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Thursday, July 20, 2006

The Flip-Flopper

Our assumptions were correct. Ben Bernanke wants to be loved. After the stock market was dragged in the past weeks by poor corporate results as economic growth slows down, we had expected dovish talk from Mr. Bernanke and even a pause in the August Fed meeting, which will allow the market to rally strongly from oversold conditions. Last night it happened. Despite previous testimony from our beloved Fed chairman that he will be data dependent, he flip-flopped yet again. Last night's June CPI figures were worse than expected... economists expected a 0.2% mom increase in the core figure, and it turned out to be 0.3%. A lock for more hawkish comments from the Fed right? Nope... instead he turned out with more dovish talk, that economic growth was slowing and that alone was enough to deal with the higher than expected inflation figures. How's that for data dependent?! The market might rally some more when the Fed actually pauses in August but take note corporate profits are still slowing down, so we don't expect the market to go new highs. Instead the market will stumble once again.. and maybe who knows... some rate CUT talk from Mr. Bernanke? Take note that by allowing the stock market to consolidate in a range, and put a halt to the momentum market (maybe install some interest rate hike fears from time to time), the Fed takes out some of the steam in the inflated asset market in place of further rate hikes. But Mr. Bernanke won't allow a stock market crash, he won't want to be remembered for that. Happy range trading guys.



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