Saturday, June 21, 2008

Another Headfake

Well another week, another week of head fakes, but the direction seems clear. Fed Ex reported results earlier this week, and their results were weaker than expected. FedEx is considered a leading indicator to the strength of the economy, and FedEx specifically referred to oil prices hurting their results. Welcome to the club.

Despite the bailout in February, the market continues to fall and the VIX, or volatility index, continues to move inversely to the market's direction. The VIX suggests that fear and uncertainty are still in play. If you look at the charts, you'll see the VIX spiked in February as uncertainty around Bear Stearns peaked. Today, consumer discretionary and retail stocks got hammered, why should you care? Remember, the consumer, and their stimulus checks are going to help us weather the storm. And financials and housing have bottomed, remember? Are you kidding me? Hope is when you haven't a clue.

The reason I looked at the market and VIX since January 2002 is because this is when the last bubble burst. So while corporate profits no doubt expanded during these last 7 years given low rates, its plausible to have some context of where the correction could take us. Rates are now at 2.00%, but think about the correction if the Fed gets hawkish on inflation and begins raise rates...Toles has got it perfect.

Fed Funds futures are showing this hawkish attitude already, so investors are already expecting the Fed to do this...When rates rise, the markets discounts more heavily, so the market will fall.

Buckle up.