Wednesday, November 14, 2007

Entry for November 14, 2007

Bernakes interesting proposal.

This move to transparency is one thing that can eliminate considerable amount of volatility in the markets. In terms of stability and goals of the Fed in terms of monetary policy, this is a move that is strategically smart. Though for the investor who live off periods of volatilty may be dreading this descion. If Bernakes plans are indeed to work how he proposes, the there will be a convergence and direct correlation between markets and economy. Though in whole i do not see this possible in reality, though it may be a step closer if things go according to plan. If so weighin in sentiment maybe less important in future analysis, and possibly closing of avenues for behavioral finance specialist and economist.

Again whispers of more Fed cuts being necessary are being heard, as i presented at the Federal Reserve challenge, more cuts will be necessary to maintain growth, primarily on a liquidty basis, and a need for fundamentals in the financial and housing sector to improve over an exteneded period of time (possible a few years for full recovery but about 1 year for some stability).

As i also mentioned, apprent inflation, the ones that we as consumers are feeling now will show refect in short term slowed growth (into the year end, 4th quarter). Though as i always said the consumer is not as weak as appeared, as retail reports have been coming in positive, and with oil prices soon to decline from seasonality, we should see more strength from retail. Though inflation can primarily be stemming from the weak dollar, from higher import prices, despite a decrease in current account and trade deficiet, which as not found a bottom yet.

I believe due to inflation the feds will not be able to cut as much as they would like,

as stated by Bernake:
''Ultimately, households and businesses care about the overall, or headline, rate of inflation,'' Bernanke said.

the focus on overall inflation is an important factor as it does affect sentiment and short term growth, the consumer is one who feels the current effects of high energy and commodity prices. The Feds reportings are based of lagged information and should always be considered more of indicator of past trends, but necessary current trends.

My expectation of a series of Fed Fund rate cuts may appear as bearish, however, the economy is still strong in my opinion. My main arguement being a tight labor market, is what is helping the drive of consumption. As with housing, and now the financials these are problems that need to fix themselves over the long term, one can expect to see dragging affects through 2008.

If the Feds can clear away most of the bearish sentiment in the markets, i would expect a stronger 4th quarter in the markets overall. My only fear is that people will price in cuts now, and not expect further weakness from the financial sector or housing sector which in turn will create more volatilty in the 4th quarter, which is what we have seen in the 3rd quarter.

Based of Fundamentals, I have a bullish stance and expect better growth in the 4th quarter. My bullish stance only holds if people also price in weakness from housing and the financial sector, and maintain their own stance.

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