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2006-09-07 :: When (Fed) Doves Cry – Today's 2nd Entry

The President of the San Francisco Federal Reserve Bank, Janet Yellen, has been the most dovish member of the policy committee that sets  rates.   Prior to the August 8th meeting, she noted that the Fed didn’t want to tighten too much now has changed her tune a bit.  She now sounds like someone that isn’t in support of the Fed’s current pause and could support further rate hikes.

President Yellen said, “With inflation too high, policy must have a bias toward further firming.” She noted that the impact of the past increases were still working their way through the pipeline, but the clear implication of her remarks is that the Fed isn’t ready to cut rates anytime soon.

This had an important negative psychological impact today.  There was red across the board, with the defensive stocks heading down even more than the energy stocks.  Pepsi, Colgate Polmolive, Coke, Bud, Merck, Pfizer, Johnson & Johnson, Disney, Walgreens, all leaders of the defensive stock trend of the last several weeks were down today.

Oddly enough, the energy indices were down less than the defensive and broader indices.  Particularly troubling was the fact that bank stocks (generally the leaders in a market where the Fed eases) took in the chin today, down > 1%.

We are clearly in the seasonal doldrums for the equity markets that will last for a few more weeks.  The earnings strength is still with the energy, materials and infrastructure stocks.  The defensive stocks are having fairly flat earnings growth (or even earnings disappointments, in the case of Colgate).    The financials will begin to get upward earnings estimates revisions once the Fed signals a clear direction with their “bias.” We’ve started adding some bank stocks to portfolios, a bit at a time, so that we can build positions prior to an announced change in bias and so we can be in place for the big moves in bank stocks that come from lower interest rates.

Earnings always tell the tale in the long run, despite what happens in the short run.

More later!