Posts Tagged ‘Interest Rates’

August 5th:

Rates are kept at 2%, all sectors but oil and commodities rally, and the dollar gets stronger. *did I read the wrong headline, because based on that information I thought rates would be at 2.25%*

CNBC was rather amusing, as the crew was trying to diagnose the market’s behavior: they concluded that the traders didn’t buy the Fed’s “hawkish” tone towards inflation, which means that they could possibly be overplaying the prospect of inflation, and will be able to keep rates where they are. What’s also of note, is that news from the Fed, good only on a relative basis, always impacts the markets. Despite my complaining, I think that this boost was needed. Nothing goes in only one direction, we can extrapolate what we want from the data, it all depends on the mood of the market.

I wouldn’t be surprised to see this behavior continue for another month or so (people seemed pretty cheery on television), simply because oil doesn’t have any buyers right now; the short term prospects of inflation are evaporating. Oil goes down when there’s a hurricane (which must mean that a catastrophic disruption was priced in), and the latest thing is “demand destruction”, which holds some credence, but now has gotten to the point where it is contradicting the fundamentals of most companies in the sector. There are companies which have actually reported real, tangible earnings in this environment (believe it or not), including almost any energy company or miner of basic materials.

The market, however, is tired of the story. It’s like a little kid who has a short attention span. People love the newest thing, but eventually it gets old or boring. This, I suppose, is a part of the cyclical nature of markets…if it weren’t, when would we have such buying opportunities? Take Brazil as an example: people couldn’t get enough of their prospects going into the summer, but now that people have become more risk averse, they think back 10 years and relate it to crises such as Russia’s default, times of hyperinflation, and a volatile currency (the last characteristic is still true). As a result, some of the best stocks are down 25%-30%.

My take on all of this, is that while this is a nice sigh of relief, its an even nicer time to establish a short position in financial services.


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