What the Fed's Latest Decision Means for Investors

by: Marc Courtenay August 06, 2008 | about stocks: ABX / AEM / FNM / FRE / GG / GLD / HL / KGC / PAAS / SH / SLV / SLW / XME    

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The Federal Reserve's Open Market Committee held a key interest rate steady on Tuesday in an effort to supposedly nurse the economy back to health. This is apparently to be done without further exacerbating inflation.

The decision by the U.S. central bank leaves the benchmark federal funds rate target at a low 2 percent, where it has been since April.

The Fed had reduced rates by a total of 3.25 percentage points since mid-September in response to serious housing correction, mortgage crisis and the turmoil in the credit markets in general.

If you believe that an accommodating monetary policy, low interest rates, government (at tax-payer's expense) bailouts of brokerage firms like Bear Stearns (BSC) and publicly-traded companies like Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), and other economic stimulus efforts are not inflationary, I have a wonderful bridge near my home that I want to sell you.

Tuesday's Fed decision also signals to me that they are not concerned about supporting the US dollar or from preventing its ongoing devaluation.

Right now the markets are buying into the idea that energy prices are going down, the cost-of-living is either stabilizing or falling, and that the Fed will buy their way out of the worst credit and monetary crisis in modern times.

I for one don't buy it, and I speak as a pragmatist and not as a bear. Take a look at chart below. Do you sense a healthy correction going on?

click to enlarge

It's a good thing there are ways to hedge against the current round of "irrational exuberance".

Have you checked out the ProShares Short S&P 500 ETF (AMEX:SH) which seeks daily investment results, before fees and expenses, which correspond to the inverse of the daily performance of the S&P 500 index?

When calmer, clearer heads prevail in the next few months, I sense investors will be looking at inflation with both eyes open. This might lead to some nice rebounds for funds that own traditional inflation hedges like the Gold ETF (NYSE:GLD) and the Silver ETF (AMEX:SLV).

Right now the gold and silver producing companies like Barrick (NYSE:ABX), Godcorp (NYSE:GG) Silver Wheaton (NYSE:SLW), Pan American Silver (Nasdaq:PAAS), Hecla (NYSE:HL), Agnico-Eagle (NYSE:AEM) and Kinross (NYSE:KGC) are being treated like they have leprosy.

Experienced investors know that this kind of negative sentiment can turn on a dime and these very companies will once again have their day in the sun.

Energy stocks will likely begin to rally again at some point. On Thursday I'll be interviewing the CIO of a new energy alternatives fund and he promises to share the names of some of the stocks that he thinks will benefit from the high price of energy as well as the Pickens Plan which has received lots of publicity of late.

So keep reading this section and we will keep telling you what the best minds in the investment world are saying about how the Fed's decisions and policies are most likely to impact different sectors of the economy and the stock market in particular.

We will also share with you the names of companies whose stocks look particularly attractive to them. Who knows, they might even tell us why!

Disclosure: Long GLD, SLV, ABX, GG, SLW, PAAS, KGC,  AEM  and HL.

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This article has 18 comments:

  •  
    Aug 06 08:11 AM
    Finally somebody with some sense...a good article pointing to the "obvious" that everybody seems, to want, to ignore...I for one like hard data vs Bernake's bla bla bla that everybody just eats up....I also believe it is a perfect time to buy into gold/silver...Inflatio... pressures will continue and INTENSIFY....And i do not see the dollar rebounding as fast as others but that is just my opinion....

    In any case good article and focusing on real things that are going on (bailouts, monetary policy) instead of Bernake's BS...With kind regards from Germany CW

    Long ABX, AUY, CSIQ, ESLR, SSL, TSL
    Reply | Link to Comment
  •  
    Aug 06 08:12 AM
    Correction:
    *inflationary pressure will continue and INTENSIFY
    Reply | Link to Comment
  •  
    Aug 06 08:52 AM
    I agree Marc and Dicki. Well done.
    Reply | Link to Comment
  •  
    Aug 06 09:11 AM
    Good call, nice work. Agree with you 100%.
    Reply | Link to Comment
  •  
    Aug 06 09:30 AM
    Inflation in food, energy and industrial commodities. Deflation in stocks, real estate, US$ and, possibly, bonds. Which will win out?
    Reply | Link to Comment
  •  
    Aug 06 09:33 AM
    you are pointing our attention to the engine of the car. but what about the handbrakes?!?!
    1. the SEC has banned short selling in 19 banks by creating bottlenecks at the securities lending side.
    2. the CFTC has already identified one speculator!!! needless to say this is a dutch company with no political clout that actually has been shorting oil more often than going long. at the same time SemGroup was allowed to accumulate short position equal to 5,000 days of their own production (1.1 days of global consumption). they are not deemed speculators.

    the government is actively engaging now in dictating economic behavior a-la USSR style. i guess they can ban trading in precious metals as well before you even realize...
    Reply | Link to Comment
  •  
    Aug 06 10:41 AM
    Okay, inflation is an issue, but the fed has reason for delaying their tightening agenda:
    1. Unemployment is straying away from their target rate, meaning new downside growth risks are present among the one's that are already there.
    2. Oil prices are falling. Anyone who thinks they can target a source for this is kidding themselves, but let's say that it has something to do with a global econ. slowdown leading to weaker demand (and the CFTC, and Obama??, and alt energy demand...).
    Now, if oil prices are falling, that means headline inflation risks are diminishing and headline will (fingers crossed) trend closer to core -- closing the gap between actual inflation rates and fed target rates. Downside growth risks (unemployment risks) are currently outweighing inflationary pressures as unemployment strays away and inflation trends toward fed targets.

    Now, inflation is an issue -- it just isn't AS big an issue as it was last meeting when oil prices were sky high. With the gov't approving that housing bill, I see a compromise coming to solve the energy crisis: pursuing more oil (either offshore or SR) in exchange for higher CAFE standards...incentiviz... alt. energy and whatever else is thought of (also, with regard to food prices, I see them going down when we end our ethanol subsidies). I hate betting for inflation because it is betting that oil prices go up (and that we continue to increase our demand for oil), and who doesn't want to solve this energy crisis -- both its effect on our wallets and its effect on our planet.
    Reply | Link to Comment
  •  
    Aug 06 11:08 AM
    The fed is a vessel of the Big banks. They are trying to buy time for the banks by keeping their borrowing costs low while their lending rates are increasing. This approach is the best chance of getting the banks profitable again. In addition the fed would be be irresponsible to raise rates at this point since we in a recession. This whole episode exposes the massive corruption that has been the framework for the last 6 or 7 years.
    Reply | Link to Comment
  •  
    Aug 06 12:20 PM
    Good eyes open article:
    The question in the short term is where the up and down of oil is going to balance out. It only took the average American about two $100 tank fulls to park and share. The stocks built up and prices fell. Question is will he be comfortable at $375.?? or stay short on the driving??

    In the long run that Detroit Dinosaur we all knew and loved will become extinct. But until that day it's going to be red ink greasing the recessionary skids.

    Forget the Politicians; We'd be better off without them!, Their fixes for friends-(future employers)-and largesses have cooked our currency beyond recognition, our industrial base is a skeleton and our children will be left with obscenities blocking any fond memories of our generation.

    We know the right direction to take, it's just a question of wasting time with the blame game and expecting Govt. to act, or simply taking the controls in a swift and decisive manner--a-la T. Boone--and doing what Americans do best---as individuals.
    Reply | Link to Comment
  •  
    Aug 06 12:57 PM
    mining stocks are not so easy to trade like the period 2001-06. Hui index is below may 06 when gold was trading around 650, now two years later with gold around 900, the income statements are really poor and frustrating. teh recent selloff came by as companies started reporting and hui fell from 460 to 360, a really masacre. management has made many errors, issuing to many capital, keeping too long the hedge book, paying absurd prices for competitos and so on. The only companies that fullfilled are barrick and newmont and buenaventura that has beee hit recently because it has copper as a byproduct. To put it in a nutshell, a very if not the most complicated sector, gold has risen in tha period from 660 to 900, and mining shares are below whatever are the reasons, now if you want to see hui at 515 (march 08)you need a gold of 1000, teh same old story but i know that at these prices the sector is a buy but you have to be more studious to choose , not all are winners
    Reply | Link to Comment
  •  
    Aug 06 01:23 PM
    swartzfr - 6 or 7 years???

    You mean like 100yrs of criminal unconstitutional monopoly cartel Fed of massive corruption and theft of the people by interest and inflation??

    Man - get an education, and not one sponsored by govt greased liars, cheats, thieves and murderers! Sheeesh!

    Here's a good start - it IS in English:
    The Bank of England and the Federal Reserve System
    www.mnemeion.studien-v...
    Reply | Link to Comment
  •  
    Aug 06 02:17 PM
    I'm pretty sure everyone is aware that the Fed has a choice. Bailout **or** inflation. I think that for the most part, they are doing what they have to. What's the real alternative.... Let the patient die? Think of it as a cancer treatment. Cancer drugs kill cells.. Hopefully, the result is positive in the long run....

    jegan ;-)

    Reply | Link to Comment
  •  
    Aug 06 03:23 PM
    The Fed should have RAISED RATES! With oil prices declining, Bernanke could have given oil a good swift kick in the pants and bolstered the dollar. But, he couldn't abandon his Wall Street banker buddies and do the right thing.

    Reply | Link to Comment
  •  
    Aug 06 04:56 PM
    The economy is slow and inflation seems to be under control because bank lending is contracting due to their loan problems. When they have less money to lend, credit in the economy contracts. The Fed is doing everything it can to increase liquidity and get credit expanding again. They can print as much money as they need to fix the banks problems.

    It really is a matter of timing. After the banks start expanding loans again, all this liquidity will cause an excessive amount of credit which will fire up inflation. It will be more difficult for the Fed to remove this excess liquidity once it is out in the economy without very high interest rates, reserve requirements. This excess liquidity being pumped into the economy now will be the fuel for future inflation, although it may be slow to show up because banks have not yet started to expand credit. It will eventually show up, by definition just when the bank credit problems look like they are getting better. Good article.
    Reply | Link to Comment
  •  
    Aug 06 06:52 PM
    Thanks for all the useful comments and feedback.
    Reply | Link to Comment
  •  
    Aug 06 11:29 PM
    I'm afraid Mr Marxbites is on the right track. Almost all Americans are debt slaves. Their currency only worth something due to mass hypnosis. Gold and silver are the real currencies, but the government might take them just as they took the gold of their citizens in 1933. Mr Courtenay is right gold should rally, but it is not in the interest of the controllers of the fiat money supply to do so. I suggest buying some gold and silver and trying to enjoy the remainder of your life in whatever pursuit you believe is worthwhile. I believe the oncoming collapse will be unprecedented and may lead us back to serfdom of the dark ages. Good luck everyone.
    Reply | Link to Comment
  •  
    Aug 07 11:44 PM
    Thanks Ed.

    I was very pleasantly surprised to hear the FDR administration was per usual govt ineptitude, only able to collect but 20% of the people's gold. Pretty sure we'd be less proud of the current crop. But how dare the criminals even try, eh? The thought is shaming.

    The great Ponzi has run it's course.

    Why is this ANY diff from 20'S Germany but for being on a global scale this time?

    It's well past time to neuter Leviathan
    Reply | Link to Comment
  •  
    Aug 08 07:21 AM
    enjoyed the article which akes a lotof sense.My free website has achived over double digit growth because of understandng the prnciples the author has put forward.The companies which can"handle" inflation best have performed best
    Reply | Link to Comment
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