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From the Trading Turret

March 27, 2005

Not a lot to say about the overall stock market this week except to say that we have moved to the capital preservation side of the ledger. This move has been expected and it occurred late last week. A separate Trading Turret is devoted to the move from offense to defense.

What I wanted to touch on today is the action of the Federal Reserve last week. Their actions and commentary is quite telling. Here are my thoughts:

As expected, the Federal Reserve raised the benchmark overnight lending rate for the seventh consecutive time by 0.25% to 2.75%. The Fed said its monetary policy "remains accommodative" and that with "underlying inflation expected to be contained, the committee believes that policy accommodation can be removed at a pace that likely to be measures." In addition, the committee upgraded its assessment of the economy from "moderate" to "solid." However, even though the Fed kept the "measured" language in their official statement, the statement had a more hawkish tone than past announcements and underscores the Fed's growing concern about inflation picking up. The FOMC statement said "Pressures on inflation have picked up in recent months and pricing power is more evident." Translating Fed speak into plain English it means that with inflation rising and pricing power growing the rate of inflation could increase rapidly. The Fed tried to soften the blow by saying that the rise in energy prices has "not notably fed through to core consumer prices."

So, where does all of this leave monetary policy? Given the Fed's increasing concern about inflation, the Fed is prepared to keep hiking rates, and in fact, the Fed's hawkish tone following the FOMC meeting leaves the door open for even more aggressive rates hikes if necessary. The impression the Fed gave was that there is a long way to go before the Fed stops hiking rates. The Fed funds futures are still suggesting that they will hike rates by 0.25% at each of the next four FOMC meetings, which would put the fed funds rate at 3.75% by October. The bond market's concern is that once the Fed gets behind the curve, they typically accelerate the pace of rate hikes. The bond market did not take kindly to the Fed's hawkish tone and as a result the yield on the 10-year Treasury Notes spiked to 4.60%. The Fed's next meeting is scheduled for May 3rd.

The bottom line is that more rate hikes are coming. Owning a long term bond at this point may be hazardous to your health. Be careful and if you have any questions, please feel free to give us a call.

Website Notes: Be sure to check out our website, www.christyinvestments.com for news and updates – it’s still a work in progress and we’re making changes on a regular basis. 

Operation Notes: Debby and I are in the process of putting together a “Documents” page. The design is such that you’ll be able to find all of our required documents plus a host of others, such a dividend payouts, requesting money from your accounts, etc. 

Technology Notes: Have you seen our blog yet? It’s still a work in progress, but eventually it will be an online chat session where clients can check in and see what I am up to, etc. I’m trying to develop it along the lines of an online trading journal so that everyone can see what I am doing in a live mode. The comments so far have been encouraging – it needs work, but mostly I need the time to get comfortable with it.

Baseball season is progressing and so far it’s been a great ride. I’ve enjoyed some great baseball games and I’m proud of all my former players are doing well on their respective teams.  My knees are holding up OK for now, but being back on the field as an umpire is one great feeling.

That’s about it for now. Have a great week!

Bob

Robert Christy is a professional trader, author and money manager. Mr. Christy is also the President/ CEO of Christy Investment Group, Ltd., a registered investment advisory firm. At the time of publication, Mr. Christy may from time to time write about stocks in which he, Plato Advisors LLC, or Christy Investment Group, Ltd.  has a position. In such cases, appropriate disclosure is made.  Under no circumstances does the information in this column represent a specific recommendation to buy or sell stocks. Mr. Christy appreciates your feedback and invites you to send it to rac@christyinvestments.com.