Ahead of the Fed: Some Answers
It's possible that too much has been made of this meeting unless the Fed surprises big in either direction.
Here are my answers to the Fed questions I posed yesterday:
- Given the increasing short interest any incremental positive news out of the Fed could cause more short covering over the coming days/weeks than is currently anticipated.
- Naz short interest, QID volume etc.: My take is many folks currently only know how (or choose) to lay on a QID long or short the Q's and do not do the work to target select fundamentally overvalued stocks. Therefore, they are essentially shorting the wrong stocks for truly effective Alpha generation.
- I think small/mid cap stocks (tech included) are pricing in future recessionary conditions, and this is both right and wrong. We are in a bifurcated economy where some industries are going through a recession, while other areas are still strong. I think many small/mid cap tech stocks are oversold and very undervalued. But that doesn't mean they could not get more oversold before resuming a sustained bullish trend.
- The market can rally on a 25 bps cut -- if this cut is combined with a rate cut at the discount window as well.
- As stated in the above sentence, the market is focusing too much on Fed Funds and not enough on the discount window. And cutting the discount rate could well trump a muted Fed Funds cut.
- As far as who needs the market to move in their direction more? This is a tough call. However, we are not anywhere near all time high valuation levels on the U.S. indices, while we are at or near all-time high records of various short interest metrics.
- If the Fed cuts 50? I think this would lead to a much stronger rally than most have said. Further, all the talk that a 50 bps cut signals panic by the Fed seems counterintuitive. A 50 bps cut catches the Fed up with the amount of easing it probably should have done already.
- If the Fed does nothing? Anything less than a 5% sell-off and the market is being very kind to the longs.
- The Fed language needs to support its view and re-instill confidence that the Fed will not stay behind the curve. If it does that then the language takes a back seat to the rate move(s).
- My view is that the commodity bulls are trying to jawbone the Fed into believing that inflation is a bigger risk than reality. They have experienced a very long bull market and do not want the ride to end. I think speculation (not demand), has fueled much of the recent strength in many commodities.
- It's possible that too much has been made of this meeting unless the Fed surprises big in either direction.
I think the Fed moves the funds rate 25 bps but also lowers the discount rate. I think this will be viewed as a bullish development within days, if not within hours. To reiterate, if the Fed does move 50 bps and there is any sell the news reaction I'll use any weakness to add to selective positions.
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