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Monday, July 10, 2006

Ben wants some lovin'

Let's face it... everybody wants to be loved in some way, including our good friend Ben. First he inherited the mess that was the US economy from Alan Greenspan, rampant with asset inflation (or dare we say bubble), and when all the fun finally ends Ben will be remembered as the chairman under whose regime it happened and he will be hated for it. So naturally Ben hiked interest rates and released some hawkish comments early in May, which spooked all asset classes but the US$. This sort of fixed the yield curve problem for the meantime, which was always threatening to invert since December. This also gave him room for another rate hike, which he executed, in late June. But the main reason Ben did this is he wants to be loved.

However, he is also aware of the lagged effect of interest rate tools and knows that the economy is already slowing down. Already, economic data coming out is already starting to point more towards that... and you very well know what everybody is cheering for... so again Ben wants to be loved. Along with the June rate hike, which we believe will probably be his last one, he released some dovish comments, a 360 degree turn from his May comments.

We might as well see a pause in August 8's Fed meeting, by that time earnings season will already be in full swing and we should see some slowing earnings growth. Take note analysts are slow to ratchet up their estimates at the beginning and also slow to take them down when earnings are peaking. This is why we are expecting more volatily... poor earnings will probably drag markets down as we are seeing now, but a Fed rate pause will be a catalyst for a rally.



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