team believes that the Fed will hike rates 25 bps and provide a very subtle change in language indicating that the pause is coming. Perhaps they will hint that they will be closely watching key data points over the next month for signs of slowing consumer spending. Maybe they will simply change a few adjectives as Steven Roach (Chief Economist from Morgan Stanley) mentioned as an inclination for the Fed easing off of the rate hike peddle. In other words, don't expect any grand statements from Greeny indicating a clear end to the rate hike campaign on this go-around. If there's one thing Greenspan has assured in his legacy it is that clear communication is not his mantra so why change now.

Many market participants are prepared for a sell the news reaction to the Fed even if the language is leaning Dovish. Our view is that the market has officially consolidated and based out over the last couple of weeks resulting in lower Bullish expectations. Therefore we would not be surprised to see the market resume its upward trajectory post the announcement. Of course a little knee-jerk selling is likely, but we would use such a dip for buying purposes. Specifically we're looking to add to our positions in Yahoo (YHOO) and Broadcom (BRCM). The internet sector is starting to look healthier to us lately as we indicated in yesterday's post.

Overall the breadth of the market in recent days has been improving while the averages have been going sideways. This is a positive divergence that we are noticing. Should we receive friendly news from the Fed the market will likely resume an upward trend within a news vacuum until year end. Remember, whenever there is a black hole of information the prevailing trend is your friend.

One last point: Gold stocks have finally shown a little pullback which is popping up on our radar as potential buys as well. While we believe a little more shakeout is necessary, some small scale buys throughout the rest of this week seems prudent.

Talk to you later.

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