Prague Twin

Wednesday, June 06, 2007

Traders Come to Their Senses

All three major indices (Dow Jones, Nasdaq, S&P) ended down nearly a full percentage point today as traders finally realized that the Fed will not be cutting rates any time soon.

I've been saying since the last hike nearly a year ago that a cut is not imminent and that the risk for a further hike still exists. Stubborn inflation indicators including increased unit labor costs will continue to influence Fed action for the foreseeable future. Strong resource utilization (low unemployment) is probably the most important factor driving inflation at the present time, but persistently high energy costs should not be ignored.

Morgan Stanley issued a "triple sell" recommendation for European stocks citing their analysis that European markets are as much as 14% overvalued. Traders fear that U.S. equities may be similarly overpriced.

It is satisfying to know I've been right all along. If only I knew how to profit from that, I wouldn't have to work.

This is a healthy correction, but I believe that the Dow could easily drop another 1000 points in the coming months as bond yields continue to rise reflecting the reality of a hawkish rate regime.

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3 Comments:

  • Do you ever read Cunning Realist, pt? He's a conservative blogger (link is on my blog, if you're interested), works in finance and has an M.B.A. in International Business from Columbia (so I suppose he knows more than, say me, about the markets.) He's of the opinion that everything is overinflated, including the markets, because the Fed continues to monetize every problem in the economy and the markets away by printing gobs of money and that all of this stems from the financing of the Iraq war. Here's a link to one of his posts here:

    http://cunningrealist.blogspot.com/2007/05/consequences.html

    I'd be interested to know what you think. My Dad's one of these old conservative guys who HATES the Fed, thinks we should have never gone off the gold standard and believes the Fed Chair solves every problem by printing more money, so Cunning Realist's theory resonated a bit w/ me.

    By Blogger reality-based educator, at 1:07 PM  

  • Great article and great post. I've bookmarked it and will continue to read regularly.

    Funny how some of the more thinking liberals are embracing old-school conservative values as the mainstream conservatives follow president Bush into oblivion.

    We thought Reagan was so bad. Man, how we would love to have him back now.

    By Blogger Praguetwin, at 10:34 PM  

  • I'm w/ Ron Paul and Pat Buchanan and other paleo-conservatives when it comes to the expansion of the American Empire - enough is enough. No more interventions - not in the mideast, not in the Balkans, not in Darfur. Let's get our own house in order before we start trying to fix the rest of the world. That's where I'm at these days. I was going there even before Bush, but the neo-con/remake the world safe for democracy while remaking the U.S. in the image of Oceania has moved me there much quicker.

    BTW, I'm also becoming a very big fan of The American Conservative magazine. Unlike The American Spectator, NRO et al., TAC actually sticks to conservative principles as opposed to embracing whatever Dear Leader says.

    Yeah, it is interesting how much damage Bush has done to the conservative movement and the conservative brand. Remember when they made the word "liberal" a curse word? Well, the word "conservative" these days isn't much better - it conjures up in people's heads images like Tom Delay, Teri Schiavo, Trader Jack Abramoff, Iraq, Katrina, etc.

    By Blogger reality-based educator, at 11:57 PM  

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